Companies Call On ACLI To Act Regarding UL Reserving

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Even as regulators consider adoption of a current reserving proposal for universal life contracts with secondary guarantees, 13 industry leaders from 10 major insurers wrote a letter to American Council of Life Insurers President Frank Keating, calling on the ACLI to take action on the issue.

The Washington-based ACLI has maintained, until recently, a neutral position on Actuarial Guideline 38, a model regulation for UL reserving at the National Association of Insurance Commissioners, Kansas City, Mo. Now, in response to the April 5 letter, ACLI is promising to act as a “forum” on the issue.

ACLI has members who support and oppose the Application of the Valuation of Life Insurance Policies model regulation, known as AG 38. AG 38 is the second retooling of the Valuation of Life Insurance Policies model regulation, more familiarly known as Guideline Triple-X. The retooling of Triple-X was deemed necessary by regulators and industry representatives to prevent the use of new product designs to work around the reserving intent in the original model.

The latest model draft currently is being exposed by the NAICs Life & Health Actuarial Task Force and could be adopted by the task force next month, and then advanced to its parent “A” Committee. Mike Batte, LHATF chairman and a New Mexico regulator, says it is his sense the group feels its work on the model is done and that it could be adopted if a motion is made on May 9.

Several commissioners on the “A” Committee including its chair, North Dakota Insurance Commissioner Jim Poolman; and Nebraska Insurance Director Tim Wagner, oppose the model and instead, favor devoting resources to a long-term solution. LHATF has responded that it, too, favors a long-term solution, but a short-term answer also is needed in the interim.

In their letter to Keating, the company leaders asked the full ACLI board to endorse principles including “addressing promptly any differences of opinion arising among segments of our industry.” It also requests that “a board-level steering committee or similar group” be established.

The letter proposes short-term and long-term solutions. In the short term, it recommends adopting the current AG 38 with the following modifications: applying it from July 1, 2005; labeling it “temporary” and creating an April 1, 2007, sunset; and, including an actuarial reserving calculation that would “add a 7% load to the net single premium used in the denominator in one of the steps used in calculating reserves.”

In the long term, it recommends that the NAIC, companies and the American Academy of Actuaries develop a Modern Valuation model law and regulation, replacing at least Guideline Triple-X.

The MVL, according to the letter, would among other points: employ a “principle-based” reserving rather than a formulaic reserving approach; recognize the need to use stochastic testing, commonly known as an asset adequacy approach; use guidelines supporting appropriate federal income tax deductions and regulatory transparency; include an NAIC coordinated review process; be responsive to environmental changes; and be consistent among all states.

Gary Hughes, ACLI executive vice president and general counsel, says the ACLIs executive committee has reviewed and endorsed the request of these industry leaders and that the full ACLI board will look at the issue when it meets in late June.

“This signals the beginning of a process,” Hughes explains. ACLI wants this to be a “very open process” that also would be open to input from companies not named in the letter. Although different members hold different views on this issue, according to Hughes, the commonality is that action needs to be taken to change the current system. “We view ourselves as a forum.”

Whether there can be sufficient compromise to allow something to be accomplished remains to be seen, he says. “If everyone takes a hard line, there is not much we will be able to do as an association.”

There are certain steps that can be taken to changing a reserving system that would have a minimal impact on taxes and then there are “bolder” steps that have bigger tax implications, according to Hughes. When asked if the Internal Revenue Service would be a part of this forum, Hughes said he didnt know.

He says it is difficult to tell whether the 2007 time frame is realistic but notes that it indicates the serious intent of companies to create a new system.

The points made in the letter add a third proposal for a solution on the issue. Last month, a group of 8 major companies formed the Affordable Life Insurance Alliance, Washington, to develop a long-term, principle-based approach that uses asset adequacy analysis as a keystone for reserving. Alliance Executive Director Scott Harrison currently is working with regulators from Minnesota and Nebraska to try to flesh out this approach.

Dennis Glass, president and CEO of Jefferson-Pilot Corp., Greensboro, N.C., is both a co-chair of ALIA and a signer of the Keating letter.

Paul Mason, JP spokesman, offers this statement: “The letter represents the start of the process of reaching a compromise on establishing appropriate reserve levels. The intent is to ask the ACLI to endorse the principles in the letter and to establish a steering committee to implement the principles. Companies representing both sides of the issue have signed the letter in a good faith effort to come together in the best interests of our customers and the industry. We believe this signifies a positive step in the process.”

Pacific Life also signed the letter and is an ALIA member.


Reproduced from National Underwriter Edition, April 15, 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.