Work on the fundamental underpinnings of a system of principles-based reserving continues so that state insurance regulators can actually begin to move the project toward completion later this year.
Among the work is a review of the Standard Valuation Law, the creation of a statistical agent to meet a new regulation allowing companies to use preferred mortality tables and a review of how reinsurance guidelines would be incorporated into a new Valuation Manual that is being developed for PBR. The work is currently being discussed by members of the Life & Health Actuarial Task Force of the National Association of Insurance Commissioners, Kansas City, Mo.
One area of discussion on Jan. 31 was VM 50 and 51, pieces of the proposed Valuation Manual that address the creation of statistical agents to manage data required by regulation.
The requirements of a new model, Regulation 815, permit the use of mortality tables that reflect differences in mortality between preferred and standard lives in determining minimum reserve liabilities. The model took effect on Jan. 1, 2007 and has been enacted in roughly 40 states.
As part of this new model, insurers are required to file annually with the commissioner, the NAIC or a statistical agent, statistical reports showing mortality and other information deemed necessary by the commissioner to meet the requirements of the regulation.
Regulators and industry continue to discuss how to do this efficiently and in a way that companies can provide data seamlessly if PBR becomes effective. The Jan. 31 discussion centered on whether the NAIC could put out request for proposals for statistical agents that individual states could use in an effort to create efficiency and uniformity. The conclusion was that because of individual state requirements; this would be difficult and probably not possible.
However, the possibility of the NAIC creating a methodology for establishing approved statistical agents similar to the Insurance Services Office, Jersey City, N.J., or the MIB, Braintree, Mass., which states could then contract with, was also raised.
Different states are at different places in their collection of data. For instance, New York is near finalizing an RFP and is on target to collect all necessary mortality data in 2008, according to Fred Andersen, a New York regulator.
Industry representatives voiced concern that they would be required to provide data to multiple statistical agents as well as to the Society of Actuaries, Schaumburg, Ill. They urged regulators to make sure that data could be filed with one agent for different statistical studies, such as one for life and one for property-casualty insurance. However, they also said that they wanted to be able to have a choice of statistical agents with which a company could contract.
Regulators also asserted that whatever system was ultimately put in place would need to allow regulators to access data. John Bruins, an actuary with the American Council of Life Insurers, Washington, said that for exam purposes regulators always have the right to ask a company for data, but that they should ask for it directly rather than through a statistical agent. When pressed to offer a reason, Bruins cited the construction of law in most states and also noted that it would allow for better protection from Freedom of Information requests.
Tom Rhodes, a representative with MIB, said the system should be established so that statistical agents do not inadvertently get caught in the middle of such a request.
Another part of the Valuation Manual that received discussion is VM 20 and how it will impact reinsurance.
The effectiveness of modeling in assessing actual risk transfer was one concern raised by regulators during a discussion of Section 20 of the proposed Valuation Manual being developed as a piece of PBR.
In order to include all the necessary assumptions in creating stochastic models, there needs to be the presumption that companies always act in their best economic interests and that all necessary information about the company is available to the modelers and that is not necessarily the case, according to Dan Keating, a Florida regulator.
New York regulator Amanda Fenwick asserted that risk transfer rules need to stay in place to prevent possible manipulation by companies.
But Diane Wallace, a life actuary and reinsurance specialist speaking both personally and for the American Academy of Actuaries, Washington, said modeling reinsurance is really no different than modeling life insurance policies. Many reinsurance cash flows, she explained, are more consistent than regular policy cash flows. And, she continued, capturing all possibilities through modeling helps eliminate the possibility of manipulating reinsurance.
The New York department’s Mark Greene, a supervising actuary, expressed concern that reinsurance transactions are based on models that companies themselves may not fully understand. It adds an extra responsibility for regulators to get their arms around these transactions to see if they are sound, he continued.
But Wallace countered, that right now companies are free to enter treaties and manage risks that may not be fully known, such as how policyholders will behave.
Sheldon Summers, a California regulator and actuary, said that when PBR and the Valuation Manual are put in place, he would like to see new reinsurance agreements that increase risk management possibilities made available as long as there is a risk transfer.
A Feb. 5 discussion of a draft of a new SVL model focused on a number of issues including not making the law so encompassing that it would bring in non-life companies and what should be the qualifications of an actuary opining on the financial health of an insurer.
New York’s Fenwick said in her state language would be supported that would require an actuary to have an FSA or ASA designation.
Another issue both Fenwick and Kerry Krantz, a Florida regulator, raised was the retention of an actuarial solvency certification by a domestic state that could be used by non-domestic states. Krantz said he wondered whether members of the NAIC’s executive committee who might rely on the certification were aware that it was being removed.
In a separate letter, Fenwick also outlined some of the other points that are important to New York regulators. She noted that the SVL should provide detail for the general reserve methodology, reassert the need to retain commissioner authority, and include a penalty for a company that intentionally sets reserves lower than what they should be.
Both the ACLI and the Affordable Life Insurance Alliance, Washington, raised concern about proposed broad language using the word ‘company’ rather than the term ‘life insurer’ citing concern that it would raise objections from non-life companies and slow down the project.
The issue did come up on the call and regulators deleted the term life insurance for one amendment so that other types of companies could be included.
Concern for small companies was raised in a written comment submitted by Donald Walker, a life actuary with Farm Bureau Life Ins. Co. of Michigan in Lansing. While he applauded single-state exemptions from some PBR requirements, he noted that other small companies with limited resources may operate in more than one state. And, he added, the changes in the SVL and PBR have a “lack of utility for companies that are not writing the more exotic lines of business.”