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Regulators Mull VA Standard Scenario Approach

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Members of the Life & Health Actuarial Task Force are hoping to complete a draft of new variable annuity reserving rules sometime this summer.

The National Association of Insurance Commissioners, Kansas City, Mo., would then expose the draft, the work of the Variable Annuity-Commissioners Annuity Reserve Valuation Method project, to public comment.

The full membership of the NAIC would have to approve the model before it would take effect, officials said Thursday during a task force discussion.

Members of the VA-CARVM team hope to replace the old, formula-based approach to regulating VA reserves with a new, more flexible, principles-based approach.

Project team members are hoping to get company data from the American Council of Life Insurers, Washington, that will focus on risk-based capital and the effect of differences between Contingent Tail Expectation 65 and CTE 75 and different versions of a standard scenario.

The standard scenario approach, supported by New York insurance regulators, would set a minimum reserving floor by requiring insurers to take a standard scenario into account when computing VA reserves.

The CTE value is an expected value over a certain anticipated threshold or level of risk.

Some speakers who participated in the discussion proposed the use of a simplified standard scenario without an option floor method to gauge the cost of options used in variable products with guarantees.

Other speakers proposed using the standard scenario in a shadow reporting approach that would give regulators an indication of the project’s results without affecting financial statements that in ways that could hurt company ratings.

Some speakers maintained that an option floor method would help reflect the risk of derivatives used in association with VA guarantees.