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.
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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.