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New York Actuaries Chime in on Net Premium Reserving

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The NAIC’s Life Actuarial Task Force (LATF) of the Life Insurance and Annuities (A) Committee debated net reserving methodology changes proposed by the American Council of Life Insurers (ACLI) today for universal life insurance products with secondary guarantees, with actuaries from New York, Bill Carmello and Amanda Fenwick expressing concern for the proposed reserving methods.

The process is part of ongoing work to develop a valuation manual for creating a principles-based reserving (PBR) roadmap that will be up for adoption by the committees and then the NAIC later this year, so it can go to the state legislatures for adoption next year—or, at least that is the goal. Forty-two state bodies need to pass PBR so it can become the defacto model of reserving by 2015.

The NAIC has been moving from formulaic approaches to reserving with the advent of new product designs to PBR methods over the past 10 years. 

The Standard Valuation Model Law with the PBR approach was adopted by the NAIC in 2009. For PBR to go forward, the Valuation Manual (VM) must first be adopted, with VM-20, the requirements for PBR for life products, having taken the bulk of time and effort, with impact studies done by actuarial firms for the industry over the course of many months. 

Actuarial Guideline 38 (AG38) has been one of the stickiest wickets for regulators. They have been trying to figure out if companies are and will be reserving adequately enough for life products with secondary guarantees and shadow accounts.

A months-long actuarial dust-up last year over adequate reserving practices resulted in the NAIC leadership taking the reins of AG 38 from LATF and folding it into a special task force, where work continues.

This specific issue revolves around future PBR methodologies that would be used to determine net premium reserves in PBR’s Valuation Manual (VM) 20, and the ACLI was tasked with the project to a large extent. It collected information and tested results from nine companies for the proposed amendment to net premium reserves in the valuation manual.

Carmello and Fenwick found fault with the ACLI proposal, which was defended by actuaries from other states on the conference call.

“Why even have this adopted when it is such a shaky form— there to really a minimum or a floor (premium reserve),” asked one New York State actuary. The New York Department of Financial Services (DFS) had proposed that it take what we had on Actuarial Guideline 38 and make some adjustments to make it less conservative and it would still have a decent floor, but expressed concern that the new net premium reserve methodology proposed by the ACLI after testing nine companies “does not reflect the products that are sold today.”

The NAIC wants to have the valuation manual ready in time for legislative action next year, and the effort has been somewhat delayed by many internal debates on credibility blending, reinvestment spreads, and of course, the net premium reserve issue, as well as with data collection and continued testing of methodologies. However, LATF was able to adopt many amendments at a conference call earlier in May.

The ACLI is concerned about the net premium issue because it is also a tax reserve issue, and has been doing a lot of work to mesh these net premium reserves with the stochastic (results vary with random inputs) and deterministic (results are determined by precise factors entered, like assumptions) reserve methodologies. It became more contentious when life products with secondary guarantees became involved.

People were interpreting it differently just to serve their needs, Carmello said about AG 38 reserve calculations.

New York said it had a proposal to be considered alongside the ACLI’s, using a not-so-conservative interest rate of 4%.

Other state actuaries on the call defended the ACLI work, saying it was unclear if the industry could do a lot better to make a reserve calculation that worked for this particular product designed, and that they did not think that there would be a formulaic reserve that will attach itself to a product that well.

Overall, when you look at all the companies’ results under the ACLI proposal, the association’s actuary John Bruins said on the call, the level of net premium reserves, is more reasonable than what is in VM 20.

Every universal life product with secondary guarantees failed the stochastic exclusion test, according to Bruins.

One state actuary told New York’s Carmello, “I don’t think you believe in stochastic reserves.”

New York’s Carmello responded, “You don’t need all that fancy stuff if interest rates are at 4%. I don’t know why you need a big fancy stochastic method. … We want a reasonable objective (net premium reserve) floor.”

The state actuary, though, Mark Birdsall of the Kansas Insurance Department, wanted to give New York’s proposal its due, but discussed a concern with the degree of conservatism that may or may not be in there for different product designs, and wants to compare the results of calculating reserves—to compare the results of the methodology (NY) with the ACLI methodology.

My fundamental concern “is the degree of conservatism (in the calculation) and does that seem appropriate,” said the LATF actuary.

One issue without it is that it falls on the regulator to make sure that assumptions are reasonable, which he called “a daunting task.”

Of course, a company’s solvency is on the line in reserve adequacy, but so is its ability to write new, specialized products for the modern financial consumer landscape.

The NAIC representative said on the call that the adoption of the valuation model could be in July, before the NAIC summer national meeting. There will be a June 7, 2012, LATF call to further discuss the ACLI net premium amendment and New York’s competing net reserve premium amendment, which some regulators believe has not received any consideration. Indeed, some were struggling to locate it.

Both amendment forms 018 and 019 were adopted on the call, however.