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.]“