Industry Split On UL Reserving Change Will Be Out In The Open At NAIC

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Regulators deciding whether to advance changes to an actuarial guideline impacting Universal Life reserving will hear two messages from an industry that is split on the issue. One side is saying that better efforts need to be made to ensure that companies do not underreserve, while the other side contends that care needs to be taken not to price a popular product out of the market.

At press time, the National Association of Insurance Commissioners was scheduled to discuss the changes on Dec. 2. The NAIC says it is unclear what action will be taken on the changes: adoption, modification or re-exposure of the draft. If the revisions to Actuarial Guideline 38 are advanced by the Life & Health Actuarial Task Force, they would then go to the Life Insurance and Annuities (A) Committee on Dec. 6. Adoption by the A Committee could result in full adoption by the March 2005 NAIC meeting.

The proposed changes introduced by William Carmello, a New York regulator, were exposed by LHATF on Nov. 19 in an 11-6 vote.

The proposal establishes actuarial requirements that would seek to ensure that companies comply with the intent of Guideline AXXX, the Application of the Valuation of Life Insurance Policies model regulation. Guideline AXXX was a response to regulators concerns that some companies were avoiding proper reserving required by the Valuation of Life Insurance Policies model regulation, commonly called Guideline Triple-X.

Insurers are divided over whether the changes should be advanced, abandoned or delayed until a report from the American Academy of Actuaries, Washington, is completed. The report is due at the end of 2005.

In fact, the American Council of Life Insurers, Washington, is taking a neutral stance on the issue because its members are weighing in on both sides of the issue, according to Bruce Ferguson, ACLIs senior vice president-state relations.

Among companies that are concerned about changes are AmerUS Life Insurance Company, Lincoln National Life Insurance Company, John Hancock Life Insurance Company, Mutual of Omaha Insurance Company, Principal Life Insurance Company, Jefferson-Pilot Financial and Prudential Financial.

Among the concerns enumerated in their written comments are the belief that the changes are more than a clarification of the guideline and that the proposal increases the secondary guarantee UL reserves.

In an opinion piece in the Nov. 29 edition of National Underwriter, Mark Konen, executive vice president-life and annuity manufacturing, for Jefferson-Pilot Financial, Greensboro, N.C., wrote that the popularity of secondary guarantee UL products has “caught the eye of competitors who do not manufacture the product.”

Konen also wrote that the focus should be on adequate reserves and not on creating a level playing field. He warned that “redundant reserves” will require greater use of reinsurance or securitizations in order to relieve capital strain.

Larry Gorski, a consulting actuary in the New Berlin, Ill., office of Claire Thinking, says that when other contentious issues have arisen, waiting for the Academy to offer an actuarial report has been an important part of reaching a conclusion. A lot of the components of the work needed in correctly approaching the issue such as C3 Phase I and II already have been done, he adds.

It is important to use asset adequacy analysis in conjunction with a formulaic approach to calculating reserves, according to Gorski.

The issue should be one of adequate and reasonable reserving and not creating a level playing field, he continues.

Gorski says the proposal has “the potential to hurt the UL business and could result in more use of letters of credit, securitizations and reinsurance. It would increase cost and complexity, he adds.

The current wording in Guideline AXXX sets the tone for strengthening requirements by including a stand-alone asset adequacy analysis test, he says. Stand-alone means that the test would apply to the UL product alone and not the aggregate test for all products, according to Gorski.

Revamping the lifetime guarantee could affect the product and those agencies that offer them, says Cindy Gentry, chairman of the National Association of Independent Life Brokerage Agencies, Fairfax, Va. It would affect customers and NAILBA members if “those products go away,” she says, and the issue needs to be carefully examined so that it can be handled correctly.

William Koenig, a senior vice president and chief actuary with Northwestern Mutual, Milwaukee, Wis., supports the Carmello proposal. Currently, he says, there are a wide range of interpretations of AG 38 and consequently a change is necessary to ensure the integrity of annual statement.

Several years ago, codification of statutory accounting principles was created to eliminate state-by-state variations and by not ensuring uniform reserving, the NAIC could be opening itself up to those who favor federal regulation, he adds.

It is not a stock-mutual issue, he says, but rather one of creating comparable reserving standards. If the standards are created, those companies that are able to operate more efficiently or have a better product will be able to compete in the market, Koenig says.

Action needs to be taken now, he continues, because if the Academy proposal is delivered at the end of 2005, it still could be several years before it is ultimately enacted in the states.

He also notes that under codification principles, companies can seek permission to hold lower than required reserves if they disclose those lower reserves in their annual statements. So, he continues, they do have an alternative to use.


Reproduced from National Underwriter Edition, December 3, 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.