A second draft of a reserving guideline for universal life products with secondary guarantees was unanimously adopted by regulators for exposure along with a draft that is currently being exposed.
Action on either draft could be taken during the summer meeting of the National Association of Insurance Commissioners in June.
The second draft of Actuarial Guideline 38, the Application of the Valuation of Life Insurance Policies model regulation, incorporates suggestions that CEOs of 10 major life insurers recommended in a letter to Frank Keating, president of the American Council of Life Insurers, Washington (see NU, April 18). It was offered by William Carmello, a New York regulator.
Among those suggestions are: a July 1, 2005, effective date for short-term solutions that would include a 7% load to the net single premium used in the denominator in one of the steps used to calculate reserves; an April 1, 2007, sunset; and a commitment to a long-term principle-based solution.
However, language was added to the sunset provision that in lieu of a final principle-based solution at the time of the sunset, relief also could be offered by an interim step that was more “readily achievable” while providing “relief from overly conservative requirements” such as valuation mortality requirements.
The language reflects regulators’ concerns that even with a commitment to move toward a principle-based approach, the work is complex and might not be finalized by the sunset date. Consequently, there was support for language that provided a second option of reserving relief while a principle-based solution was implemented.
In several places, the language offered by Carmello changes the timetable throughout the initial model to reflect the interim period of July 1, 2005, through April 1, 2007.
The second draft may not be uniformly accepted by the life insurance industry. During a discussion at the Life & Health Actuarial Task Force session, Randy Freitag, a senior vice president with Jefferson-Pilot Financial Corp., Greensboro, N.C., noted that the inclusion of the clause provision on the mortality valuation requirement was “not close” to the principle-based approach supported in the CEO letter and that the points in that letter should be incorporated fully into the draft.
Gary Falde, vice president and appointed actuary with Pacific Life Insurance Company, Newport Beach, Calif., urged regulators to avoid a “one-size-fits-all approach” and changes to the sunset provision that could “dilute the sense of urgency to complete a principle-based solution.”
Representatives for Jefferson-Pilot Financial; Northwestern Mutual Life Insurance Co., Milwaukee; and New York Life Insurance Company, expressed support for the compromise in the CEO letter and urged that any draft reflect those suggestions.
Insurers offered comments that any advancement of a draft be postponed until the ACLI board of directors meets on June 24 to decide what action to take on the issue.
Mike Batte, a chief actuary and regulator representing New Mexico as LHATF chair, says he is disappointed that there are now two drafts because it will be hard to communicate why a second draft was needed. The second draft could create confusion, he adds.
Batte also says he is surprised the Task Force would agree to a sunset provision in a draft, noting that a current reserving model for variable annuities is going to expire in January 2006 and work on the VACARVM project has not been finalized to replace it.
Joe Musgrove, an Arkansas regulator, says the “A” Committee, LHATF’s parent at NAIC, has expressed its preference for a principle-based solution rather than a formulaic approach and that even an addition to the sunset language might sound like a continuation of efforts to advance a formulaic solution. “I can promise you that ‘A’ has heard enough of it,” he adds.
Other regulators expressed concern that a sunset provision may not take into account all circumstances. For instance, Frank Dino, a Florida regulator, cites the possibility that tax implications may make it difficult for industry to reach an acceptable principle-based solution.
As a regulator he says he is concerned about going back to guidelines that would permit inadequate reserves if there is a sunset in an existing guideline.
Sheldon Summers, a California regulator, says that creating a new principle-based approach is not an easy matter and that regulators need to be sure they have the time to develop this system thoroughly.
Nebraska regulator John Rink raised the issue of whether a July 1, 2005, implementation date would be too soon given the fact that it is May and the ACLI board will not be meeting until June 24, a week before implementation would begin.