Balanced open discussion is needed on UL Reserving Regulation
By Mark Konen
Volatile equity markets and lower absolute investment returns have caused consumers to seek out products with varying degrees of certainty and guarantees as part of their overall financial plan. Universal Life with secondary guarantees that provide death protection at a guaranteed price is an example of a product that has been responsive to this consumer trend.
According to recent LIMRA statistics, UL product sales have grown significantly relative to other product segments, with sales up 24% in the first half of 2004. Consumer demand for the secondary guarantee product is behind this growth. The industry should be applauded for its innovative response to a real consumer need.
However, the popularity of secondary guarantee UL products has caught the eye of competitors who do not manufacture the product and selected state regulators who suddenly have questioned the adequacy of reserves related to secondary guarantees as defined by Actuarial Guideline 38 (AXXX), which has been on the books since Jan. 1, 2003. Their activity has been directed toward changing AXXX to increase minimum reserves for UL policies with secondary guarantees. We question the undue haste with which the issue is being pushed.
Jefferson Pilot follows applicable reserve requirements, including AXXX. Our assumptions about future experience are sound, and we have had our internal work confirmed by a respected third-party actuarial firm. We view with incredulity and skepticism the “reverse engineering” arguments of competitors. It is not possible for competitors to know either our product assumptions or the reserves we hold.
A variety of explanations for changing the minimum reserves for UL products with secondary guarantees have been put forward: the intent of AXXX is not being followed; AXXX provides for possible lower reserves than other traditional products; and “a level playing field needs to be enforced.” What is surprisingly absent from the discussion is whether or not manufacturers of the product have established adequate reserves.
Further, the discussion does not include the impact of unnecessarily increasing reserves on the industry and consumers, which would have the effect of raising prices and reducing the availability of a popular and meaningful industry product.
Our industry must compete effectively in the broader financial services industry, and these unnecessary increases to cost hamper our ability to help solve Americas growing needs (saving for retirement, protection, estate planning, etc.). Further, as solvency is the issue that reserve regulations should address, it is worth noting that there is a substantial body of law already in place to equip insurers and the regulatory community with the ability to measure this risk. The Standard Valuation Law provides for formulaic reserves, and, more important, requires a thorough asset adequacy analysis. This is a robust and appropriately conservative analysis that allows our industry to recognize problems and take necessary actions well before real problems manifest themselves. Thus, there is no imminent solvency crisis.
Requiring highly redundant reserves for secondary guarantee UL products will likely result in a situation akin to that experienced in the term insurance world. Redundant reserves (Regulation XXX) are not being held by the term writers, but rather are being “off-loaded” through various reinsurance or capital markets transactions. The capital market solutions, by the way, are premised on the fact that XXX reserves are so redundant that they will never be needed. The result is increased cost, complexity and risk, with no corresponding solvency benefit. We need to learn from our mistakes, not repeat them.
The debate surrounding changes to AXXX should be in an open, balanced forum. It should center on finding a balance between adequate solvency to ensure the long-term protection of policyholders and providing value to consumers. Unfortunately, proponents of the change to AXXX have a different goal in mind and seem unwilling to open the debate more broadly. To date, activities have been rapid and closed to real debate.
We believe the responsible course at the present time is to keep AG38 in place as currently adopted and allow the Academy of Actuaries to complete its analysis of the appropriate method of reserves for UL products. This analysis is scheduled to be completed by year-end 2005 and should be concluded before moving forward with action on AG38.
While that analysis is being conducted, it is our hope that the insurance community can work together to come to a consensus on appropriate reserve standards. We are part of a group of at least 13 highly respected companies working together to promote the concept of a reasoned, comprehensive analysis of this issue. We will be glad to participate in a balanced industrywide discussion to determine if any changes are necessary.
Lets work together to achieve a balance between adequate reserves and value so we can keep life insurance affordable for consumers.
Mark Konen is executive vice president of life and annuity manufacturing for Jefferson Pilot Financial, Greensboro, N.C. He can be reached via e-mail at firstname.lastname@example.org.
Reproduced from National Underwriter Edition, November 24, 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.