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Insurers May Avoid Big Hit to Reserves for In-Force Business Under AG 38 Draft

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UPDATES WITH OHIO NATIONAL correction and statement:

Insurance commissioners have made a stab at the contentious issue of reserving for universal life with secondary guarantee (ULSG) and Term UL products with a new draft framework that addresses both in-force business and prospective business, and seems to grant insurers away to avoid anteing up hefty reserves for force business.

It is unclear what the size of any impact to reserves will be on business already in force, and there may be some potential for a hit to reserves if stand-alone evaluations show companies need to add to reserves, but the NAIC’s approach indicates it won’t be as much as feared should the regulators gone strictly on the basis of a states’-based actuarial staff report.

It appears that the new proposed framework offers a reprieve for the most life insurers who have already underwritten many of these products using looser actuarial guidelines than some state actuaries deemed proper.

However, going forward, insurers who write these products will likely have to start increasing reserves for them, meaning the premiums for term UL and USLG will be raised.

The formulaic approach consistent with the Life Actuarial Task Force’s (LATF’s) interpretation of AG 38 won’t be applied to in-force business, as some insurers had feared, according to the draft.  Instead, closed blocks of in-force business would be evaluated by actuaries on a stand-alone basis, the draft states.

 “The evaluations would consist of asset adequacy analyses incorporating moderately adverse scenarios,” the commissioners of the Joint Working Group of the Life Insurance and Annuities (A) Committee and the Financial Condition (E) Committee said in the draft.

Once the concerns came to light, life insurers had pushed for an asset adequacy test for in-force business, and that approach had been rejected by LATF. 

“Policy designs which are created to simply disguise those guarantees or exploit a perceived loophole must be reserved in a manner similar to more typical designs with similar guarantees,” the task force recorded in its March minutes.

LATF is comprised of staff-level career actuaries from several states, including South Carolina, New York and Kansas, and its approach and concerns set off a chain of events that threw AG 38 into the spotlight, and then catapulted it into the hand of the commissioners in order to smooth things over. 

Some actuaries had been concerned companies were exploiting a loophole in AG 38 to keep reserves artificially low.

According to discussions on the matter within LATF, some companies are “artificially” increasing premiums used in the reserve calculations above the minimum premiums needed to keep the policy in force. This would reduce reserves below the minimum statutory requirement, they said.

The issue has been ongoing, and came to light when one company complained because it thought it was reserving correctly, and did not like the appearance of an unlevel playing field, so complained to regulators about a competitors looser approach to reserving for term UL products, according to some. The concerns still percolate during NAIC meetings and conference calls on the subject with industry present. 

Companies like Lincoln Financial Group, The Principal Financial, Genworth Financial, MetLife and others sell these modern life insurance products. See: 

“While the framework raises a number of questions, this seems to be a positive step forward and we look forward to continuing to work with the NAIC to come to a satisfactory conclusion,” said Scott Harrison, executive director of the Affordable Life Insurance Alliance.

The industry had been seeking a uniform approach to the reserving issue, and seems to have gotten it, under the new draft language.

“This framework, in addition to the process in general, reflects the states’ commitment to develop a uniform interpretation regarding existing reserving requirements for ULSG and term UL products, while also considering how reserves for these products should be set in the future,” stated Eleanor Kitzman, Texas Insurance Commissioner and Chair of the Joint Working Group, which took the issue from the actuaries to the policymakers after industry outcry.

Prospectively, policies issued on and after a specified date, but prior to the effective date of Principle-Based Reserving (PBR), would be reserved using a formulaic approach consistent with the LATF’s interpretation of AG 38, according to the Joint Working Group’s draft, but  “modified or clarified to address any questions regarding its requirements,” the draft adds, opening the LATF statement open to a variety of tweaks.

 Policies issued on and after the effective date of PBR would be reserved using PBR methodology designed to address the advent of more modern life financial products in the past decade or two. PBR is expected to be implemented in 2015 by the states if all he work stays on track for a model adoption by the NAIC at its March meeting in New Orleans.

The NAIC is soliciting comments on it, due Jan. 30, just before the annual conference of commissioners to be held the first week in February in Miami. 

The Joint Working Group attached a lengthy appendix of questions and issues to be addressed, such as defining terms, actuarial assumptions, and extent of evaluations to be made on closed books of business,  and even who those conducting the actuarial evaluations should be–regulatory, independent or from within the company–and how they should be selected. 

The NAIC has a well-respected insurance regulatory consultant, Neil Rector of Rector + Associates Inc. of Columbus, Ohio, working on the issue for it, and he has solicited input already from interested parties and regulatory actuaries . 

“In implementing the draft framework, it is intended that a number of key decisions will still need to be made as the process is developed. For example, the NAIC will need to retain one or more independent, consulting actuaries to advise the Joint Working Group,” the draft stated.  

Ohio National does not sell these hybrid products but follows the proceedings closely. It provided this statement from Peter Whipple, vice president of life product management:  “We support the framework announced by the NAIC and believe it establishes the foundation to resolve the issues reasonably and responsibly, in the best interests of life insurance consumers and the industry.”