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VA-CARVM Discussion Balances Safety, Efficiency

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Regulators are trying to narrow the set of concerns that is delaying the advancement of an actuarial guideline that establishes reserving requirements for variable annuities with guarantees.

During the spring meeting of the National Association of Insurance Commissioners here, regulators discussed the possibility of advancing the model out of the Life & Health Actuarial Task Force either by the summer meeting or later this fall. The timing depends on how quickly accord can be reached on issues including the use of a standard scenario along with stochastic modeling envisioned in the model. Other issues that were broached included revenue sharing, and the inclusion of an option pricing floor requirement into the standard scenario. Stochastic modeling is a system that creates many iterations of possible outcomes in order to get a sense of the risk in a product and in its guarantees. The standard scenario is a proposal developed by the New York insurance department that creates a reserving floor.

AG-CARVM is an attempt to create guidelines that incorporate more flexible stochastic modeling that create an ease of mind among regulators that guaranteed death and living benefits have sufficient reserves.

The reserving for these products follows risk-based capital requirements that were put in place at the end of 2005. The reserving component is currently being developed by the American Academy of Actuary’s Variable Annuity Reserve working group, headed by Tom Campbell, a life actuary with Hartford Life Ins. Co., Simsbury, Conn.

William Carmello, a life actuary with the New York insurance department, said that if stochastic modeling is done prudently, it should be higher than a standard scenario and should not be “trumped” by it.

But, he says that features such as an option floor which uses an option to create another level of safety, is an important protection because “this product is essentially toxic.” The reason, he explains, is that the product can be volatile and if the guarantees go ‘in the money’, it could have a negative impact on insurers. The lack of reinsurance and the expense of long dated options point to the risk associated with these guarantees, Carmello adds.

John Bruins, a life actuary with the American Council of Life Insurers, Washington, noted that while capital filings are done annually, reserving would be done quarterly and consequently, companies would have little time to complete their filings. As a result, he continues, the more complicated a filing is, the more time both companies and regulators will have to spend preparing and reviewing it.

The industry supports a standard scenario, according to Bruins. However, it must be simple, a floor, and, “tax friendly.” It is a “major issue” for insurers that reserves remain tax deductible, he continued.

Mike Batte, a life actuary and LHATF co-chair, noted that the purpose of the AG-CARVM would be to create reserves that protect solvency. The ability to take tax deductions is between companies and Congress, he added.


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