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Rifts Over Reopening Triple-X

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Anchorage, Alaska

Regulators and industry are divided over whether to reopen Triple-X regulation in response to reports that the intent of the model is being gamed.

Three large mutual insurers support opening up the model again, while the majority of companies speaking before regulators at the fall meeting of the National Association of Insurance Commissioners oppose revisiting it. The three mutual companies are Guardian Life Insurance Company of America, New York Life Insurance Company, both based in New York, and Northwestern Mutual Life Insurance Company, Milwaukee.

Regulators also fall into two camps. Those in the first camp say the current model, itself a second incarnation created to stop gaming, is sufficient. These regulators maintain that if abuses exist, it is more of a market conduct issue. Others say it would be worthwhile to explore ways to quell new product designs that skirt the model.

The intent of Triple-X is to ensure proper reserving for level premium term and universal life products. Revised guidance, Actuarial Guideline 38, the Application of the Valuation of Life Insurance Policies model regulation, was adopted by the NAIC in March 1999. That revision sought to regulate use of shadow accounts in UL policies that kept a policy in force and in effect provided long-term guarantees without setting aside reserves that normally would be required for such extended guarantees.

The National Association of Independent Life Brokerage Agencies, Fairfax, Va., writes that “any change of the significance suggested in AG 38″ is “not an issue to be taken lightly and deserves the time needed to define issues and allow for adequate discussion and debate.”

New York developed a draft proposal that New York regulator Dennis Lauzon says would restore a level playing field to the market and follows the principles of current regulatory guidance. The proposal is one of three ideas being floated to address any problems that exist. The New York proposal, developed by New York regulator Bill Carmello, would calculate segmented reserves for UL policies by determining future gross premiums as the policy issue date that would keep the policy in force through maturity. Then the ratio of net to gross premiums would be determined. The minimum schedule of future gross premiums would be calculated and then that schedule would be multiplied.

Among the product designs the New York proposal cites as being on regulators radar are a 10-year level premium rate followed by increased guaranteed premiums for an additional 20 years. The company could not increase premiums after year 10 unless a specific event occurred. Another product cited by New York is one in which an initial level premium is guaranteed for 10 years followed by increased guaranteed premiums for an additional 20 years. However, according to the New York proposal, after year 10, the policyholder is protected against premiums being increased above the initial level. The protection, it continues, comes from reinsurance, a second policy issued to the consumer, or an agreement between the company writing the business and the second company.

But Mike Batte, a New Mexico regulator, argues that it is more of a compliance issue and says the current guidance allows states to pursue enforcement aggressively if they choose.

John Hartnedy, an Arkansas regulator, also argues against revisiting the model. However, Hartnedy says that even if states do have the right to pursue enforcement, “the majority of states wont look at it anyway. We dont have the staff or the guns to go through the formula [in the New York proposal.]“

Speaking of the need for flexibility in product development, he adds, “We dont need another law or regulation that possibly limits what companies can do.” And noting projects such as the current C-3, Phase II, which relies more on actuarial judgment and modeling than formulas, he says a “similar approach is needed rather than squeezing a product into a formulaic approach.”

Many insurers agree that the guideline should not be reopened citing concerns such as a provision to make most of the new requirements retroactive. “Actuarial Guideline 38 stands by itself. What is really needed is local supervision and a gathering of facts,” says Michael Streck, vice president and actuary in charge at Principal Life Insurance Company, Des Moines, Iowa. “There is no proof that a company has violated the letter or spirit of the law.”

Streck says the New York proposal focuses on reserving for lifetime guarantees when, in fact, 50%-70% of consumers buy policies that are term to 65, 75, or 85 years of age.

Ten insurers signed a letter questioning the need to reopen the regulation, including: AmerUS Group, Jefferson-Pilot Financial, Lincoln National Life Insurance Company, Midland National Life Insurance Company, Mutual of Omaha Insurance Company, North American Company for Life & Health Insurance, Pacific Life Insurance Company, Principal Life, Protective Life Insurance Company, and Trustmark Insurance Cos.

A new regulation is needed, says Bill Koenig, a senior vice president and chief actuary with Northwestern Mutual. The principle of Triple-X and AG 38 is that reserves should be the difference between the present value of future guaranteed benefits less the present value of future premiums needed to support those benefits, he says.

“This is an urgent matter,” he explains. “It is important that companies are regulated on a uniform basis and not on a state-by-state basis.” If there is an economic reason why companies feel that reserve requirements are too high, they should address the issue rather than creating new products that circumvent current regulation, he adds.

New Yorks proposal is not a change but a clarification of existing regulation, says Scott Berlin, vice president and actuary with New York Life. And, Jim Van Elsen of Van Elsen Consulting, Pella, Iowa, says that even though Triple-X is a “flawed regulation,” it still “works better than most things on the table.” He says that reopening the model would not be healthy for companies. “The more time you spend defining what companies cant do, the more they will find ways around it.”

Another approach, an attained age level reserve approach, is an approach that regulators should review, according to Kory Olsen, a life actuary with Allstate, Northbrook, Ill. The approach, as described in a letter from Olsen and Edward Robbins, funds the secondary guarantee on a levelized basis, would offer consistent treatment of specified premium vs. shadow account secondary guarantees, and is “relatively easy to audit and doesnt appear to have generated significant abuses.”

The American Academy of Actuaries, Washington, also is working on a solution, says Dave Nave, co-chair of an AAA universal life working group. The work examines an approach that is principle-based and uses stochastic modeling as opposed to a focus on formulas.

William Schreiner, a life actuary with the American Council of Life Insurers, Washington, warns that “stochastic determined reserves are not deductible for tax purposes,” an issue he says is “a very serious problem” that needs to be considered as this approach is developed.

Reproduced from National Underwriter Edition, September 16, 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.


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