Assessing principles-based reserving and the C-3, Phase II project
At press time, life reinsurers are among those watching for the outcome of a regulatory vote that would establish risk-based capital requirements for variable annuities with guarantees.
That anticipated vote on Oct. 14 by regulators of the National Association of Insurance Commissioners, Kansas City, Mo., as well as the outcome of two other projects still under development, could impact reinsurers’ business, according to interviews with National Underwriter.
These interviews suggest a general impression that the NAIC’s executive committee and plenary will adopt the measure, which places more emphasis on modeling than do traditional formulaic RBC requirements.
A second component of the C-3, Phase II project, which deals with reserving for variable annuities with guarantees, could be in place by year-end 2006 or in 2007. A newer project that creates a principles-based reserving framework is scheduled for a March 2007 completion.
Life reinsurers say that until the details of these proposals become clearer, it is difficult to say for sure what the impact on the reinsurance community will be. But they did discuss 3 general areas of change: direct writers’ future need for reinsurance; the impact on business that reinsurers hold; and, direct writers’ need for reinsurers’ advice.
For direct writers, the use of reinsurance as well as hedging techniques determine the type of risk management program a company has, and, consequently, the degree of risk that will be captured in modeling, says Tom Campbell, chairman of the variable annuity working group of the Academy of Actuaries, Washington, and a vice president and corporate actuary with Hartford Life Insurance Company, Simsbury, Conn. The working group is looking at the reserving component of the C-3 project.
To the extent that risk management becomes more important in the modeling process, companies will be encouraged to take a fresh look at how reinsurance is used, Campbell explains. It is one more element that will be looked at in the risk mitigation process, he adds.
And, to the extent that reinsurers are diversifying the business they hold, that will also be reflected in modeling, he says.
Arnold Dicke, senior manager with KPMG in New York, says that if regulatory changes become effective, there will be a need for advice either internally or externally on issues such as the use of reinsurance and clearly defined hedging strategies. If C-3 reserving requirements are adopted, they will take “a considerable amount of effort to comply with,” he says. “A great deal of modeling will be required.”
But he also notes that presently, there are few reinsurers that are assuming VAs with guarantees. And, in the case of C-3 RBC, there is a phase-in of the new approach, Dicke adds.
The impact of the principles-based project is more difficult to determine because at this point it is conceptual and “there are many different players and many different hopes for this,” Dicke says. But, depending on how the project develops, reserving for direct writers and to a corresponding degree for reinsurers would change, he notes.
Although the reinsurance market for VAs with guarantees has “significantly dried up,” to the extent that a direct writer uses hedging effectively, it can reduce its need for reinsurance and benefit from treatment under the new C-3 project, says Keith Floman, a senior actuarial advisor with Insurance and Actuarial Advisory Services practice of Ernst & Young, New York.
The impact of C-3, Phase II will vary by company depending on how conservative management is, says Ari Lindner, president of ACE Tempest Life Reinsurance, Ltd., a life reinsurance unit of ACE Group, Hamilton, Bermuda, one of the few reinsurers who write VAs with guarantees. He says he already has received a few calls on the issue. For many companies, introducing volatility into capital reporting may not be something that excites them too much, Lindner adds.
Jim Sweeney, executive vice president and COO with Munich American Reassurance Corp., Atlanta, says it is too early to say what the impact of principles-based reserving will be on reinsurers. There is reason for some optimism, he adds, but until details of the proposals are developed, it is difficult to say how much is justified.