Life at the NAIC meeting: Reserves and more reserves

Stroock’s securitization team had noted back in 2007 that industry professionals estimate that within the next ten years, additional reserves required by Regulation XXX and Guideline AXXX would exceed $150 billion.

The  conservative assumptions result in significantly higher reserve levels for term life insurance business than were previously maintained and limit the financial flexibility of direct issuers of term life insurance and reinsurers of such business, Stroock said, echoing life insurers’ concerns and sending many into arrangements with captives and SPVs. 

The AG 38—Actuarial Guideline XXXVIII—effort was formally adopted by the NAIC at its 2012 Fall National Meeting and the NAIC has decided to hire ARC of Georgia and ISC Strategies Consulting as actuarial consultants to guide the non-actuarial Financial Analysis Working Group to review the reserving methodologies used by the insurance company and approved by the domiciliary state regulator. The subject was first raised in the working group of actuaries, the Life Actuarial Task Force (LATF).

At its intensive, all-day Thursday and part-day Friday, the Life Actuarial Task Force meeting, the American Council of Life Insurers (ACLI) will speak to low-interest rate environment considerations on the Valuation Manual with many other subjects, including PBR.

The Contingent Deferred Annuities (CDA) Working Group under Wisconsin Commissioner Ted Nickel (WI) will propose to the Life Insurance Committee that CDA’s be defined as “an annuity contract that establishes a life insurer’s obligation to make periodic payments for the annuitant’s lifetime at the time designated investments, which are not owned or held by the insurer, are depleted to a contractually-defined amount due to contractually-permitted withdrawals, market performance, fees and/or other charges.” 

In this regard, a CDA can be generally thought of as a living benefit added to a separately managed retirement account, for example a mutual fund, the working group stated. New York State still has an interpretation on the books that contingent annuities are financial guaranty products.

Of interest, the SEC has not taken a position regarding whether CDAs are required to be registered as securities.

However, based on information the SEC shared with the working group in November, it is the working group’s understanding that a product that is a derivative of a registered security is also considered a security requiring registration, the working group has stated in a memo.

”It is the working groups understanding, based on our discussions with the life industry, that insurers have been registering CDA products with the SEC to date. The working group believes that companies should continue to register CDA products with the SEC as securities unless registration is explicitly exempted.” 

Also, the working group notes that CDAs offered through an ERISA retirement plan would be exempt from registration with the SEC and would be subject to regulation by the U.S. Department of Labor.