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Life Health > Life Insurance

ACLI calls Lawsky's letter on reserves 'irresponsible'

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In a letter to state insurance commissioners, the American Council of Life Insurers (ACLI) called the top New York insurance regulator’s remarks on life insurance reserving “irresponsible” and inaccurate, the former because they erode trust in the state regulatory system and the industry and the latter for actuarial reasons.

The letter was written by ACLI President Dirk Kempthorne in response to a warning last week from New York Banking and Insurance Superintendent Ben Lawsky.  

“I felt it necessary to not only express our profound disappointment but also set the record straight,” Kempthorne stated. 

The reserving matter concerns a retroactive test for Actuarial Guideline 38 (AG 38), which establishes reserve requirements for certain types of life insurance policies. 

The solution forged among regulators through the bulk of 2012 is based upon a cornerstone of life insurance modernization, principle-based reserves (PBR). 

New York’s Lawsky cried foul on the method, saying it leaves the life industry under-reserved by billions. New York will no longer implement the formerly agreed-upon AG 38 solution that addresses the universal life products with secondary guarantees (ULSG) products’ reserves and many ULSG life insurers such as Lincoln National, Genworth Financial and AIG in New York will be told to increase their reserves by billions overall. 

Specifically, Lawsky reported a “widely estimated $10 billion” in reserve increases expected with the application of the new AG 38 fix for in-force policies. He had called the industry under-reserved by $20 billion and noted that only $1 billion in reserve increases had shown up under the NAIC’s AG 38 solution for in-force business for ULSG products.

However, “his letter is the first time that any number, much less $10 billion, has ever been mentioned,” Kempthorne said.

“The form of the requirements developed in AG 38 required company-specific modeling, and until the companies submitted their results, nothing other than a guess could have been made about the magnitude of any change,” Kempthorne explained. “To be clear, a targeted reserve increase was never a stated or agreed upon goal by regulators. Never.”

Kempthorne is telling state insurance commissioners that the results of the AG 38 analysis demonstrate that the industry is not under-reserved as the Superintendent contends, but rather that the reserves are appropriate and adequate — and that a targeted reserve increase was never stated, nor agreed upon.

The industry and regulatory discussion had been about life insurer behavior in exploiting loopholes in the old AG 38 guideline to reserve less conservatively than some say the spirit of AG 38 intended. The NAIC reviews and oversight on comporting with the new AG 38 solution shows that the reserves are close to where they should have been, according to industry. 

Kempthorne also took offense at the notion that Lawsky implies there continues to be ‘gamesmanship and abuses’ in the compliance with AG 38 when “each and every reserve determination is being reviewed by actuarial consultants retained by the NAIC on behalf of the commissioners.”  

Staunchly defending the life industry, Kempthorne sad that “perhaps the most troubling aspect of the Superintendent’s letter is the implication that life insurers do not support strong solvency regulation.”

If a life insurer fails, Kempthorne explained other life companies must pick up the tab for that insolvency. It is in the best interest of the entire industry and its policyholders to ensure that all companies are well capitalized.”

This is what is happening now with Executive Life of New York (ELNY). The company was not insolvent when it was seized but became so in the clutch of the New York Liquidation Bureau over the years, and now industry is not only paying millions in the state guaranty fund, but many more millions toward voluntary funding mechanism for policyholders. Even with all the heavily negotiated and painstakingly developed plans and stop-gap measures in the ELNY liquidation plan, some annuitants will be left incomplete, the ultimate black eye for the industry based upon promises and for insurance regulation designed to prevent such shortfalls for policyholders.

The NAIC said it will review New York’s findings in conjunction with the NAIC peer review process implemented earlier this year to help ensure consistent application of the revised AG 38 reserves for universal life policies with secondary guarantees.
“Preliminary results of this process have not identified any improper reserve activity,” stated NAIC President Jim Donelon of Louisiana.
The New York Department of Financial Services (DFS) declined comment. The U.S. Treasury, which houses the Financial Stability Oversight Council and the Federal Insurance Office (FIO), had no comment previously. They may or may not consult with actuaries or statutory accounting personnel, but any people with this expertise do not show up as present in FSOC meeting minutes.
FIO is concerned about reserves via the captives reinsurance issue Lawsky has brought to the fore, and will be discussing this Wednesday at its insurance advisory committee meeting with Lawsky or his representative and other members of the committee, state regulatory and industry alike. 

This is not the first time that Lawsky and the DFS have warned about PBR.

Lawsky launched a warning in a Nov. 26 letter near the eve of the NAIC national meeting where the state-based organization is gathering to adopt the pivotal Valuation Manual.  


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