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Life Health > Life Insurance

NAIC Panel Lets Public See Reserving Draft

By Jim Connolly

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Insurance regulators are asking for comments about a proposed temporary regulation that could affect sellers of term life and universal life with secondary guarantees.

The Life and Health Actuarial Task Force of the National Association of Insurance Commissioners, Kansas City, Mo., voted to “expose” a draft of the interim reserve proposal.

The exposure process gives members of the public a chance to react to a proposal before the NAIC acts on the proposal.

The American Council of Life Insurers, Washington, developed the interim reserve proposal in an effort to come up with a placeholder regulation that could guide life reserving while officials at the NAIC debate permanent changes.

The ACLI proposal would make 3 major changes to the reserve standards in the Standard Valuation Law, the backbone of reserving for life insurance products.

These changes would include introducing preferred mortality rates as a valuation standard by splitting the 2001 CSO Table into preferred and residual standard mortality; introducing lapse rates into the reserve calculation for UL policies with secondary guarantees; and allowing non-premium paying UL contracts with secondary guarantees to use the surrender charge offset to the additional reserve calculation.

During an earlier, separate discussion, the American Academy of Actuaries, Washington, held a discussion about how rates earned on a company’s investments could, under the current draft, affect reserve requirements.

After making provisions for credit risk, a portfolio of corporate AAA securities could lead to lower reserve requirements than a portfolio of Treasuries with the same maturities, according to the leader of the AAA discussion, Dave Neve, co-chair of the AAA life reserve working group.

If the company with AAA corporate securities and the company with Treasury securities had different risk levels, requiring each to hold the same level of reserves would violate the principles-based reserving approach, Neve said.

At some point down the “risk ladder,” it “probably makes sense to not allow the reserve to decrease, even if the earnings stream after credit losses is higher,” Neve said.

William Carmello, a life actuary with the New York insurance department, said during the AAA discussion that he embraces the idea of a principles-based reserving approach because “in a lot of ways the formulaic approach leaves a lot to be desired.”

However, Carmello said he opposes the idea of investing in riskier assets leading to reduced reserving requirements.

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