There has been wide disagreement in select reserve approaches and mortality assumptions among the industry and regulators going into Principles-Based Reservings’ (PBR) Valuation Manual, just as it is slated to be adopted.
Support is needed for the Standard Valuation Law (SVL) enabling PBR when it is introduced in state legislatures beginning in 2013.
Life and health insurers are expressing concern on the initial draft of the NAIC manual that will be used for PBR centered around mortality assumptions and a perceived need for a more formal process for updating the valuation manual.
The American Council of Life Insurers (ACLI) said it was “very disappointed” that the key task force involved in setting standards adopted amendments to override the mortality assumption setting proposal developed by the American Academy of Actuaries’ (AAA), in a letter to Mike Boerner, chair of the NAIC Life Actuarial Task Force (LATF) and the lead Texas actuary.
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The ACLI says a company’s own experience will always be a more relevant indicator of the future than an industry table.
“It is disheartening that LATF chose to ignore that work and arbitrarily modify it based on “gut feeling,” said the letter written by ACLI chief actuary Paul Graham, referencing the ACLI’s board’s earlier approval to support the SVL enabling PBR “so long as certain key issues are satisfactorily addressed between now and the end of 2012.”
However, LATF decided to reconsider the changes on a conference call this week, and the ACLI is pleased with that, it said.
The ACLI still believes that the AAA proposal is more conservative than necessary, and would like some changes, but it is concerned with an overlay of new LATF changes.
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 AAA proposal was developed after a huge NAIC-private impact study determined that the original mortality approach was overly complicated, difficult to understand, and contributed to excess conservatism.
“There is no reason to ignore credible mortality experience when there is 100% credibility… There is ample evidence that preferred mortality and residual mortality do not converge for many years into the future, if ever… The Academy’s proposal gives credence to this evidence, but still requires complete convergence with industry mortality data within 25 years,” the ACLI states.
Many companies prefer their own company’s mortality experience to the choice of the industry mortality tables.
Industry tables, Graham argues in the July 16 letter, cannot reflect items like market, distribution channels, expertise of underwriting staff, etc., and have been broadly designed to differentiate between medical underwriting standards. The ACLI argues with one member’s regulatory stance (Alabama’s) that held that no company has credible mortality experience beyond 25 durations.
“That is an incorrect assumption. Many companies have more mortality data than that, including significant amounts of ultimate mortality experience. Furthermore, companies will continue to accumulate experience both before and after PBR is implemented… There is no reason to arbitrarily set a limit that overrides the durations for which a company has ‘sufficient data,’” Graham writes.