Regulators voted to expose a draft of an actuarial guideline for reserving of variable annuities with living benefits that incorporates a proposal of the American Council of Life Insurers and work from the American Academy of Actuaries.
The 8-4 vote of the Life and Health Actuarial Task Force took place during the winter meeting of the National Association of Insurance Commissioners here. The motion did not include a proposal made by the New York insurance department. Following the vote, several attendees at the meeting told National Underwriter that they feel a barrier may have been finally broken.
Comments made during discussion on the issue suggested a desire to advance the project so action can be taken in 2006. Work on the effort has been ongoing for several years. Mike Batte, LHATF chair, asked, “What does the task force want to do with VA-CARVM?” He noted that to date, the ACLI, Academy and New York department have offered suggestions for reserving, but consensus has not been reached.
Major sticking points have been the use of a standard scenario as a floor and the degree of conservatism the guideline needs.
Tom Campbell, a life actuary with Hartford Life who is representing the Academy on the issue, said a simplified calculation and a minimum floor could work. However, he added that the standard scenario would not be as effective as focusing on a modeling approach and on principle-based reserving.
The ACLI is concerned with adding additional levels of conservatism, said John Bruins, a life actuary with the ACLI. A standard scenario should be a simple calculation that should become a floor and not a basis to which floors are added, he said. In a Nov. 28 letter to LHATF, Bruins wrote that a standard scenario equal to the basic adjusted reserve will “meet the goal of providing a reasonable floor for reserves.”
Some insurers are saying the New York proposal is too conservative. For instance, a letter submitted by Life Investors Insurance Company of America, Cedar Rapids, Iowa, states that the ACLI draft should be a starting point for the VA-CARVM discussion. It adds that recent drafts from the New York department are “impractical” and add “additional conservatism.”
The letter says those drafts would require the calculation of an accumulation of fee amount and a capital markets option cost for embedded guarantees. The latter, the letter continues, “is particularly troubling since it assumes the ease of being able to determine the fair market value of option costs driven by mortality rates, highly complex policyholder behaviors and offsetting revenue streams.” It says that very conservative reserve levels reduce the competitiveness of annuity products but also notes that “regulators need to have reasonable assurances that policyholder claims can be met.”
A major sticking point has been the use of a standard scenario as a floor