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Life Health > Life Insurance

Regulators Plow Ahead With Principles Project

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Officials at the U.S. Treasury Department seem to be more interested in hearing updates on efforts to modernize life insurance reserving methods.

Actuaries and trade group representatives gave that assessment here this week during a session of the Life and Health Actuarial Task Force, at the fall meeting of the National Association of Insurance Commissioners, Washington.

Actuaries trying to develop a new, more flexible, “principles-based” approach to life reserving said worries about income tax implications and questions about whether to evaluate reserves on a product-by-product or companywide basis still require further consideration.

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In the past, Treasury officials seemed to be interested in reserving tax issues only when the LHATF had a completed document or almost-completed document in hand, according to Dave Neve, co-chair of the life reserves working group of the American Academy of Actuaries, Washington.

Today, Neve said, Treasury officials want to hear regularly about what insurers and regulators are thinking about efforts to develop a principles-based reserving system.

Insurance industry officials will be heading to Treasury for another informal meeting on the efforts later this month, Neve said.

The ACLI will be trying to educate Treasury officials about principles-based issues, but Treasury officials will be preoccupied with developing a budget, said Gregory Jenner, ACLI executive vice president for taxes and retirement security.

The ACLI has a strong incentive to try to work within the scope of current laws, because asking Congress to change the laws could open up a “Pandora’s box” of problems, Jenner said.

Although the ACLI is “highly optimistic” that the tax issue will be addressed by the end of the year, Treasury feedback could lead to tweaking of the final proposal, Jenner said.

“Fluidity is the key word here,” Jenner said.

Neve, who works for Principal Financial Group Inc., Des Moines, Iowa, said completion of the principles-based reserving project also hinges on discussions of whether companies should be able to use the risk profile of one product line to offset the risk profile of another product line.

Neve said he believes allowing risk offsets could be appropriate.

But Leslie Jones, a life actuary from South Carolina, noted that requiring separate reserving for each of line of business could provide more clarity.

Under a product-by-product reserving system, if an insurer sold a line of business with strong reserves and kept a business with weaker reserves, reserving for the remaining line of business would still be appropriate, Jones said.

Another issue that came up during the LHATF meeting was concern about the possibility that allowing the use of projected earnings on a company’s assets could encourage companies to invest in high-risk investments. Companies that invested in the higher-risk investments would earn a higher interest rate, and that higher rate would reduce product reserve requirements, speakers said.

New York regulators want to cap the discount rate at the Treasury rate plus 0.5 percentage points.

But Tom Campbell, a life actuary with the Hartford Life unit of Hartford Financial Group Inc., Hartford, and other meeting participants said capping the discount rate could end up cutting the contract holder crediting rate and having other unintended consequences.

The LHATF also reviewed efforts to develop Actuarial Guideline VA-CARVM – a guideline for use of the Commissioners Annuity Reserve Valuation Method for variable annuities with guarantees.

LHATF members adopted a motion to substitute a draft of Actuarial VA-CARVM developed by Hartford Life for a draft developed by an LHATF subgroup.

The Hartford Life draft would provide somewhat more generous treatment of unusual, high-risk events than the LHATF subgroup draft would provide, by showing how reserves would fare under a tough scenario obtained by computing the numberical average of present values for scenarios that rank in the 65th percentile or higher in terms of severity. Regulators have wanted to set a “conditional tail expectation” of 75%, while some insurance companies have been asking for a CTE of 70%.

The Hartford Life draft also includes a provision that calls for insurers to use a “reasonably prudent best estimate” over a plausible range of expected experience when making deterministic assumptions.

Another Hartford Life draft provision addresses treatment of policyholder behavior assumptions.

Jones and other LHATF members sought assurances before approving the substitution that the Hartford Life draft would be used for discussion rather than simply as a replacement for the LHATF draft.

LHATF members still can consider elements of the LHATF subgroup draft, colleagues told Jones.


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