Debate Continues On Regulations
For VAs With Guarantees
Proposed reserving and capital requirements for variable insurance products with guarantees continue to generate discussion over how to make sure that companies selling these products are financially strong without creating excessive capital hurdles.
The C-3, Phase II project moving through the National Association of Insurance Commissioners is raising issues such as how much capital is needed to back VA guarantees and how the new requirements may affect volatility as market fluctuations change the value of a guarantee for a consumer.
The American Academy of Actuaries, Washington, is working to develop reserving and capital actuarial projections that are part of the NAIC project, dubbed C-3, Phase II.
The NAIC defines C-3 risk as the risk of underestimating liabilities from business already written or inadequately pricing business to be written during the year that risk-based capital is being measured. Phase I of the project addresses interest rate risk. Phase II encompasses equity risk.
Under the proposal, companies would develop models to create different scenarios for the impact of equity markets on guarantees.
An alternative method using new actuarial tables could be used for VAs with minimum death benefits but not for those with living benefits. But once modeling was chosen by a company, it could not decide to use the alternative method for C-3 purposes.
New York regulators also are offering a standard scenario as part of requirements to ensure the financial strength of companies offering these products. Among the rationales offered are: reasonableness of results; reasonable constraints to actuarial judgment when models are used; and ensuring that requirements are not unreasonably low.
The New York proposal is being looked at for both RBC and reserving purposes. One part of that proposal is a 0.5% floor for RBC that would be applied to a formula using reserves. If regulators adopt the RBC guidelines, and a new reserving proposal, those reserving requirements would be used as part of the RBC formula. If the reserving proposal is not adopted and the RBC proposal is enacted, then the floor would be based on current reserving requirements.
But New York regulators said they are receiving feedback that refinement is needed to apply a lower percent to contracts with only a return of premium. Their next draft will probably reflect these comments, they added.
Indeed, Robert Meilander, vice president-corporate actuary with Northwestern Mutual Life Insurance Company, Milwaukee, said that although the scope of the proposal is to encompass all VAs, the floor was too high for products in which there was little risk such as return of premium contracts.
During the discussion, one company also stated it is projecting that its RBC requirements for GMDBs and GMIBs would increase tenfold, creating what it termed “excessive” capital requirements. The company, which was not named during the discussion, raised the issue of how rating agencies would treat this change.
Larry Gorski, a consulting actuary in the New Berlin, Ill., office of Claire Thinking and chair of the American Academy of Actuaries capital adequacy subcommittee, said the Academy was reaching out to rating agencies such as Standard & Poors Corp., New York.