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Life Health > Life Insurance

Insurers Criticize VA Guarantee Guideline Draft

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Life insurers are sparring with regulators over a draft actuarial guideline that could affect issuers of variable annuities that come with guarantees.

Members of the Life & Health Actuarial Task Force at the National Association of Insurance Commissioners, Kansas City, Mo., are working on the draft of Actuarial Guideline VACARVM with representatives from the American Academy of Actuaries, Washington, and the American Council of Life Insurers, Washington.

The finished guideline is supposed to help insurers and actuaries implement the NAIC’s Commissioners Annuity Reserve Valuation Method for Variable Annuities.

In the latest draft, regulators have tightened some standards.

Regulators say they are simply trying to protect consumers, but insurers say the changes violate the spirit of efforts to move toward a “principles-based” approach to reserving.

Advocates of the principles-based approach want the insurance industry to rely less on static ratios and formulas and more on statistical modeling and actuarial judgment.

Tom Campbell, a life actuary with Hartford Life Insurance Company, Simsbury, Conn., and chair of the variable reserve working group at the AAA, says guideline draft issues that concern actuaries include contract holder behavior; the revenue-sharing mechanisms that mutual fund companies use to pay insurers for administrative and distribution services; and the level of conservatism expressed in requirements for the “conditional tail expectation,” or CTE.

- Contract holder behavior: New York regulators want insurers to assume in their models that policyholders will make the most efficient possible use of guaranteed living benefits.

But Mike Sparrow of Nationwide Financial Services Inc., Columbus, Ohio, says making accurate assumptions about contract holder behavior is difficult, because insurers still have little guaranteed living benefits experience.

- Revenue sharing: Campbell notes in a comment letter on behalf of Hartford Life that the current Actuarial Guideline VACARVM draft would eliminate a good portion of, if not all, revenue-sharing income.

- CTE: Modern stochastic models use huge numbers of hypothetical “scenarios” to determine how products or product features might perform under a wide range of possible conditions. The CTE is a risk measure that reflects how much risk insurers face from a range of bad scenarios, such as the 10% most damaging scenarios analyzed, rather than a single typical scenario, or a single moderately bad scenario.

The authors of the Actuarial Guideline VACARVM draft have included a 75 CTE. That means insurers would have to compute the numerical average of scenario present values that rank among the worst 25% on a list that ranks scenario present values from best to worst.

A 75 CTE would, in effect, show how much risk annuity issuers might face from scenarios that rank in the top quarter in terms of severity.

An earlier draft of the guideline included a 65 CTE, which would show how much risk annuity issuers might face from scenarios that rank in the top 35% in terms of severity.

Increasing the requirement to a 75 CTE, from a 65 CTE, would make the requirement overly conservative, according to supporters of the 65 CTE requirement.

Because of the changes made in the stochastic CTE model, the model is no longer consistent with the NAIC’s C-3, Phase II capital requirements for variable annuities or with the definition of principles-based reserving, according to John Bruins, an ACLI life actuary.

“This is no longer a principle-based approach.” Bruins says.

The current version of the reserve standard would produce reserve levels that would be greater than needed on a prudent best estimate basis and, in some cases, greater than the levels required by the C-3 Phase II RBC standards, Bruins writes in a comment letter.


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