Several top life actuaries urged regulators to expose an industry plan for principle-based reserving that would include using existing CSO mortality tables to create new preferred and standard risk classes. The plan was discussed during the winter meeting of the National Association of Insurance Commissioners here.
The request for exposure was deferred by regulators at the Life & Health Actuarial Task Force until after a call to be held in 2006 so that regulators would have additional time to review the proposal. The call will probably be held in February 2006 but cannot be scheduled yet because under NAIC procedure, LHATF is not officially continued as an entity until the commissioners meet at their annual gathering. The 2006 gathering is scheduled for the first weekend in February.
The plan is being advanced by the American Council of Life Insurers. It would also include making changes to Actuarial Guideline 38, which was developed in response to companies that created new products and product features to keep reserving requirements lower than those required by adoption of Guideline Triple-X.
Michael Taht, a life actuary with Towers Perrin-Tillinghast, detailed how the existing 2001 nonsmoker CSO Table would be split into super preferred nonsmoker, preferred nonsmoker and residual standard nonsmoker.
Among the assumptions made in reworking the 2001 CSO Table were the level of preferred risk nonsmoker mortality, persistence of preferred risk mortality differentials and the prevalence of preferred risk products in underlying experience.
Mortality experience that was relied on included a Tillinghast old age mortality study, as well as Society of Actuaries preferred risk underwriting surveys and medical studies.
In preparation for a principle-based reserving system, the Society of Actuaries, in conjunction with the American Academy of Actuaries, Washington, and its preferred mortality project, is working on updated actuarial tables. The effort is separate from the ACLI work.
Armand diPaolo, chief actuary with Guardian Life Insurance Company of America, urged regulators to expose the proposal because he said it was important that the industry “not go back to the world that existed prior to AG 38.” To return to a pre-AG 38 world would be “corrosive” to the industry, according to diPaolo.
During his discussion, diPaolo said that while he supports efforts to gather more updated experience, creation of a new table also could cause complications in discussions with the Treasury Department. The introduction of a new table shortly after the 2001 CSO Table was introduced as the prevailing table could raise issues with Treasury on tax treatment under sections 807(d), 7702 and 7702(a) of the internal revenue code, he said.
Treasury has the authority to choose the prevailing table and depending on the table it chooses, the definition of life insurance and inside buildup could be impacted, he explained. To have two tables–the existing table and a new table–would make discussions more complicated, he continued.
During further discussion of a principle-based solution, LHATF voted to expose work of the American Academy of Actuaries’ life reserve working group. The vote was 12-1, with New York voting ‘no.’
The Academy effort would include all individual life insurance products and consider the possibility of creating an actuarial standard of practice rather than a regulation or actuarial guideline. It would also look at methods used to determine earned rates and discount rates. The goal of the Academy group is to present a final draft that can be adopted by LHATF at the December 2006 NAIC meeting.
Governance was another area discussed by regulators as the Academy advances efforts to develop proper oversight in a principle-based system. A regulatory framework was favored by regulators from California, Florida, New York and Texas.
“We are looking at a major change in the valuation law, and I would like to have something to fall back on,” said Sheldon Summers, a life actuary with the California department.
Dan Keating, a Florida life actuary, said that during a recent discussion, a Canadian actuary’s comments indicated that Canadian actuaries were as concerned with violating their professional standards as they were with violating the law. But, Keating continued, he did not think the same necessarily held true in the United States.
However, Tomasz Serbinowski, a Utah life actuary, said that if efforts move too slowly, the project might not advance. He likened it to trying to break a wood plank with karate in little bits rather than with one whack. The plank doesn’t break, he noted.
An industry plan would include using existing CSO mortality tables to create new preferred and standard risk classes