The National Association of Insurance Commissioners (NAIC) adopted revisions to a controversially applied actuarial guideline that governs reserves for universal life products with secondary guarantees after almost a year of intense debate among regulators on all levels and the industry.
Some government actuaries from states like New York and South Carolina had raised concerns about adequate reserving for these newer product designs and if some companies were slipping through the old guideline’s loopholes and not reserving enough.
Actuarial Guideline 38 (AG 38), as revised, provides examples of various policy features that constitute “guarantees” and gives directions and guidance on how to reserve for these guarantees but it is not prescriptive in its nature and it allows companies to use their best judgment, weighing payment patterns which keep the policy in force over the lifetime.
For example, for certain policies, companies must “perform a good faith high-level analytical review of the product design with respect to the premium payment patterns to be expected with respect to that design.”
The new revisions allow a company to report in its financial statements the greater of the PBR (principles-based reserving) stochastic reserve or the company’s current reserving methodology.
“ALIA [Affordable Life Insurance Alliance] is pleased that the NAIC has adopted the most recent changes to Actuarial Guideline 38. This most recent controversy regarding the interpretation of the Guideline illustrates yet again the need for a modern valuation system utilizing a principle based approach,” stated Alia Executive Director Scott Harrison.
The American Council of Life Insurers also supported the final measure:”We believe that the changes are a carefully crafted approach to ensuring proper reserves for universal life insurance with secondary guarantees. We commend the regulators, actuaries, and consultants for their time, effort, and consideration of these issues,” it stated today.
The revisions continue to apply the current formulaic approach, with new parameters set out in new sections, until the valuation manual becomes operative and PBR principles apply.
Affected policies issued on or after July 1, 2005 and in force until Dec. 31, 2012, are subject to certain reserving requirements that may require revising reserves for some companies to higher reserve thresholds, and any exemption must be cleared with the state of domicile with a copy to the NAIC’s Financial Analysis Working Group (FAWG). If the FAWG does not conclude that the exemption would allow the company to use a reserving methodology that is not appropriate in relation to the benefits and the pattern of premiums for the plans covered, and the state of domicile agrees with the exemption request, there would be an exemption allowed.
The revised reserving guideline goes on to say that the review should consider whether there are situations whereby the product design is likely to elicit a pattern of premium payments that, if paid, would provide the insured with access to lower charges and/or higher credits … thereby resulting in the need for a deficiency reserve significantly in excess of the one determined using the schedules of minimum gross premiums determined in pursuant to the premium payment patterns required to be tested under a section of the guideline.
The company then must use such other premium payment patterns it determines are likely to result in the need for a greater deficiency reserve than implied by the standard premium payment patterns.