A Critical Review Of Triple-X Can Offer
A Solution To Greater Credit Risk
We believe that a more critical review of Guideline Triple-X and the reserves it produces can offer a solution to the industrywide problem of increasing credit risk due to future letter of credit costs.
It has been pointed out that the Valuation of Life Insurance Policies model regulation, more commonly called Guideline Triple-X, is causing immediate and future surplus strain that is usually solved by reinsurance. The regulation, applied to term and universal life insurance, is increasing the cost of reinsurance and slowing the decline in term premiums. This has become even more significant as the cost of letters of credit, financial instruments used to meet reserving requirements, increase.
Regulation Triple-X offers many options. The actuary calculating Triple-X reserves must make many choices, which have differing impacts on different products. If the choices are not made carefully, reserves can be much higher than necessary.
Some of these choices have been made by habit or custom rather than to minimize reserves. Some of the same choices are required to calculate reserves for products such as whole life insurance, but in this case, they cause a trivial reserve difference. However, when applied to term, the proportional increase is much larger. Decisions that could be made without much thought or impact on whole life deserve analysis on term.
Some actuaries may feel it is conservative to hold redundant reserves and then cede them. But what is really conservative about holding higher than necessary reserves and then ceding them, especially to offshore reinsurers? All it really accomplishes is to increase the cost of doing business.
While this applies to basic as well as minimum reserves, the choice of X-factors is of particular importance. X-factors are numbers multiplied times the valuation mortality rate that may reduce or eliminate deficiency reserves under Triple-X. They can better reflect a companys experience.
Few, if any, reasonably priced term products should generate deficiency reserves. In practice, many companies do hold deficiency reserves on their term products. Many cede them to reinsurers and thus incur additional costs, including direct or indirect letters of credit costs.