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New Group Formed To Push Reserving Change

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Product reserving that uses principles rather than formulas got another show of support in the form of a brand new industry group, the Affordable Life Insurance Alliance, Washington.[@@]

The American Academy of Actuaries, Washington, has been advancing the approach for 10 years, and the National Association of Insurance Commissioners, Kansas City, Mo., is working on several projects that use a principle-based approach as a keystone for reserving requirements.

The Alliance, launched on March 8, includes AmerUs Life Insurance Group, Jefferson Pilot Financial, Lincoln Financial Group, Midland National Life Insurance Company, North American Company for Life & Health Insurance, Pacific Life Insurance Company, the Penn Mutual Insurance Company and Protective Life Corp.

Dennis Glass, president and CEO of Jefferson-Pilot Financial, Greensboro, N.C., said that 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., said that principle-based reserving “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. He says that the new group supports and will work with the Academy as well as the American Council of Life Insurers, Washington, and the National Association of Insurance Commissioners, Kansas City, Mo.

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 O’Connor, an ALIA senior consultant. In response to a request to define “proper reserving,” he said that it is “reserving to reflect the economic risk inherent in any product.”

Scott Harrison, the new group’s executive director, said that it is “our objective is to spend the first few months developing information not just for regulators but also for legislators.” He emphasized that ALIA’s efforts will be educational and that it will work with the Academy, the ACLI, the NAIC and the National Conference of Insurance Legislators, Troy, N.Y. ALIA is not trying to replace the work of any of these groups, he added.

Academy President Robert Wilcox says that while the Academy is interested in creating a dialogue with those interested in a principle-based approach, it also will not be tightly linked with any group in order to maintain a professional stance.

Wilcox notes that the Academy has long advocated a more flexible approach to reserving that goes back 10 years to the Academy’s work on a unified valuation system. With new technology, a new approach is now feasible, Wilcox says. When the concept was first raised, companies did not think that it was practically feasible even if they agreed with the concept. Now, there is a feeling that “it’s the right way.”

The concept is becoming more accepted worldwide, including Canada, he notes. And now it is starting to be embraced in the U.S. as well, he says.

Any work will have to address the impact on how the Internal Revenue Service looks at taxes, according to Wilcox.

“It is an issue that [the industry] can’t dodge or hide from.” But if it is approached properly and the benefits of a principle-based approach are explained, then that issue can be addressed, he says.

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 a formula-based approach, Actuarial Guideline 38. Regulators themselves told commissioners that they also favor a principle-based approach but an immediate solution was needed to ensure proper reserving for UL products.

Commissioners stepped into the fray because a number of companies, including some companies in the new trade group, expressed concern about redundant product reserving that would hurt companies’ and indeed, the industry’s competitiveness. A number of regulators maintained that a more formulaic approach was needed immediately to prevent companies sidestepping reserve requirements.

Regulators are still considering how to respond to a request from commissioners to review the issue. The discussion, though far from final, covered possible responses ranging from focusing solely on a principle-based approach to reporting back to commissioners that AG 38 is the correct response.

Several projects at the NAIC with input from the Academy use a principal-based approach, including a project to reserve for variable annuities. A related C-3, Phase II approach for capital adequacy also takes a more flexible approach to reserving that relies on actuarial modeling.