A More Flexible Reserving Approach Group says its agenda is not restricted to UL with secondary guarantees
By Jim Connolly
A brand new industry group, the Affordable Life Insurance Alliance, was launched on March 8 and will push for product reserving that uses principles rather than formulas.
Alliance co-chair Dennis Glass, president and CEO of Jefferson-Pilot Financial, Greensboro, N.C., said the new group wants to ensure that “Americans have safe and affordable insurance” based on modern state laws that reflect a principle-based approach to reserving. A fundamental goal, he continued, was to offer “properly reserved, innovative, affordable life insurance products.”
John D. Johns, chairman, president and CEO of Protective Life Corp., Birmingham, Ala., who is also co-chair of the Alliance, said “it has been identified as a top priority for over a decade but little has been done to date” because there have been more pressing issues the industry has faced or, in some instances, a reluctance to change.
“Excessively redundant reserves,” he noted, could discourage product innovation without providing additional solvency benefits. The new group supports and will work with the American Academy of Actuaries as well as the American Council of Life Insurers and the National Association of Insurance Commissioners.
The Academy has been advancing the approach for 10 years and the NAIC is working on several projects that use a principle-based approach to reserving as a keystone for reserving requirements.
ALIA is seeking a broad-based reform to address many insurance products and is not concerned specifically with universal life insurance with secondary guarantees, according to Bill OConnor, an ALIA senior consultant. In response to a request to define “proper reserving,” he said it is “reserving to reflect the economic risk inherent in any product.”
Scott Harrison, the new Alliances executive director, said, “Our objective is to spend the first few months developing information not just for regulators but also for legislators.” He emphasized that ALIAs efforts will be educational and that it will work with the Academy, the ACLI, the NAIC and the National Conference of Insurance Legislators. ALIA is not trying to replace the work of any of these groups, he added.
Academy President Robert Wilcox said that while the Academy is interested in creating a dialogue with those favoring a principle-based approach, it also will not be tightly linked with any group in order to maintain a professional stance.
Wilcox noted that the Academy has long advocated a more flexible approach to reserving going back 10 years to its work on a unified valuation system. With new technology, a new approach is now feasible, Wilcox said. When the concept was first raised 10 years ago, companies did not think it was feasible even if they agreed with the concept. Now, there is a feeling that “its the right way and we can do it that way.”
The concept is becoming more accepted worldwide including in Canada, he noted, and now it is starting to be embraced in the U.S. as well.
Any work will have to address the impact on how the Internal Revenue Service looks at taxes, according to Wilcox. “It is an issue [the industry] cant dodge or hide from,” he said, but if it is approached properly and the benefits of a principle-based approach are explained, then that issue can be addressed.
During the December 2004 NAIC meeting, commissioners encouraged regulators working on a reserving project for universal life products with secondary guarantees to seek a principle-based approach rather than focus on Actuarial Guideline 38, a formula-based approach. Regulators told commissioners that they also favored a principle-based approach, but an immediate solution was needed to ensure proper reserving for UL products.