Regulations addressing risk-based capital for variable annuities, reserving for universal life insurance, and small face amount life insurance policy disclosure are among measures adopted by the National Association of Insurance Commissioners during a conference call on Oct. 14.
The actions taken by state insurance regulators were anticipated and, in general, well received by insurance representatives, according to interviews conducted by National Underwriter.
The issues were supposed to be addressed during the fall meeting of the NAIC, which was scheduled to be held in New Orleans, but Hurricane Katrina forced the cancellation of that meeting.
The C-3, Phase II project, which establishes a modeling approach for risk-based capital requirements for variable annuities with guarantees, was adopted during the joint executive committee/plenary session of the NAIC.
Lou Felice, a New York regulator and chair of the NAIC’s Capital Adequacy Task Force, explained that the new approach will be tempered by a standard scenario that creates a minimum RBC requirement. That requirement creates an element of conservatism in company modeling until regulators become more comfortable with the new approach, he added.
A reserving component of C-3, Phase II for VAs is currently being developed by the American Academy of Actuaries, Washington, to complement the C-3, Phase II RBC part of the project.
Jim Poolman, chairman of the NAIC’s Life & Annuities “A” Committee and North Dakota insurance commissioner, said Actuarial Guideline 38, which the executive committee and plenary approved, was a temporary solution for reserving for products including universal life products with guarantees until a principles-based approach to reserving can be applied. He urged that the model be adopted uniformly among states because it is a reserving issue.
Ultimately, it is anticipated that a principles-based approach could be applied broadly to all products.
The American Council of Life Insurers, Washington, supports the actions on AG 38 and C-3, Phase II taken by the NAIC, according to Whit Cornman, a spokesman.
ACLI also supports the NAIC’s full adoption of work on a regulation addressing small face amount policies developed in the “A” committee, says Patricia Parachini, ACLI senior director-insurance regulation. “To the extent that a state sees a problem on this issue and wants to adopt the model, we will support it,” she adds.
It was good to hear regulators say there is still a lot of work to do before the project is complete, said Scott Harrison, executive director of Affordable Life Insurance Alliance, Washington. The guideline is an interim solution while work is done to complete a long-term solution, he adds.
It was also a positive that the C-3, Phase II RBC project was referenced as being consistent with the principles-based approach, Harrison says.
The C-3 project will have immediate implications for companies that sell products that are covered by it, Harrison says, but both the adoption of AG 38 and the C-3, RBC project signifies “a very strong commitment to move the NAIC in a direction for principles-based valuation.”
A “belt and suspenders approach” that resulted in inclusion of a minimum RBC requirement called the ‘standard scenario’ is something members would have preferred had not been included in C-3, Harrison continues. However, he also noted that regulators are taking an untested path and want to ensure that they are sufficiently conservative in their initial approach. During the discussion, he says, regulators indicated that the standard scenario was a temporary requirement until they become more comfortable with the approach.
“It was a compromise that everyone wanted,” says Scott Cipinko, counsel with Lord Bissell & Brook, LLP, and interim executive director of the Life Insurers Council, both in Atlanta. There was a realization that regulators wanted the issue addressed and this was a solution that everyone could agree to, he adds. Now companies will have to deploy resources to start changing their systems to incorporate disclosure requirements, Cipinko adds.
With regard to AG 38, Cipinko says regulators stepped up, addressed the issue and dealt with it quickly. However, he expressed some concern over the July 1 effective date of the regulation, saying it will require vigilance to ensure that the use of a retroactive date is not something that is regularly used.
More generally, Cipinko says insurers should be aware that the principles-based approach will not just affect Triple-X products but all products. “We are literally revamping the way that policies are written. It is important that everyone offer input in the process. It is like changing the rules of gravity. Everyone on earth is going to be impacted.”
The Small Face Amount Life Insurance Policies model act will require insurers to warn consumers about the date when premium payments for a small life policy will exceed the anticipated death benefits.
In states that adopt the model, sellers of small policies also will have to give purchasers of the policies 10 days to ask for full premium refunds.
‘A very strong commitment to move the NAIC in a direction for principles-based valuation’