Empire State regulators say they want to stop life insurers from using tricky policy designs to lower policy reserve requirements.

The New York State Insurance Department has proposed an amendment to Regulation Number 147 that would tighten reserving requirements for certain types of universal life insurance products that come with secondary guarantees, such as provisions that keep premiums level for a set number of years or provisions that let policyholders “catch up” on the payments needed to keep coverage in force.

The text of the amendment describes specific examples of problem policies.

If, for example, a policy offered a 10-year level-premium term, but then limits the ability of the insurer to increase premiums for another 20 years, then, “in the reserve calculation, an initial reserve segment of 30 years must be used,” according to the regulation text. “Since the contract contains provisions that limit the insurer’s ability to increase premiums, the initial premium shall be treated as guaranteed for the entire 30-year period.”

If a policyholder who fell behind on payment could take advantage of UL policy catch-up provisions, then the basic and deficiency reserves “shall be computed as if the specified premium requirement had been met,” according to the amendment text.

The New York department believes the proposed changes are consistent with a move by the National Association of Insurance Commissioners, Kansas City, Mo., to revise NAIC Actuarial Guideline 38 in 2005, officials write in a discussion of the proposed amendment.

The guideline, originally published in 2002, was supposed to clear up ambiguities in an NAIC life policy valuation model regulation adopted in 1999, New York officials note.

Both the 2002 guideline and the 2005 revision of the guideline were supposed to keep life insurers from disguising guarantees in ways that make reserve requirements for the more policies containing the disguised guarantees lower than the requirements for similar products with more typical designs, officials write.

New York Regulation Number 147 was based on the 1999 model, officials write.

Some parties have asked New York to leave Regulation Number 147 unchanged, but officials say a spreadsheet review reflecting the effects of the proposed amendment show it would have the “appropriate effect on reserves.”

Otherwise, some insurers would end up holding reserves lower than those required by New York insurance laws, officials write.

The proposed amendment to Regulation Number 147 also includes standards for credit life insurance reserves and a provision that would affect life insurance policies that accelerate payment of benefits for insureds who need long term care.

The LTC provision would let life insurers reduce reserves to reflect reduction in total policy benefits due to acceleration of payments. But “in no event shall the reserves for the long term care benefit and the life insurance benefit be less than the reserves for the life insurance benefit assuming no long term care benefit is available,” according to the text of the proposed amendment.

Links to the text of the proposed amendment and other documents relating to the proposed amendment are on the Web at Document Link