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NAIC Works On VA Guarantee Jigsaw Puzzle

By Jim Connolly

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NU Online News Service, March 15, 2004, 5:52 p.m. EST, New York – Insurers still are thinking about 2 proposals that would affect the capital adequacy rules for variable annuity guarantees.[@@]

Regulators and others considered the VA capital adequacy jigsaw puzzle here at the spring meeting of the National Association of Insurance Commissioners, Kansas City, Mo.

The NAIC could adopt one proposal, the risk-based capital component of the C-3, Phase II project, as early as June. The NAIC could adopt the other proposal, which deals with reserves, in December.

Insurers agree that the NAIC approach to VA guarantee capital adequacy is promising, but they say they want to see how the pieces fit together before they throw their support behind the proposals.

The NAIC could use the capital adequacy regulatory system for VA guarantees for other products, such as variable universal life insurance, says Tom Campbell, chair of the academy’s variable annuity reserve working group and a life actuary with Hartford Life Insurance Company, Hartford. Campbell says the idea is to try to move away from a strictly formulaic approach to determining reserves.

Regulators have fleshed out the risk-based capital proposal by completing work on actuarial factors for an alternate method for determining RBC for variable annuities. Actuaries can use the alternate RBC calculation method on VA products that include guaranteed minimum death benefits. The proposal allows companies to determine RBC for variable annuities with guarantees either through scenario testing or a factor approach.

Bob Brown, a life actuary with CIGNA Corp., Philadelphia, who is chairing the RBC group, says there is enough conservatism in the way that a company could select scenarios. Companies could not just pick and choose which scenarios they wanted to use, he says.

New York actuaries Dennis Lauzon and William Carmello have described a standard scenario that they say is needed to act as a floor for RBC and reserving. The academy should incorporate the scenario into its work, the actuaries say.

Some meeting participants have asked whether the proposed standard scenario is too conservative.

Both the American Council of Life Insurers, Washington, and the National Alliance of Life Companies, Rosemont, Ill., are calling for more time to look at both the factors for the RBC project and the New York standard scenario.

The proposals must be “appropriate and tax effective,” says William Schreiner, an ACLI life actuary. And, right now, he says, “RBC is still wet paint.” Since up until this point, there has not been a complete proposal, companies have not devoted resources to developing systems for C-3, Phase II, according to Schreiner.

Mike Batte, a life actuary with the New Mexico Insurance Department, asked why this was so, since companies have known about the RBC timeline for nearly a year.

In a time of cost cutting, companies are not going to devote money to modeling systems for a proposal that is not completed, says Doug Barnert, who was representing NALC. “It is very complex and very expensive” to create programs, he adds.

Companies are just getting the information they need to decide what to do, Barnert says.

Some companies might decide to sell small operations rather than put in expensive new systems, Barnert adds.