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Flexible VA Reserving Approach Advances

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By Jim Connolly

New Orleans

A proposal that would create a minimum floor for reserving for variable annuities with guarantees will not receive the support of the American Academy of Actuaries in its current form.

The Academy, based in Washington, discussed a standard scenario reserving approach as well as its work on Actuarial Guideline VACARVM during the winter meeting of the National Association of Insurance Commissioners here.

The Academys VA reserve work group is spearheaded by Tom Campbell, the groups chair.

VACARVM is the second piece of a project that relies on stochastic modeling rather than on formulaic reserving techniques. It is related to the C-3, Phase II project, which takes the modeling approach and uses it to establish risk-based capital requirements for VAs with guarantees. That project is headed by Bob Brown, the Academys representative. Many actuaries are advocating a more flexible approach to reserving, suggesting this will allow companies more freedom in the type of products delivered to consumers.

During the development of the VACARVM project, the New York insurance department expressed concern that a minimum floor was needed to ensure proper reserving for these products. Consequently, a standard scenario was developed.

The scenario would provide a way for companies to establish reserves if they did not want to create stochastic modeling but is also considered by some to be more conservative and produce results that require higher reserves.

At the NAIC meeting, Campbell explained why the Academy cannot support the current standard scenario reserve proposal.

Among the reasons he cited are the cost and the resources needed to create a hardware and software infrastructure to make the standard scenario work, and the lack of review the scenario has received in comparison to the stochastic modeling effort.

Other reasons cited by the Academy include the possibility that the standard scenario would “interfere with the development of more refined modeling techniques because companies would have less motivation to commit resources to modeling their business” whenever the standard scenario reserve consistently prevails over reserves or total asset requirements.

Additionally, the Academys working group said many of the assumptions in the standard scenario proposal “were chosen at somewhat arbitrary levels and as such cannot appropriately capture the risks inherent in the many combinations of products, benefits and company expense levels.”

Dennis Lauzon, a New York regulator, agreed to be part of a regulator group that would study the standard scenario but said, “New York does not want to participate in any changes to the standard scenario.”

The American Council of Life Insurers, supports the standard scenario because it would not create federal income tax issues, says Bill Schreiner, an ACLI life actuary. But, he adds, work on the standard scenario still needs to be done to “bring this wild child under control.”

Regulators also voted to leave alone a mortality calculation in the Academys VACARVM proposal. Currently, the calculation calls for mortality to be based on 65% of the 1994 Variable Annuity MGDB Mortality Table. Some regulators had argued that the amount should be a more conservative 85%. Regulators declined to change that total in a 10-3 vote. One state abstained.

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.


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