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.”