Flexibility is important to life insurers who say the standard valuation law should use asset adequacy testing rather than formulas to determine necessary reserves.
Asset adequacy testing is a more flexible approach that allows an actuary to use professional judgment to determine whether reserving for assets is adequate.
The findings are part of a preliminary survey by the American Academy of Actuaries, Washington, which queried the top 200 life insurers by life reserves, on deficiency reserving. The response rate to the survey was about 30%, representing $180 billion in reserves out of a total of $600 billion.
The survey, an update of which is currently under way, was conducted by the Academys deficiency reserves working group.
The findings are being discussed by regulators who are considering possible changes to the Standard Valuation Law, a law that establishes reserving for life insurance products.
Companies were asked if the Standard Valuation Law, should be amended to eliminate the current formulaic approach to calculate deficiency reserves, which are all instances where the gross premium is less than the net premium. Responses indicated that 75% said yes and 15% responded no.
Another question asked was whether asset adequacy could be an appropriate approach to replace the current formulaic deficiency reserve approach. Some 80% favored such an approach, while 15% opposed.
Insurers also offered comments to explain their positions.
Reasons cited for changing the reserving methodology include reserves that are “too high or excessive” as well as calculations that are “very complex.”
Also, according to some comments, there is subjectivity in determining the formulas and calculations such as the X-factors that are added to calculations from the CSO Table to determine deficiency reserves. Consequently, according to a discussion of these comments, it would be better to just move to a system that allows an actuary to use professional judgment.
The need for change to the SVL is less clear-cut among regulators, according to a recent discussion. However, there was some support offered for at least considering asset adequacy analysis.
There was some discussion regarding how the use of tabular reserves based on mortality tables for gross premium valuation could ultimately be used to move toward asset adequacy analysis.
However, tax issues would need to be worked out if tabular reserves are used, says Florida insurance department life actuary Frank Dino.
Movement toward a more flexible reserving approach would create a system in which “we dont have to put band-aids on every new product that comes out,” he added.
Making valuation laws more uniform is an issue that also is important, said Sheldon Summers, a life actuary with the California insurance department.
Summers recommended the creation of a valuation manual that would incorporate all actuarial laws, regulations and guidelines.
Such a manual would help create uniform standards in the states, Summers says.
Instead of having each state change laws, states could reference an NAIC Valuation Manual and update requirements in that way, he says. Thus, he adds, a change could be implemented immediately after NAIC adoption and would not have to be implemented state by state.
For states that did not want to do this, there could be an opt-out provision, Summers continues.
“The standards would have to be real standards and not the lowest common denominator,” cautioned Floridas Dino.
Reproduced from National Underwriter Life & Health/Financial Services Edition, February 6, 2004. Copyright 2004 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.