MetLife is a seller of universal life with secondary guarantees, which has raised concerns about insurer reserves

Universal life products with secondary guarantees (ULSG) have been the subject of actuarial scrutiny for more than five years now, with assertions dating from at least 2005 that their design can have lower reserves than defined premium designs, possibly violating the spirit of a key actuarial guideline. 

However, the issue has reared its head to the point where it is on the lips of top regulators and trade association officials at the NAIC Fall national meeting, which has been running this week outside of Washington, D.C. 

AG 38, or Actuarial Guideline 38 for UL policies with secondary guarantees, “is the biggest issue of this conference,” New York’s relatively new Superintendent of Financial Services Benjamin Lawsky told National Underwriter Thursday, after the opening session of the national meeting, now held three times per year. 

Lawsky has already made a big impact –and major headlines — on the state insurance industry with a massive initiative, first opposed but later endorsed by major health insurers, that individual health insurers make their rate filings public. When he spoke with National Underwriter, he stressed that when it came to this issue of ULSG and insurer reserves, he was not taking the matter lightly.

“It’s a huge product, with billions and billions going into it,” Lawsky said of ULSG, and added he wanted to know more. He will get his chance.

Lawsky oversees about 4,400 financial companies managing more than $6.2 trillion in assets and is “a prosecutor at heart” who will take an aggressive tack in regulatory lapses, according to a Bloomberg News profile. 

Insurers who sell ULSG include MetLife (domiciled in New York), The Principal Financial, Lincoln Financial, which is an active marketer of the product, Protective Life and others. 

“There’s a real problem with the reserves,” said Lawsky, who was approached by big industry representatives to discuss the matter. Lawsky was just named by the U.S. Treasury Department to an advisory panel of insurance talent to help Federal Insurance Office Director Michael McRaith. 

MetLife said through a spokesperson that “since discussions with regulators are ongoing, it is not possible to provide an exact impact to the company,” but that it did not anticipate that any revisions to Universal Life reserve requirements would have a significant impact on MetLife.

“The product affected by this reserve discussion is only related to one life product offered by MetLife,” said the spokesman, John Calagna. “MetLife looks forward to working with our state regulators and industry members as adequate and reasonable reserve bases are developed and set for insurance products, including Universal Life.” 

The NAIC’s life actuarial task force sent a statement of its concern about insurers’ reserves not being adequate for this product, after task force members raised concerns, including actuary Mark Birdsall from the Kansas Insurance Department, who called the actuarial hijinks he thinks the companies are playing unconscionable. The issue in its current incarnation has been percolating among regulators since March.  

The secondary guarantees are backed by the claims-paying ability of the issuing company.

The AG 38 Reserve formula involves a ratio to indicate a pre-funding level. As one actuary from AIG American General in a long-ago paper wrote, the ratio involves creativity from companies, where the numerator is excess payments (or the amount in shadow accounts) and the denominator is the single premium needed to fully pay up the shadow account for life, assuming the minimum needed so far has been paid. This ratio is said to inspire creativity by companies in their reserving methodologies.

AG was to sunset with the implementation of principles-based reserving, but PBR is still several years away, as the NAIC needs to adopt the valuation manuals and states then 42 states need to pass the model, regulators on the NAIC’s life actuarial task force noted this week in an brief interview.