On June 24, the board of the American Council of Life Insurers voted in favor of having state insurance regulators pursue a principle-based approach for reserving and risk-based capital.

That proposal is an alternative to a draft of Actuarial Guideline 38 for reserving for universal life contracts with secondary guarantees. AG 38 incorporates more of a formulaic approach to reserving rather than relying on actuarial judgment.

The ACLI board’s vote endorsed a proposal offered by 10 insurance executives that calls for short- and long-term solutions. In the short term, it recommends adopting AG 38 as currently proposed but with an April 1, 2007, sunset date. It also recommends including an actuarial 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.

A July 1, 2005, effective date would be applied retroactively under the proposal.

While regulators, insurers and actuaries support a principle-based proposal for reserving, achieving that end continues to cause controversy.

But Gary Hughes, ACLI executive vice president and general counsel, says the ACLI board’s endorsement of the concept is a recognition that it is in the interest of companies to work with regulators for both a short-term and a long-term solution. Companies already have made compromises to come up with this proposal, he adds.

“Moving toward a modern reserving system using principle-based reserving is a good thing for the industry,” Hughes says.

A solid majority of the board endorsed the CEOs’ proposal, he says, and while there are still some concerns with AG 38, as with any compromise, companies wanted to advance the project.

The endorsement frees the ACLI to move from a position of neutrality to one in which it can work actively with regulators, according to Hughes.

There is no industrywide study of how a principle-based approach would affect reserves because each company has a different reserving number, explains Paul Graham, ACLI vice president, market regulation and chief actuary.

There are three steps that ACLI sees in moving to a principle-based approach, according to Graham. The first is to change AG 38; the second is to change the Valuation of Life Insurance Policies model regulation, known as Guideline Triple-X as well as new mortality tables; and the third is to move to a full principle-based system, he says. The second step–changing Triple-X–would be developed during the two-year period between the July 1, 2005, effective date and the April 1, 2007, sunset, he adds.

The ACLI envisions a new mortality table that would incorporate new underwriting classifications such as select and super-select categories, Graham says.

‘Moving toward a principle-based system is a good thing for the industry’