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Speakers Spar Over UL Secondary Guarantee Rules

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Regulators, actuaries and others squared off Thursday over reserving requirements for universal life products with secondary guarantees.[@@]

Regulators voted 10-5 here at the winter meeting of the National Association of Insurance Commissioners, Kansas City, Mo., to continue to expose a proposed actuarial guideline revision to further discussion rather than advancing it to a higher level.

One state abstained from the vote.

Regulators also asked the American Academy of Actuaries, Washington, to look at how revisions to the guarantee guideline, Actuarial Guideline 38, would affect UL products with secondary guarantees.

The regulators who voted are members of the NAIC’s Life & Health Actuarial Task Force.

The proposed revision to AG 38 is the culmination of years of efforts by regulators to make sure that life insurers set aside enough reserves to support level-premium products.

The first effort was adoption of the Valuation of Life Insurance Policies model regulation, also known as Guideline Triple-X. Regulators later adopted the Application of the Valuation of Life Insurance Policies model regulation, known as Guideline AXXX. AXXX, in turn, has established Actuarial Guideline 38.

The current debate is over changes to AG 38. The changes were prompted by concerns that companies are still sidestepping the spirit of the guideline with products that reduce reserving requirements. Some companies that sell large amounts of universal life insurance say other companies are reacting to the fact that UL products account for a growing share of life insurance sales.

The life actuarial task force gave members of the public, including a number of company actuaries, a chance to line up at a microphone to make their case about why changes to UL secondary reserving requirements should or should not be made and whether the changes should apply retroactively.

Here’s a sampling of reactions to the proposed reserving changes.


- John Hartnedy, an Arkansas regulator: Insurer insolvencies usually result from the types of assets that an insurer holds, not from problems with reserve levels, Hartnedy said at the life actuarial task force meeting.

In the UL market, “we don’t have any insolvency,” Hartnedy said. “No customer is getting shafted. If anything, they are getting lower prices.”

If any actuaries did skirt the existing reserving guideline, the actuarial professional could take disciplinary action, Hartnedy said.

If insurers do not want to sell UL products, that is their prerogative, but those insurers should not be able to stifle innovation at the companies that do want to sell the new products, Hartnedy added.

- North Dakota Insurance Commissioner Jim Poolman: Poolman said he thinks the debate about AG 38 has more to do with competition than with solvency.

- Mike Batte, a New Mexico regulator: Batte said he would vote against exposing the current AG 38 revision draft further because “regulators’ time would be much better spent on a valuation system that makes more sense, especially when the product is one that has appeal.”

- Dennis Lauzon, a New York regulator: “The main problem with the guideline [AG 38] was that it wasn’t followed and created an unlevel playing field,” Lauzon said.

- North Carolina Insurance Commissioner Jim Long: Long wrote in a Nov. 18 letter that, if changes are made to AG 38, they should not be applied retroactively. He recommended pursuing a valuation process that “takes into account supportable company variations in such areas as underwriting criteria, mortality experience, expense levels, and the invested assets supporting a company’s liabilities.”


- Larry Gorski, a former regulator and a consulting actuary in the New Berlin, Ill., office of Claire Thinking: Gorski said efforts to come up with more flexible reserving techniques should help lead to more efficient reserving strategies. Moving away from a formulaic approach should reduce the number of disagreements about reserving, Gorski said.

Gorski recommended requiring a stand-alone asset adequacy test that deals only with the UL product, then waiting for the American Academy of Actuaries to finish its report on reserving. The report is due at the end of 2005.

- Wayne Stuenkel, chief actuary of Protective Life Corp., Birmingham, Ala.: Stuenkel argued against retroactive changes to UL secondary guarantee reserving requirements.

Protective checked with domestic regulators about AG 38 5 times, and regulators found the company’s reserves to be appropriate each time, Stuenkel said.

Protective is required to certify in statutory and GAAP filings that reserves are sufficient, and Protective takes that requirement “very seriously,” Stuenkel said. The goal is to balance the interests of stockholders and policyholders by ensuring that reserves are neither too low nor too high, Stuenkel added.

Protective and other companies have to rely on the directions in a guideline, because it is impossible for companies to determine the intent of what regulators meant 2 to 3 years ago, Stuenkel said.

- Mike Streck, a life actuary at Principal Financial Group Inc., Des Moines, Iowa: Streck talked about the effects of different reserving approaches on a hypothetical UL product.

The different approaches in New York and California would produce a 40% difference in reserving requirements, Streck said.

UL might not exist today if companies were punished with a retroactive reserve requirement, Streck said.

- Scott Harrison, a Washington lawyer who is representing a group of 15 insurers that includes Jefferson-Pilot Financial, Greensboro, N.C., and Pacific Life Insurance Company, Newport Beach, Calif.: If insurers are interpreting AG 38 wrong, then regulators should fix that, but regulators should avoid making any retroactive changes, Harrison said.

It is important that insurers be able to rely on the language in the guideline, Harrison said.

- Scott Berlin, a life actuary with New York Life Insurance Company, New York: Berlin said use of a formulaic approach to setting reserve levels may have protected life insurers from reserve-related insolvencies, but he suggested that reserve problems could cause future life company failures. “If we cut corners on reserves, that is what might happen,” Berlin said.

- Robert Beuerlein, chief actuary at AIG American General, Houston: Beuerlein said he can look out of his windows and see the Enron towers. “I don’t want to see the actuarial profession mess up,” Beuerlein said, adding that actuaries “cannot be cutting corners.” Some actuaries at the meeting criticized Beuerlein’s reference to Enron.