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NAIC Top Working Group Tackles AG 38

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As the NAIC’s special new joint working group of the Life Insurance and Annuities (A) and the Financial Condition Committee (E) gets its wheels in gear to explore and possibly revamp reserving methodologies for certain universal life products with secondary guarantees, it has underscored the need, with industry accord, for a level playing field for products’ reserve determinations across state and company lines.

On the high-level joint working group’s second conference call since it was formed in the wake of the NAIC national fall meeting, Texas insurance commissioner and chair of the working group, Eleanor Kitzman made clear after listening to industry concerns that of the “many things are to be worked out but a level playing field is at the top of the list.”

The group has developed “momentum,” according to Kitzman, and a consultant has already made the rounds gathering information on concerns with actuarial guideline 38, or AG 38, as it is called, the tool used  (or abused, some stte actuaries might say) to determine reserves for products in question.

The NAIC has also hired a well-respected insurance regulatory consultant, Neil Rector of Rector + Associates Inc. of Columbus, Ohio,  to hammer out some of the fine points after canvassing  the industry for input and information on the issue. The issue is a hot-button actuarial reserving concern centered around universal life products with secondary guarantees, and the way some companies may be under-reserving for them. 

The joint working group is tasked with determining whether it is prudent and necessary to develop interim guidelines and/or tools to be utilized by regulators in evaluating reserves for these products and, if so, to promptly develop such interim guidelines and/or tools. It is “very important that we try to do something  that doesn’t put us back in this same position later, [however inadvertently] because products change…and that’s a good thing, so we will need your assistance with that,” Kitzman told  the actuary from the American Council of Life Insurers, Paul Graham, on embarking on  developing a set of premiums for the products. Too-high premiums would result in artificially low reserves, an issue that greatly concerns states like New York. Companies that sell the products whose reserve methodologies are debated include MetLife and Lincoln National.

The joint working group of commissioners also apparently decided at its first meeting by phone Dec. 1  to  “bifurcate” the  reserving approach applied to in-force USLG products versus  prospective ULSG products. 

The ACLI had the most to say during the conference call Dec. 8th to receive comment from the industry, even though Rector, a former Ohio deputy commissioner  and lawyer who worked on accreditation for the NAIC, has been gathering input from regulators recently and will be meeting with the  industry and trade associations like the ACLI soon  to move the project along in the next few weeks, he said on the call. Rector still must talk to actuaries on the key task force that spoke out against suspected reserving problems with AG 38. Rector’s office referred calls to the NAIC. 

Graham said the first thing that is needed is an adjustment to AG 38 in the interim, before principles-based reserving is finally adopted, so actuarial guidance will be better suited to new product designs rather than trying to fit reserve methodologies that are 60 to 70 years-old on new products. 

Graham  agreed with regulators that “we need to ensure reserves on in-force polices are adequate,” and also that reserves have to be standard in all states. There should be a level playing field with standard valuation law and other actuarial guideline regulations, Graham said,  because of all the insurers out there  competing with different products. He promoted the use of an asset adequacy report specifically geared to AG 38 be prepared by all companies selling the USLG products so that regulators could “isolate” those companies that are outside the bounds of normal assumption setting and allow regulators to compare across companies’ assumptions.

Graham also expressed concern that customers could be priced out of products they would find suitable if reserves are too high.

He also called for a third party review process in place to review the asset adequacy analysis to make sure assumptions would be appropriate. 

This would allow regulators to be comfortable that reserves on in-force policies are adequate, Graham said. 

He also suggested a new floor for requirements on new policies, sometime in 2012 using a principles-based reserving (PBR) method as the formulation part of AG 38 atrophies in time. 

He would want the reserve to be higher than the formulaic AG 38 used today, and would want it to apply not only on universal life but on term insurance to help level the playing field.

The ACLI intends to send the working group a mark up of AG 38.

Affordable Life Insurance Alliance’s executive director, former state regulator Scott Harrison, agreed with many of ACLI’s points and also called for uniformity, modern reserving methods, customer marketplace and asset adequacy testing for in force business, but said, unlike the ACLI, it can’t work with the LATF statement on AG 38 adopted by the task force at the NAIC Fall conference. 

The LATF statement refers to the NAIC’s Life Actuarial (A) Task Force Statement on AG 38 which held that the correct application of the actuarial guideline for these product designs – and all other product designs subject to AG 38 – “is to derive the ‘minimum gross premiums’ that represent the lowest schedule of premiums a policyholder could pay to satisfy the secondary guarantee. …..When a policy contains more than one secondary guarantee, Model 830 requires reserves to be calculated using the secondary guarantee that produces the greatest reserves ignoring all other secondary guarantees.”

“LATF believes the requirements are clear and no changes or clarifications are needed to these requirements,” the statement says.

“With all due respect to the Task Force–the statement is fundamentally flawed…It cannot be  rehabilitated,” Harrison said.   

NAIC President Susan Voss of Iowa asked Kitzman that, since she had heard a lot about peer review, how did Kitzman see this working, but Graham from the ACLI stepped in and said he would answer–regulators could certify a number of consultants that the industry could choose among, he said.

One voice among the industry which did embrace the LATF stance that task force thad recognized a product design that was circumventing reserve methodology and that the practice must be eliminated belonged to Ohio National Financial Services’s actuary and a vice president, Pete Whipple. 

Whipple said he was also encouraged that the new, greater group would address term universal life so there would be a level playing field among these type of products. 

Much work is expected to be done in the next few weeks, despite the holiday schedule, according to the discussion during the conference call.

Stay tuned.