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.