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"Toxic" VAs Need Careful Reserving: Regulator

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Even as one regulator called variable annuities “toxic products,” industry representatives were saying the current draft actuarial guideline creates reserves that are redundant and too conservative.

The discussion took place during a meeting of the Life & Health Actuarial Task Force of the National Association of Insurance Commissioners, Kansas City, Mo. LHATF voted 11 to 3 to present a draft of a guideline for comment., and it expects to approve the guideline in September as a step toward full adoption by the NAIC by Dec. 31, 2007, of the actuarial guideline known as the Commissioners Annuity Reserve Valuation Method.

New York regulator William Carmello argued the reserving requirements should be more conservative because of the options in VAs.

“It is a product that I view as toxic and that could definitely bring a company down in an instant,” Carmello said.

Variable annuities with guarantees are offering promises that not even reinsurers are willing to take on, according to Carmello. “That’s got to say something,” he added.

Allan Elstein, a Connecticut regulator, said during the discussion that an exposure draft should include a strong standard scenario.

The standard scenario, first proposed by the New York department, is designed to ensure a minimum degree of reserving safety. VA companies have argued, however, that it is too conservative and creates unnecessary reserving.

In response, Tom Campbell, a life actuary with Hartford Life Insurance Co., Simsbury, Conn., said that if the task force really believes VAs with guarantees are toxic, then it should communicate that. If it doesn’t believe that, and it believes that the reserves are redundant, that should also be communicated, said Campbell, who is chair of the American Academy of Actuaries’ variable reserve working group.

Hartford Life also submitted its own suggestions for shaping the draft.

John Bruins, an actuary with the American Council of Life Insurers, Washington, said the ACLI views VAs with guarantees as “reasonable but risky products in which we are looking to establish reasonable reserves. If LHATF thinks that these products are toxic, then we’d like to hear that.”