Premium levels on certain universal life with secondary guarantee and term universal life products may be rising. An approach adopted by the National Association of Insurance Commissioners’ joint working group would require insurance companies to adjust asset reserve levels associated with these universal life insurance products, and any increases in the requisite reserves would likely result in a corresponding rise in premium levels. Increased premium levels may make these life insurance products much less appealing to your clients.
At issue is the methodology used by insurance companies for applying Actuarial Guideline 38 (AG 38) to these products. When looser guidelines are adopted, reserve levels may be lower than those actually required. The approach designed by the NAIC is widely supported by insurance companies for the certainty it can provide in determining reserve levels, despite the potential increase in premium levels.
A Bifurcated Approach
The NAIC’s initial framework adopts a bifurcated approach, so that policies written before a certain date would be evaluated differently than those policies written after that date. So-called “old business” policies would be evaluated on a stand-alone basis using asset adequacy analysis that would incorporate “moderately adverse scenarios.” If the policy reserves are determined to be adequate based on this evaluation, no adjustment to the reserve levels would be required. However, it is likely that some adjustments will be required.
Prospective business policies–those written after the effective date of Principle Based Reserving–would be evaluated according to PBR methodologies designed to take into account those modern financial products that have been developed recently, or that may be developed in the future. PBR is meant to represent a less formulaic approach to determining required reserve levels and, as such, is supported by many insurance companies. PBR would also provide more detailed guidance on the application of methods for calculating reserves associated with newly developed life insurance products so that insurance companies can more accurately determine required reserve levels.
Because PBR is not yet effective, and is not expected to be implemented until 2015, there is time for insurance providers to develop methods for increasing reserve levels where necessary.
Leveling the Playing Field