The American Council of Life Insurers, Washington, reiterated its support for a principle-based reserving system and promised to present a short-term solution for term and universal life products with secondary guarantees to state insurance regulators by the end of 2005.
The ACLI presented its views during a two-day interim meeting held by the National Association of Insurance Commissioners, Kansas City, Mo., on Aug. 22-23. The meeting drew approximately 100 interested parties including some 9 state insurance commissioners, as well as actuaries and industry representatives.
Commissioners in attendance included Jim Poolman of North Dakota, Julie Benafield Bowman of Arkansas, Kevin McCarty of Florida, Susan Voss of Iowa, Glenn Jennings of Kentucky and Tim Wagner of Nebraska, who are all members of the NAIC’s Life & Annuities “A” Committee where the issue is under discussion, according to interviews.
They are interested in seeing how more efficient reserving for life insurance products can be developed. The system currently uses formulaic reserves which some maintain are inefficient, while others say it affords a degree of conservatism and safety into the system. The “A” Committee interim session in Minneapolis was held so that a dialogue could lead to a general discussion of a work timetable that could advance these objectives, Poolman told National Underwriter (see NU, Aug. 22/29).
The issue has implications for consumers, the life insurance market and solvency oversight, Poolman told NU.
The solution ACLI says it will develop will be advanced even as another short-term solution that sunsets in 2007, Actuarial Guideline 38, is readied for review and possible adoption by the NAIC.
The effort will be parallel to the work being done on principle-based reserving by the American Academy of Actuaries, Washington, says Paul Graham, ACLI vice president-insurance regulation and chief actuary. If the Academy’s work advances more quickly, then the ACLI will put its work aside, he explains.
But the need to work on an immediate solution is important because the earliest that changes in states’ standard valuation law could be in place would be 2009 and in the interim the ability to offer reasonably priced products to the underinsured continues, Graham says. While 2009 might not seem a long way off, it represents 4 years in which it is more difficult to offer these products to consumers.
The effort will look at the current Valuation of Life Insurance Policies model regulation, better known as Guideline Triple-X, and see where “small tweaks” can be made, Graham says.
Efforts will be made to keep it “relatively simple, something that is easy to adopt,” he continues. “It will provide relief where reserves are more redundant than necessary,” he adds. Mortality, interest rates and how reserves are developed will be among the areas that are examined, Graham says.
The work will have to fit in with Standard Valuation Law and the federal tax code, he adds. The effort could be a way to test the concept of principle-based reserving, Graham says. ACLI is committed to working with the Treasury Department and the Internal Revenue Service, he adds.
It will be important to make sure that reserving stays within the current guidelines established by the existing definition of life insurance, according to Graham.
If reserves and mortality assumptions are tied, and different companies assume different mortality rates, then a consumer with a contract of one company may own a life insurance contract, but a consumer with another company may own a contract that does not meet that definition, he explains. In such a case, that consumer would be considered to own a modified endowment contract, he adds. An MEC is a contract that does not meet certain premium limits that are tested for a period of 7 years. The test is known as the ’7 Pay Test.’
Scott Harrison, executive director of the Affordable Life Insurance Alliance, Washington, says there was a lot of discussion about the need to reform and about reducing costs so that those who are underinsured or not insured at all would have greater access to insurance. Both ALIA founding co-chairs, Dennis Glass, president and CEO of Jefferson-Pilot Financial, Greensboro, N.C., and John D. Johns, chairman, president and CEO of Protective Life Corp., Birmingham, Ala., detailed how their companies had to maintain significantly higher reserves than they felt was necessary under the current system, Harrison says.
When asked if there were other ways to reduce the cost of insurance, Harrison says the point made during the discussion was that proper reserving would be a major way to reduce excessive costs.
A discussion of potential tax implications during the session indicated that the current tax code is flexible enough to incorporate principle-based changes, Harrison says.
Kristi Matus, president and CEO of USAA Life Insurance Company, San Antonio, Texas, also discussed the need for affordable insurance. Currently, reserves are 3 times higher than USAA believes they need to be, she says.
Because of co-insurance and other arrangements, Matus adds that USAA customers have not experienced increases in premiums. But, she continues, if these options were not available, the cost of insurance would increase, making it unaffordable for many consumers.
Matus cites LIMRA International statistics that show 72% of families choose term insurance and that 22% of American households have no life insurance.
She says a balance is needed between cost and solvency considerations, and reserving needs to reflect that balance. There is a misconception that too much reserving makes a company safer and that is not necessarily true, she adds.
ACLI’s effort will be parallel to the work being done on principle-based reserving by the American Academy of Actuaries