Regulators are clashing with consumer representatives over the process the National Association of Insurance Commissioners is using to review changes in capital rules requested by the American Council of Life Insurers.

Members of the NAIC, Kansas City, Mo., held a series of closed door sessions on the proposals here at the group’s winter meeting.

Technical groups discussed and voted on the proposals in meetings that excluded the consumer representatives who usually represent consumer interests in NAIC proceedings. Other attendees who are not regulators also were excluded.

The ACLI, Washington, described the suggested changes in a letter sent to NAIC President Sandy Praeger, the Kansas insurance commissioner, Nov. 11.

In the letter, ACLI President Frank Keating lists ways commissioners could move to free up life insurers’ capital.

The list includes suggestions such as eliminating “artificial constraints in Regulation XXX for the calculation of X factors” and waiving “the Standard Scenario as the floor in the C-3 Phase 2 calculation of risk-based capital for the year ends 2008 and 2009.”

The C-3 Phase 2 rules would have insurers use actuarial judgment and statistical forecasting methods, rather than static formulas and minimum percentages, to set variable annuity reserves. Advocates of the Standard Scenario approach want insurers to use the likely performance of a contract in a Standard Scenario to set a floor for reserves.

Insurers say the proposed changes would make the life insurance industry stronger and are not due to insurers’ financial woes.

At press time, a full list of NAIC panel votes on the suggestions was not available.

The Life Risk Based Capital group rejected the ACLI’s Standard Scenario waiver suggestion, and it also rejected a another suggestion dealing with treatment of investments.

The NAIC’s Life & Health Actuarial Task Force said approving 2 suggestions dealing with preferred and non-preferred mortality tables would not entail a “regulatory compromise” but approving a third suggestion, which refers to Actuarial Guideline 38, a guideline that addresses reserving for variable annuities, “would be a compromise.”

Paul Graham, an ACLI life actuary, said in an interview that, “as far as we know,” no insurers are in financial jeopardy.

ACLI is proposing the capital rules changes now partly because of a concern that statutory capital and surplus requirements putting risk-based capital levels below 300% would restrict insurers’ ability to sell products to consumers and would restrict “normal activity,” Graham said.

“We are not trying to delay companies from becoming insolvent,” Graham said. “That is not what we would want.”

If rating agencies reduced ratings because of RBC requirements, and a company was forced to sell assets at a loss to avoid a 100% hit to capital on the assets sold, then companies would be hurt for reasons that do not reflect their true strength, Graham said.

The top 100 insurers started the year with $306 billion in surplus but suffered $76 billion in net capital losses during the first 3 quarters, according to Fred Townsend, president of Townsend Independent Actuarial Research Alliance, Wolcott, Conn.

The losses were offset by $40 billion paid in but were more than 5.5 times larger than net operational gains, Townsend says.

During an open session after the NAIC’s closed sessions, Birny Birnbaum, executive director of the Center for Economic Justice, Austin, Texas, a consumer rep, criticized commissioners for keeping the process for considering the ACLI suggestions closed.

Birnbaum said he did not have a sense of what was being discussed until he spoke with ACLI.

There might be some merits to the points the ACLI has proposed, but keeping the public uninformed during a period of “incredible” financial conditions prevents the public from understanding the reasoning behind the decision to advance the proposals, Birnbaum said.

Brendan Bridgeland, executive director of the Center for Insurance Research, Cambridge, Mass., said no one outside the NAIC technical groups knows which proposals the groups have supported or rejected, or why.

Scott Harrison of the Affordable Life Insurance Alliance, Washington, noted that 6 of the 9 ACLI suggestions already are part of the principles-based reserving project.

Wisconsin Commissioner Sean Dilweg said in interview that there may be a good case for some of the ACLI’s suggestions.

But Dilweg said he has questions about the speed with which the proposals were brought forth.

Addressing company issues individually might be better, at least initially, Dilweg said.

Using commissioners’ authority to address individual companies’ needs individually could address immediate concerns while a longer term solution is developed, Dilweg said.