Empire State regulators want life insurers to set aside more capital to back their life insurance products.[@@]

The regulators have adopted an emergency regulation, an amendment to Part 98 of New York’s Regulation 147, that beefs up life insurance reserving requirements.

The rule, which took effect at the end of 2004, could affect universal life policies with secondary guarantees, life policies with non-level premiums or non-level benefits, life policies with indeterminate premiums, variable life policies and credit life policies.

The new rule provides examples of policy designs which constitute guarantees and describes the reserve methodologies to be used in valuing such policies.

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

New York State Insurance Department officials justify the emergency adoption of the regulation by referring to reports of efforts by some insurers to design products that “circumvent” existing reserve standards.

Efforts to get around the standards raise questions about some insurers’ solvency, give those insurers an edge over other insurers to do a better job of complying with the standards, and constitute a “serious threat that could be imposed on consumers,” officials write in their discussion of the emergency rule.

The rule states that unless insurers already have told New York regulators about plans to adopt lower reserving strategies, insurers will have to get regulators’ prior approval before adopting such strategies.

The emergency rule change applies to all life insurance companies operating in New York, according to Mike Barry, a department spokesman.

In the life market, the amount of underreserving can be “upwards of 15%,” and New York regulators deemed the issue to be of a pressing nature, Barry says.

The New York department has sent a survey to insurers to gauge the effects of the new regulation and expects to get responses by March 1, Barry says.

The change in Rule 147 will not affect the financials of Northwestern Mutual Life Insurance Company, Milwaukee, but other companies may have to consider the change when they are putting together financial statements for 2004, says William Koenig, Northwestern Mutual’s chief actuary.

“It is a little unusual [to advance a change] so late in the year,” Koenig says.

But the New York proposal will create certainty in the level of reserves while regulators and actuaries work on improving reserving requirements, Koenig says.

Scott Harrison, a Washington lawyer who represents a group of insurers that oppose implementation of A.G. 38, a proposal by some officials at the National Association of Insurance Commissioners, Kansas City, Mo., to tighten life insurance reserving requirements, says he questions the “unilateral action taken while the NAIC process is under way.”

The New York move is “bad for consumers” because it will make insurance “less available and more expensive,” Harrison says.

The emergency rule is on the Web at http://www.ins.state.ny.us/acrobat/re147eta.pdf