New York Implements New UL Reserving Requirements

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New York has put a new emergency rule into effect that creates stronger reserving guidelines for life insurance products, including universal life insurance policies with secondary guarantees.

The amendment to Part 98 of Regulation 147 took effect on Dec. 29, 2004. The new rule provides examples of policy designs that constitute guarantees and describes the reserve methodologies to be used in valuing such policies. Other products besides UL that could be affected primarily include non-level premium and/or non-level benefit life, indeterminate premium life, variable life and credit life insurance policies.

The New York insurance department cites an effort among some insurers to design products that “circumvent” existing reserve standards. It adds that there is a solvency concern for those companies and a “serious threat that could be imposed on consumers.”

The department says companies that “circumvent” the law are placing themselves at a competitive advantage over companies that follow existing reserving guidelines.

It states that unless notification was provided previously to the superintendent to adopt lower reserves, insurers would need the superintendents prior approval.

The emergency rule change applies to all companies operating in New York, according to Mike Barry, a department spokesperson. The amount of underreserving, he said, can be “upwards of 15%” and New York deemed the issue to be of a pressing enough nature to bring a resolution to protect consumers in the state.

A survey on the impact of the new regulation was scheduled to go out to companies on Jan. 26 with a response due by March 1, Barry says.

The new rule also provides minimum mortality standards and minimum reserve standards for credit life insurance.

The reserving issue has been hotly debated at the National Association of Insurance Commissioners. During the NAIC meeting in December 2004, efforts to advance Actuarial Guideline 38 caused such consternation among insurers that regulators intervened in the process.

The decision reached by commissioners was to wait for the American Academy of Actuaries, Washington, to finish a project in 2005 that would offer a more long-term solution to capital and reserving for life insurance products including variable products and UL products with secondary guarantees. The C-3, Phase II project is a major undertaking of the Academy that has been ongoing for the last several years.

Commissioners did not preclude advancing an actuarial guideline that established reserving for products including UL products with secondary guarantees.

The guideline, AG 38, or the amendments to the Application of the Valuation of Life Insurance Policies model regulation, will continue to be exposed by the NAIC and could be advanced. AG 38 is the second incarnation of Guideline Triple-X. Guideline AXXX was developed to eliminate loopholes that regulators maintained some insurers were using to avoid reserving requirements. AG 38 was a further effort by regulators to eliminate any existing loopholes.

The change in New York Rule 147 will not affect Northwestern Mutuals financials but will impact the financials of some companies, says William Koenig, a senior vice president and chief actuary with Northwestern Mutual, Milwaukee. “It is a little unusual [to advance a change] so late in the year,” he adds. Companies will need to consider the change when they are putting together their financial statements for 2004, he explains, adding it is “unusual and unfortunate.”

The New York proposal will create certainty in the level of reserves, he says. The work of the Academy and the efforts by both regulators and actuaries to create a long-term solution is important, he says, but for the time being, it is important to have reserve requirements for policies that are paid up that provide reserves that are consistent with the 1980 CSO Tables.

Jefferson-Pilot Financial, Greensboro, N.C., is reviewing the new requirements and is deferring comment for now, says Paul Mason, a company spokesman. Jeff-Pilot was one of many companies that spoke out against AG 38 during the NAIC winter meeting.

But, Scott Harrison, who represents a group of insurers who also oppose implementation of AG 38, expressed concern over the action. He questioned the “unilateral action taken while the NAIC process is under way.”

The action, he says, is “bad for consumers” because it will make insurance “less available and more expensive.”

New York has been a leading advocate of uniformity of regulation and such action could be misconstrued by those who are in favor of more federal control as a lack of commitment to the NAIC process, Harrison adds.


Reproduced from National Underwriter Edition, January 27, 2005. Copyright 2005 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.