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Reserving requirements for variable annuities with guarantees would be most effectively accomplished through a guideline, regulators say.

The decision to pursue a guideline followed a discussion among regulators at the National Association of Insurance Commissioners about whether a company could refuse to reserve using the new standards.

Regulators and insurers currently are putting in place reserving and capital requirements for VAs with guarantees.

The concern over enforcement, according to discussions, is that the new proposal differs in approach from the Standard Valuation Law that currently is used to determine reserving for annuities, including VAs with guarantees.

According to Katie Campbell, a regulator representing Alaska, the new reserving standards are fundamentally different from the current standards, the Commissioners Annuity Reserve Valuation Method.

The SVL could be changed if necessary, with the guideline remaining in effect after the change was made in order to offer guidance on how to comply with the law, she added. Remaining true to the principle as well as a computation based on the SVL is also important, she said.

From a legal point of view, extrapolating a new approach from the current law could raise issues for regulators, said Allen Elstein, a Connecticut regulator. When the conditional tail expectation reserving approach that is part of the new project is used, it could go beyond interpretation of the law, he added.

The CTE 65 is an approach that takes a series of scenarios and ranks the reserving requirements from those scenarios from the lowest to the highest. It then takes the average of the highest 35% of those outcomes.

But Bill Schreiner, a life actuary with the American Council of Life Insurers, Washington, said the new approach can approximate the existing law if a standard actuarial scenario is used along with the CTE approach. It would be consistent with the existing SVL and would also address potential tax issues tied to reserving for VAs with guarantees.

Bill Carmello, a New York regulator, noted that Guideline 34 had some departures from CARVM and was still used by companies. Actuarial Guideline 34 addresses reserving for guaranteed minimum death benefits.

Regulators could adopt the proposal as a guideline and then states could adopt it as a regulation if needed, said John Rink, a Nebraska regulator.

Insurers say the timeframe for implementing the change is as important as the direction chosen. They told regulators that changing systems to comply with the new requirements is a significant undertaking and, consequently, a year-end 2005 implementation is more reasonable than a year-end 2004 implementation.


Reproduced from National Underwriter Edition, May 21, 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.