Insurers and regulators are debating whether to reopen the Triple-X model life insurance reserve regulation.[@@]
Supporters of opening up the model include 3 large mutual insurers, but the majority of life insurance company representatives who spoke about the subject here at the recent fall meeting of the National Association of Insurance Commissioners, Kansas City, Mo., opposed the idea of revisiting the model.
The insurers that want to reopen the model are Guardian Life Insurance Company of America, New York; New York Life Insurance Company, New York; and Northwestern Mutual Life Insurance Company, Milwaukee. The companies that want to reopen the model say some companies are gaming the system. But 10 other life insurers signed a letter opposing the idea of reopening the model.
The NAIC adopted the Triple-X model, officially known as Actuarial Guideline 38, the Application of the Valuation of Life Insurance Policies, in March 1999, to ensure proper reserving for level premium term and universal life products. The authors of the March 1999 revision wanted to regulate use of the shadow accounts in UL policies that kept policies in force and in effect provided long-term guarantees without companies setting aside the reserves that normally would be required for such extended guarantees.
New York regulator Bill Carmello has developed one of the 3 major revision proposals. His proposal describes several products as being on regulators’ radar. One example is a policy with a 10-year level premium rate followed by increased guaranteed premiums for an additional 20 years. The issuing company could not increase premiums after year 10 unless a specific event occurred.
Some reactions at the NAIC meeting to calls for revising Triple X:
- Mike Batte, a New Mexico regulator: Batte said any gaming of the Triple X system is a compliance problem, and he says the current guidance already lets states adopt aggressive enforcement practices.
- John Hartnedy, a regulator from Arkansas: Hartnedy argued against revisiting the model. “We don’t need another law or regulation that possibly limits what companies can do,” Hartnedy said. He suggested that in this case, the NAIC ought to emulate the regulatory approach used in the current C-3, Phase II project, which relies more on actuarial judgment and modeling than on formulas.
- Michael Streck, vice president and actuary in charge at Principal Life Insurance Company, Des Moines, Iowa: “Actuarial Guideline 38 stands by itself,” Streck said. “What is really needed is local supervision and a gathering of facts. There is no proof that a company has violated the letter or spirit of the law.” Streck added that the New York proposal focuses on reserving for lifetime guarantees when, in fact, 50% to 70% of consumers buy policies that are term to 65, 75 or 85 years of age.
- Bill Koenig, a senior vice president and chief actuary with Northwestern Mutual: Koenig said 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. “This is an urgent matter,” he said. “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 reserve requirements rather than creating new products that circumvent current regulations, Koenig said.
- Jim Van Elsen of Van Elsen Consulting, Pella, Iowa: Even though Triple X is a “flawed regulation,” it still “works better than most things on the table,” Van Elsen said. He said reopening the model would not be healthy for companies. “The more time you spend defining what companies can’t do, the more they will find ways around it.”
- Kory Olsen, a life actuary with a unit of Allstate Corp., Northbrook, Ill.: Olsen said regulators should review a reserve approach based on attained-age level reserves. The approach, described in a letter by Olsen and Edward Robbins, would fund the secondary guarantee on a levelized basis, would offer consistent treatment of specified premiums and shadow account secondary guarantees, and would be “relatively easy to audit and doesn’t appear to have generated significant abuses,” Olsen and Robbins write.
- Dave Nave, co-chairman of the universal life working group at the American Academy of Actuaries, Washington: Nave said the working group is looking at the possibility of replacing the formulas used to calculate reserve requirements with stochastic models.
- William Schreiner, a life actuary with the American Council of Life Insurers, Washington: Schreiner warned that stochastically determined reserves are not deductible for tax purposes. He said the tax treatment of stochastically determined reserves is an issue that needs more attention.