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NAIC Empowers New Working Group to Mull Guidelines on USLG Reserves

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The NAIC Executive Committee has established a new working group to tackle the issues surrounding statutory reserve requirements for companies offering universal life with secondary guarantees, with an eye toward establishing interim guidelines and/or regulatory “tools” to apply ULSG products, in the future or even in force now.

In doing so, the NAIC Exec Committee on Friday took the contentious product from the purview of the life actuarial task force, putting it under the stewardship of New Jersey Insurance Commissioner Thomas Considine, as part of a working group that combines both master committees, the Life Insurance & Annuities Committee and the Financial Condition Committee, pointing toward concern for company reserving. 

The tumult surrounding Actuarial Guideline 38–for geeks, AG 38 section 8, Step 1–packed interested parties into already cavernous conference rooms at the NAIC fall national meeting outside of Washington. Actuaries held court, if that is even possible, explaining the issue to lawyers, reporters and other “laymen,” and the state insurance department even issued a consumer alert to support the solvency of its chief domiciled underwriter of the product, Lincoln Financial. 

The controversy over the USLG products this time around–for they are not new to controversy–center around calculations of minimum premium.

There are ways of establishing ratios where the product can have less than the minimum premium and still not be underfunded under the Model Law 830. Some key state actuaries brought the reserving issue to the attention of the NAIC’s actuarial task force back in March, where the concerns caught fire among the members, some of whom even wanted to bring the crafting actuaries up on disciplinary charges.

Of course, this would rope in the state that approved these products

And, when principles-based reserving (PBR) is finally implemented in a few years or so, after a final valuation manual is adopted, the reserving to prescriptive guidelines will become moot, thus the charge for possible “interim” measures. 

However, insurers believe it is important to resolve the matter sooner because companies with new product designs want to know how to proceed.

One actuary noted that the statement adopted by the task force is too broad in that it seems to capture for inadequate reserving all product designs that contain more than one secondary guarantee, not just products that have multiple sets of charge and/or interest credits applied to the shadow account where the policy design applies a specific set of charges and/or interest credits when the shadow account is zero or less. The questioned products use the lowest set of charges and/or highest crediting rates against the secondary guarantee instead of the lowest premiums. This ploy could falsely increase premiums, lowering reserve needs as required by “law, regulation and guideline.” 

State regulators stipulate that this alternative set of charges runs higher, usually, than what would normally be applied to keep the shadow account one cent above zero, thus artificially increasing premium used in the reserve calculation. 

The text of the Indiana Consumer alert released Friday stated that, despite questions about a proposed regulatory guideline concerning financial reserving requirements in companies like Lincoln Financial, “the Indiana Department of Insurance continues to recognize Lincoln as being in sound financial shape and at no time before or during the deliberation of this proposed guideline did its financial analysis of Lincoln change.”

“The Department’s ongoing financial examinations and analyses conducted both on an annual and quarterly bases, in addition to the company’s five year financial exam, have not noted any reserve issues…The deliberations on which this article was based should in no way be construed as a question about Lincoln Financial’s financial health from a solvency standpoint,” the Indiana consumer alert stated.