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AG 38: S.C. Contends Proposed 'Framework' Doesn't Comply with SVL for In-Force Business

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The South Carolina Department of Insurance spoke out last week about some elements in the insurance commissioner-led working group’s draft framework unveiled Jan. 13 to address issues in determining statutory reserve requirements under actuarial guideline AG 38. 

Leslie Jones, deputy director and actuary with the South Carolina Department, wrote to Texas Insurance Commissioner Eleanor Kitzman chair of the NAIC’s Joint Working Group of the Life Insurance and Annuities Committee and the Financial Condition Committee, that South Carolina’s valuation laws must trump any uniform regulatory guidance, and the framework for applying AG 38 must have issues resolved before it can be applied to companies licensed in the state.

Jones is chair of the NAIC’s Life Actuarial Task Force (LATF), which adopted a controversial statement Nov. 1, 2011 for insurers offering universal life with secondary guarantees (ULSG) and term UL products.

Jones said South Carolina, which now has an acting director after David Black stepped down abruptly in late December, stands by the LATF statement until the effective date of Principles-Based Reserving (PBR), a stance many, but not all,  insures oppose–they want PBR sooner and LATF’s statement not at all.

“However, we do not believe that the Framework will assure us if compliance with our SVL for in-force business,” Jones stated in the letter.

The LATF statement, which many insurers called unclear and possibly a new interpretation of AG 38, was crafted by a group of state actuaries to prevent some insurers from possibly under-reserving for these products by using higher premiums to produce reserves for two-tier UL policies.

Not all on the LATF task force are opposed to the Framework, so Jones is speaking clearly for the state of South Carolina in her letter. However, the Alaska Department of Insurance  also provided a statement to Kitzman that clearly backed the LATF statement and  its work, as well as the Standard valuation Law.

See the draft unveiled here

The Kitzman framework proposed a bifurcated approach to old business and prospective business, which the industry embraced immediatley. 

Jones suggested that the in-force blocks of business should be evaluated as to whether reserves for the company are at least as large a those required by standard valuation law, noting the frameworks; approach may not be sufficient.

The Framework calls for  state commissioners to also have the authority to apply “moderately adverse” conditions in figuring out reserves in an sset adequacy test, rather than an evaluation on the basis of total reserves in the aggregate, as required by SVL, Jones noted. 

With regard to prospective business, South Carolina must also interpret its own valuation laws, Jones said, although it supports the development of a mechanism that leads to uniform regulatory guidance.

But even new asset adequacy requirements must not be too onerous, according to the industry.

In-force asset adequacy testing with excessively conservative requirements would have significant negative financial consequences,” warned The Principal Life Insurance Co. corporate actuary Michael Streck in a letter to Kitzman Jan. 30, when comments were due to the NAIC. “The criteria for this should be a commissioner-level decision,” he said. 

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Of course, the LATF statement would create a level playing field if it were accepted by all states, but that is unlikely. 

It is the multiple state interpretations of AG 38, some very stringent and some worried about redundant  reserving, by different states that drove the need for compromise such as the Framework document, as well as the outcry by some  insurers that the LATF statement was in some way accusing them in the press, especially, of being under-reserved.

Jones repeatedly underscored the need for each state to interpret its own valuation laws in her letter and addendum comments to Kitzman, who has so far declined to be interviewed on the subject. 

Jones also told Kitzman, who has served before as South Carolina’s insurance commissioner before landing in Texas, that she things that LATF or a subgroup of LATF is the appropriate NAIC body to develop guidance on a unified regulatory approach to AG 38.

Insurers and trade groups had written in their comment letters that they support consulting or outside actuaries for the framework process, reportign to the commissioner-level Joint Committee.

The fact that the Kitzman framework offered up the option likely means consulting actuaries are very much part of the plan. The Alaska Department, who also serves on LATF,  wrote in its comments to Kitzman  that the “industry “input provided by the framework document be deleted, noting an insurer should not determine who the state hires to examine them.

LATF initially issued a statement on Sept. 9–the one adopted at the NAIC Fall Meeting in early November otuside Washington, D.C.– that held that “some companies are holding reserves for universal life insurance products with shadow account secondary guarantees that do not fully reflect the benefits of the secondary guarantees as required pursuant to the NAIC model laws, regulations and actuarial guidelines…These reserves do not properly reflect the full benefits of the secondary guarantee as required by the law, regulation and guideline.”

The American Council of Life Insurers (ACLI) took issue with the direction of the task force in the fall and told it so.

“These statements are likely to be interpreted by outside parties to imply that some companies are holding inadequate reserves for these products,” it said in a letter Oct. 19.

“…The assertions in the Exposure are potentially very damaging and could have serious negative consequences with various audiences (including rating agencies, analysts, agents, policyholders, etc.),” the ACLI stated.

“Such assertions have no place in a public document issued by the NAIC,” the association admonished. 

The letter was written by ACLI actuary John Bruins and addressed to Jones.

“This is clearly an actuarial issue,” Alaska has written in its comment letter. It goes on to  say that once the framework is adopted in concept and consulting actuaries have been selected, it is LATF who will develop and present recommendations to the commissioner-led Joint Working Group for approval.

UPDATE: Since this story’s initial publication, both South Carolina and Alaska have been removed from the Life Actuarial Task Force.