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Small Face Issue Advances, While AG 38 Pauses

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After years of wrangling over a solution for small face amount policies that would balance the interests of consumers and companies, a consensus product was presented and advanced at a meeting of regulators here.

The breakthrough was detailed at the summer meeting of the National Association of Insurance Commissioners.

The amendments to the Small Face Amount Life Insurance Policies model act that were adopted emphasize disclosure to the contract holder.

The new language includes a statement that “an insurer issuing a small face amount policy, where over the term of the policy the cumulative policy premiums paid may exceed the face amount of the policy, shall clearly and prominently disclose, on or before policy delivery, the length of time until the cumulative policy premiums paid may exceed the face amount of the policy.”

Speaking of the compromise that all sides made, Walter Bell, Alabama commissioner and the regulator who spearheaded the effort, said, “Did everyone get what they wanted out of the situation? No.” But he added that the resulting compromise was a good product.

His remarks were reinforced by comments that followed–including remarks from the American Council of Life Insurers, the National Alliance of Life Companies, the Life Insurers Council and the Center for Economic Justice.

The concern with small face amount policies, those with a face value of less than $15,000, was that policyholders would pay in more than the value of the contract.

Meanwhile, regulators on the Life Insurance and Annuities “A” Committee decided to pause on another contentious issue, Actuarial Guideline 38, which addresses reserving for universal life products with secondary guarantees. The “A” Committee received a draft model adopted by the Life and Health Actuarial Task Force and is planning a public hearing to further discuss the matter.

The May 9 draft that was received is one of several that have been floated to address the issue of reserving of UL products.

During a discussion of the issue at LHATF, prior to the 9-1 vote to advance the draft, several issues surfaced.

A July 1, 2005, effective date was one point of concern because companies might conceivably have had to initiate changes including product repricing and a change to systems, as explained to regulators by Mary Bahna-Nolan, a representative with the North American Company for Life and Health Insurance.

But with the action deferred until a later time, the effective date could be applied retroactively.

Regulators at LHATF also expressed reservations about a sunset provision. Connecticut regulator Allen Elstein questioned the artificial pressure that a sunset provision would create in establishing a principle-based system for reserving.

Companies are, in general, in favor of a principle-based approach to reserving, although the American Council of Life Insurers will not take an official position on the issue until its June 24 board meeting.

The issue of a principle-based system was discussed in detail by representatives of the American Academy of Actuaries, Washington, during the meeting.

Among the points of discussion were 10 principles that would serve as a framework for a principle-based system for reserving for life products.

Using methodology that would appropriately capture risk, and creating a regulatory review and governance process are two of the principles described by Dave Neve, a chair of the Academy’s UL working group and a representative of Principal Life Insurance Company.


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