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Life Health > Life Insurance

Life at the NAIC meeting: Reserves and more reserves

By Elizabeth D. Festa

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So you want to go to Texas for the springtime to discuss reserves? Not oil reserves, actuarial.

The National Association of Insurance Commissioners (NAIC) is meeting next week in Houston for its Spring national meeting, where the spotlight will be on the progress of certain ongoing key product reserving and solvency-related initiatives which have garnered industry support even as the new products are defined.

The new Principle-Based Reserving (PBR) Implementation Task Force will meet and update the Life Insurance and Annuities Committee as it coordinates the work of NAIC technical groups addressing PBR issues such as further assessing the solvency implications of life insurer-owned captive insurers. 

The group was given the green-light at the NAIC commissioner’s retreat this winter in St. Thomas, Virgin Islands, Feb. 1, 2013. The group is tasked with developing an NAIC support and peer review system for implementation of the PBR framework. 

The new Task Force, chartered under the Executive Committee, will also be deployed to change blanks reporting, analysis procedures, examination procedures, and statutory accounting standards to work with PBR.

The task force, chaired by Rhode Island Superintendent Joseph Torti III (RI) and Tennessee Commissioner Julie Mix McPeak, also has its eye on the Captives and Special Purpose Vehicle (SPV) Use (E) Subgroup’s Report and its findings and recommendations in the context of the proposed PBR system. 

Torti has been leading the charge on the Captives subgroup at the NAIC. 

The Federal Insurance Office (FIO) also has just created a task force on use of captives and SPVs under its federal advisory committee. Washington, D.C. Commissioner William White, its chair, might report on this in Houston because of concern about the life industry’s risk and if they are properly presenting their capital and reserving situations. Basically, Treasury wants to know what’s being kept from its eyes, and to what extent. Its advisory group has passed around a sheaf of reading material on the subject. 

The subgroup’s work is reviewing the life insurance industry’s offloading—sometimes it is felt away from the eyes of states regulators—of perceived excess reserves from Triple X and A Triple X actuarial reserve guidelines of certain life insurance policies and accompanying solvency concerns.  

PBR is to address some of the perceived straightjacketing of the reserves by Regulation XXX (Triple X), which imposes conservative assumptions and valuation methodologies for determining the level of statutory reserves, which insurers are required to hold under statutory accounting principles for term life insurance policies with long-term guarantees of premium rates, as a seminal insurance securitizations of excess reserves paper by Stroock and Stroock structured finance and insurance lawyers stated. 

Its sister, Guideline AXXX, AG 38, requires higher reserves for secondary guarantees on whole life insurance policies. 

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.  

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