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Life Health > Life Insurance

NAIC Marshals Thoughts On Principle-Based Reserving

By Jim Connolly

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The American Council of Life Insurers has promised state insurance regulators it will offer a short-term reserving solution for term and universal life products with secondary guarantees by the end of the year.[@@]

During a meeting in Minneapolis of the National Association of Insurance Commissioners, Kansas City, Mo., on Aug. 22-23, the ACLI reiterated its support for a principle-based reserving system.

The meeting drew around 100 interested parties, including approximately 9 state insurance commissioners, all of whom are members of the NAIC’s Life & Annuities “A” Committee, where the reserving issue is under discussion. Actuaries and industry representatives also attended.

The state commissioners are interested in ways to develop more efficient reserving for life insurance products. The system currently uses formulaic reserves that some maintain are inefficient. The current system also has its supporters, however, who argue it affords a necessary degree of conservatism and safety.

The interim session of the NAIC’s “A” Committee was held to prepare for a general discussion of a work timetable that could advance more efficient reserving, North Dakota Commissioner Jim Poolman told National Underwriter (see NU’s print edition, Aug. 22-29).

The issue has implications for consumers, the life insurance market and solvency oversight, Poolman said.

As the ACLI develops its solution, another short-term solution that sunsets in 2007, Actuarial Guideline 38, is being readied for the NAIC’s review and possible adoption at its fall meeting in New Orleans Sept. 10-13.

The effort will parallel 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 states’ standard valuation law could be changed would be 2009. In the interim, the need for reasonably priced products to offer the underinsured continues, Graham says.

The effort will look at the NAIC’s 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.

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. 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.

Scott Harrison, executive director of the Affordable Life Insurance Alliance, Washington, says there was a lot of discussion during the meeting about the need to reduce cost so 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, Harrison says.

Kristi Matus, president and chief executive officer with USAA Life Insurance Co., San Antonio, Texas, told the group USAA believes its current reserves are 3 times higher than necessary. Because of coinsurance and other arrangements, however, Matus added USAA customers have not experienced increases in premiums.

She said a balance is needed between cost and solvency considerations, and that there is a misconception that too much reserving makes a company safer.

Commissioners at the meeting, in addition to North Dakota’s Poolman, included Arkansas’ Julie Benafield Bowman, Florida’s Kevin McCarty, Iowa’s Susan Voss, Kentucky’s Glenn Jennings and Nebraska’s Tim Wagner, all members of the NAIC’s Life & Annuities “A” Committee.

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