Regulators and actuaries are trying to field questions from insurers who write variable annuities with guarantees. These insurers are preparing to use C-3, Phase II RBC requirements for the first time.
The discussion took place during the winter meeting of the National Association of Insurance Commissioners, Kansas City, Mo., at the life risk-based capital working group.
The risk-based capital guidelines use stochastic modeling as well as a standard scenario, which creates a floor to ensure a certain measure of conservatism. The guidelines become effective at year-end for 2005 RBC.
A companion project currently is being developed to create reserving for VA products with guarantees. The VA-CARVM project is still in development.
Lou Felice, a New York regulator and chair of the NAIC’s capital adequacy task force, said all RBC reports will remain confidential, although there may be some information-sharing among regulators who agree to keep information confidential.
Among the 21 questions the NAIC has received to date is one asking whether the changes in C-3, Phase II apply to fixed subaccounts for a company accounting for variable annuity fixed subaccounts within the general account.
Another question asked whether a company with surrender charges defined as a percentage of premiums deposited should calculate its standard scenario amount using lapse and margin assumptions for the surrender charge period even if a renewal deposit is small relative to the total policy value.
Larry Gorski, a life actuary with Claire Thinking, who helped develop the C-3 project with other members of the American Academy of Actuaries, said some guidance may be found in the Academy practice notes in Q9-17. Felice added that the New York department also could offer guidance.
Gorski noted that although the definition of standard scenario is, in general, prescriptive, in the event additional guidance is needed, companies can look to Academy recommendations in order to interpret and implement the standard scenario.
Another question raised was how to treat small blocks of VAs such as legacy blocks of business. Tom Campbell, a life actuary with Hartford Life and chair of the VA CARVM working group of the Academy, said one option would be to go to the Academy website and download models for an alternative methodology. Another possibility, he added, is to talk to regulators in the company’s state of domicile and present an analysis showing that the company would need to hold a lot more than it currently needs to hold. However, he noted that it was not clear whether regulators would be amenable to such discussions.