A minimum floor is now part of the C-3, Phase II project proposal

Boston

Variable annuity risk-based capital requirements that have a minimum floor cleared a key hurdle here and are poised to take effect at year-end 2005.

At the summer meeting of the National Association of Insurance Commissioners here, the Financial Conditions ‘E’ Committee adopted a motion to receive the proposal, known as the C-3, Phase II project.

It could be adopted by the full NAIC at the fall meeting in September.

The Phase II project seeks to address the equity, interest rate and expense recovery risks associated with variable annuities, and group annuities that contain death benefits or living benefit guarantees.

A second project for reserving for these products–using a principle-based rather than a formulaic approach–is also currently under way.

Insurers and some regulators argued that the proposal should be adopted without the minimum floor, which is called the Standard Scenario proposal. They argued that there needs to be a commitment to principle-based RBC and reserving requirements. Principle-based reserving relies on actuarial judgment rather than on formulas.

Commissioners, the American Academy of Actuaries and many companies in the life insurance industry are calling for a new system that will rely on principles. The issue now is being debated regarding reserving for universal life products with secondary guarantees. The UL model under discussion is Actuarial Guideline 38.

Lou Felice, a New York regulator and chair of the NAIC’s capital adequacy task force, said New York is committed to a principle-based approach but also thinks that a certain amount of conservatism and a phasing-in of a principle-based approach is warranted.

But during the Financial Conditions session, the American Council of Life Insurers, Washington, and the National Alliance of Life Companies, Rosemont, Ill., called for the Standard Scenario to be removed.

Ann Henstrand, vice president-financial services industry with Multistate, representing Jackson National Life, said the Standard Scenario did not have support in the industry. She argued for a hearing, similar to what is being done for another issue, AG 38, which also addresses principal-based reserving and RBC.

Steve Johnson, deputy commissioner with the Pennsylvania insurance department, said change should be implemented carefully, noting that insolvencies may have been prevented because of the conservatism of using a formulaic approach.

Mike Batte, a New Mexico regulator, argued that a lot of resources have been expended to develop the C-3, Phase II RBC proposal and that it is a “mistake” to make one scenario a standard scenario creating a minimum floor. Rather, it would be better to use it as an informational tool instead of a part of the formula.

Doug Barnert, representing the National Alliance of Life Companies, recommended putting the original Academy report in place for 2005 without the Standard Scenario. Adopting the Standard Scenario would be to take “the wrong step at the right time.” Work on the C-3, Phase II portion of the project has been under way for three years, he noted.

Mike Akers, a representative for American International Group, New York, said 13 letters from companies to regulators supporting the Academy’s work “is a solid indication of what the industry thinks.”

And, John Bruins, a representative of the American Academy of Actuaries, Washington, said one standard scenario might not be a good measure of risk and could be used for informational purposes.

“It might be difficult to serve two masters,” noted Larry Gorski, chair of the Academy’s Life Capital Adequacy Subcommittee, speaking of the stochastic and standard scenario components of the proposal before regulators.