Regulators Considering New RBC And Reserving Requirements For VAs
By the end of 2004, variable annuity companies may face new risk-based capital and reserving requirements if two projects now being developed by the American Academy of Actuaries are endorsed and adopted by the National Association of Insurance Commissioners.
The issue has arisen in part because of significant losses suffered by some companies that offered guarantees in their VA products.
During the summer meeting of the NAIC here last month, regulators agreed to consider exposing the AAA reserving document by the end of this year, so it could possibly be adopted in tandem with the new RBC requirements for VAs with guarantees, anticipated to take effect for year-end 2004.
The RBC project, called the C-3 Phase II project because it is the second part of an examination of C-3 or interest rate risk, will remove variable life products from the scope of its requirements. This is because “testing suggested the type of variable life contract sold today does not increase capital requirements,” said Bob Brown, vice chair of the Academy working group and assistant vice president of CIGNA Corp., Hartford, Conn.
VAs without guarantees will now also be included in the scope of the report, Brown told regulators. The “modest” charge for these products will be removed from the regular C-3 factors, according to the AAA report.
And, as Brown explained, products such as group annuities that provide equity fund guarantees and group life contracts sold to mutual fund companies that provide minimum death benefit guarantees will also be included in the project. Also to be included, he told regulators, are guarantees in 401(k) plans. As the project update presented at the June meeting explained, “We need to broaden the scope to include guarantees similar to the variable annuity guarantees currently covered, no matter what policy form provides them.”
So, for instance, Brown said that if a mutual fund company offers a return of initial investment guarantee, then that would be included within the projects scope.
Even if companies have an identical product and identical assumptions, they might have substantially different percentages because of different books of business, Brown explained.
Existing work on the C3 Phase II project will make it easier to complete the reserving project for VAs with guarantees, said Tom Campbell, a life actuary with Hartford Life Insurance Company, and a co-chair of that Academy reserving project. By the fall meeting in September, the Academys Variable Annuity Reserve working group should have a list of reserving methodology strategies, he said.
The C-3 Phase II work is very complex and will need additional testing that will make it a challenge to have the paper ready for the fall meeting, said Doug Barnert, representing the National Alliance of Life Companies, Rosemont, Ill. That deadline is necessary for that part of the project to be included in a NAIC diskette used for RBC filing for year-end 2004.
The issue of reserving for dollar-for-dollar contracts in which contract holders can make significant withdrawals and maintain the life insurance component in the contract was also debated.
Reserving for 100% utilization is not rational, said Bill Schreiner, a life actuary with the American Council of Life Insurers, Washington. “It should not be required to establish reserves that are outrageously inappropriate.”
For instance, the utilization of this benefit is less than 1% for Travelers Life & Annuity Corp., according to the companys chief corporate actuary.
John Hartnedy, a life actuary with the Arkansas insurance department, said a full utilization reserving requirement would offer no purpose except to be “a statutory drain on a company for no statutory purpose. Someone has to pay for the return on money here.” If there is concern over a specific company, then a department should have the valuation actuary address it specifically, he added.
CIGNAs Bob Brown said that although it is possible for contract holders to make a withdrawal on a contract, they would have to pay taxes on that money, which would be a “very real disincentive to lock in insurance.”
In many cases, contract holders would be doing the right thing by not exercising a partial withdrawal, leaving just enough value in the contract to maintain insurance, Brown said. A possible exception would be a high water mark contract that comes down in value to its initial level, he added. But if it is above the initial cost, there would be a taxable gain, Brown continued.
Or, theoretically, if a companys ratings were to be lowered, then a contract holder could decide to make a significant partial withdrawal in a dollar-for-dollar contract and maintain the insurance, he said. Even though there might not be exposure for the company, the public could perceive it that way, Brown added. Still, overall, he said he did not think that such a scenario was likely, and since it does not necessarily benefit a policyholder to take action, experience is showing that and consequently, reserving for 100% utilization may not be necessary.
But some regulators questioned reserving based on an assumption that fewer than 100% of contract holders would opt to withdraw significant amounts of value and retain a contract for its insurance. “Where should we draw the line?” asked Sheldon Summers, a life actuary with the California department.
And Frank Dino, a life actuary with the Florida department said, “The laws the law. We need to comply with it until we fix it.”
The Standard Valuation Law applies to reserving for these products, but actuarial guidelines 33 and 34 do not address VA reserving for products with guarantees, and the new projects would offer guidance on the issue.
Reproduced from National Underwriter Edition, July 7, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.