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July 06, 2003 at 08:00 PM
Regulators Considering New RBC And Reserving Requirements For VAs
By
New York
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.
