Commissioners Step In To End UL Reserving Cat Fight
A controversy over reserving for universal life policies with secondary guarantees has prompted insurance commissioners to step in and direct actuaries to focus on actuarial modeling rather than on a traditional formulaic approach to reserving.
Insurance commissioners strongly criticized Actuarial Guideline 38, which would establish reserving for these products, during the winter meeting of the National Association of Insurance Commissioners here.
In a vote taken at “A” Committee, actuaries at the Life & Health Actuarial Task Force were not specifically told not to continue exposing and advancing AG 38, or the Amendments to the Application of the Valuation of Life Insurance Policies model regulation. Rather they were challenged to come up with a modeling approachwithin the next 6 months to a yearthat uses asset adequacy analysis as a basis to establish reserves. And, they were told that they should use their time effectively, knowing the commissioners preference for devoting energy to a new approach.
The use of actuarial modeling rather than formulas represents a major change in product reserving that advocates say will provide more flexibility in product creation and less need to tinker with actuarial models going forward.
Meanwhile, insurance commissioners bluntly assessed the contentious split among insurers that has developed over the issue.
Nebraska Director Tim Wagner said he has seen nothing that has so polarized the industry since he began attending NAIC meetings in 1968. He likened the fight between proponents and opponents of AG 38 as similar to “two cats using the same litter box,” and added that “somehow government has got to be an umpire.”
Since reserving is one of the largest components in pricing, Wagner said, in a sense “we are price fixing. We are harming the insurance-buying public. I cannot continue to support a pricing process that is driven by actuarial tables when an oversight process is available.”
Of work on AG 38, he continued, “they are trying to tweak when they should be looking at different ways to reserve. It does point out why actuaries need guidance. They are more concerned with rules and order and precision than protecting the public.”
North Dakota Insurance Commissioner Jim Poolman said he looks “at this from the standpoint of process and resources.”
The process has broken down, he said. “It is a competitive issue. Someone has a leg up on the competition and someone wants to change it.”
Rich Robleto, a Florida regulator, said he does not think the issue is one of price fixing but rather is a solvency discussion.
Walter Bell, Alabama insurance commissioner, asked if the actuaries working on AG 38 knew of specific companies holding inadequate reserves.
In a Nov. 18 letter, North Carolina Insurance Commissioner Jim Long urged that if changes are made to AG 38, they not be applied retroactively. He recommended pursuit of 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 companys liabilities.”
But LHATF actuaries offered a different perspective. Tomasz Serbinowski, a Utah regulator and life actuary, said that when products include features such as 4 different commission loads and a 40-year secondary guarantee, suspicion is raised that the company may be trying to do something.
Terri Vaughan, outgoing Iowa insurance commissioner, said, “I dont think it is an indictment of policies because of that.” She noted that when a new product comes along, it may seem complicated initially.
Vaughan said that applying asset adequacy analysis to this problem moves regulators further down the road of reaching a resolution and that it might be a good first step in creating a model-based solution.
Blaine Shepherd, a life actuary and Minnesota insurance regulator, told insurance commissioners that just because no companies have failed does not mean that solvency issues cannot come up at a future point. “It is difficult to determine now because of the length of secondary guarantees.”
Shepherd said he has seen in these designs assumptions in the provisions of the policies that are there for no other purpose than to lower the reserve calculation and the reserves.
Vaughan replied that in some cases there are wrong product designs and reserves that are lowered by AG 38. But, she asked, “Is it better to shoe horn into a broken system or move down the road toward a new system?”
But Mike Batte, a life actuary and regulator with the New Mexico department, and former LHATF chair, said, “We need to be putting resources behind a better valuation system, one that will lead to new products.” A vote for one side now will leave the other side of the industry wondering what investment it has in the project. But, if both sides can be brought on board with a long-term approach, then both could benefit, he continued. “Rather than fix someones market share problem, it is better to get them invested in what we are trying to do.”
Vaughan said she believed that if LHATF marshaled its resources, it could develop a modeling-based approach in a year.
But Dave Sandberg, representing the American Academy of Actuaries, Washington, said it would more likely be a 2-year horizon.
Larry Gorski, a former regulator and a consulting actuary in the New Berlin, Ill., office of Claire Thinking, said the current work of the C-3, Phase II risk-based capital and reserving project and other more flexible reserving techniques are good steps toward more efficient reserving that moves away from a formulaic approach and that would reduce the number of disagreements over reserving. Gorski recommended requiring a stand-alone asset adequacy test that looks only at the UL product and waiting for the American Academy of Actuaries, Washington, to finish its report, which is due out at the end of 2005.
Katie Campbell, a life actuary with the Alaska department, said that while life actuaries support a long-term solution, there are problems including industry roadblocks. The industry is always coming up with “a big hurdle,” she said.
Gayle Yeomans, a New York Life Insurance Company representative, said that “for you at this hour not to proceed with what is being exposed is ironic.” She called it “horrendous” that the “A” Committee would micromanage the decision of actuaries on an actuarial issue. “It is a terrible, terrible mistake.”
Sheldon Summers, a life actuary with the California insurance department, opposed the motion because he said LHATF already had considered asset adequacy analysis and decided that it was not the best route to take.
The discussion at “A” Committee followed a lengthy discussion at LHATF and a 10-5 vote to expose a draft with new clarifying language.
Proponents argue, among other points, that the cost of a policy is reduced because of current applications of Guideline A Triple-X. In one case, premiums were estimated to be 30%-50% lower.
One proponent, Robert Beuerlein, a senior vice president and chief actuary with AIG American General, Houston, told attendees that he can look out his windows and see the Enron towers and knows that he doesnt “want to see the actuarial profession mess up.” Actuaries “cannot be cutting corners,” Beuerlein said.
Reproduced from National Underwriter Edition, December 10, 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.