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AG 38 Reserving Debate Spawns Second Draft

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Regulators have decided to seek public comments on a second proposal for establishing reserving guidelines for universal life products with secondary guarantees.[@@]

Members of the Life and Health Actuarial Task Force at the National Association of Insurance Commissioners, Kansas City, Mo., have voted unanimously to put the second draft out for exposure alongside the first.

Commissioners could take action on either draft in June at the NAIC’s summer meeting.

The LHATF is looking at a model to establish guidelines that would help companies properly reserve for term and universal life products.

Many major life insurers are saying that regulators need to focus on a “principle-based” approach rather than spend any more time on solutions based on traditional formulas. Members of the NAIC’s “A” Committee have agreed, calling for a principle-based solution that would seek a solution that would allow for flexibility and also require proper reserving.

The newly exposed draft presents a new version of Actuarial Guideline 38, the Application of the Valuation of Life Insurance Policies model regulation. The draft, submitted by William Carmello, a New York regulator, incorporates suggestions that top executives of 10 major life insurers recommended in a letter to Frank Keating, president of the American Council of Life Insurers, Washington.

Among those suggestions are a July 1, 2005, effective date for short-term solutions, which would include a 7% load on 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 development of a long-term, principle-based solution.

However, language was added to the sunset provision that would create an alternative to creation of a final, principle-based solution on the sunset date. Regulators also could come up with an interim step that would be more “readily achievable” while providing “relief from overly conservative requirements,” such as valuation mortality requirements, according to the new language.

The language reflects regulators’ concerns that, even with a commitment to move toward a principle-based approach, the work is complex and might still be in progress on the sunset date. Consequently, there was support for language that provided a second option for reserving relief while regulators continued to look for a principle-based solution.

In several places, the language offered by Carmello changes the time table 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.

Several insurers are asking the NAIC to avoid advancing a draft until the ACLI board decides what action to take on the issue.

Randy Freitag, a senior vice president at Jefferson-Pilot Corp., Greensboro, N.C., says the new provision on the mortality valuation requirement is “not close” to the principle-based approach supported in the insurance company executives’ letter. He says the points in the executives’ letter should be fully incorporated in the draft.

Mike Batte, chief life actuary for the New Mexico Insurance Division, who represents New Mexico on the LHATF as the LHATF chair, says he is disappointed that there are now 2 drafts and that it will be hard to explain why a second draft was needed.

Joe Musgrove, an Arkansas regulator, says the NAIC’s “A” Committee, LHATF’s parent at the NAIC, has expressed its preference for a principle-based system. Even an addition to the sunset language might sound like a continuation of efforts to advance a formulaic solution, and “I can promise you that ‘A’ has heard enough of it,” Musgrove says.