The National Association of Insurance Commissioners (NAIC) is discussing a life insurance industry proposal to extend the principle-based reserve (PBR) transition period from three years to five years for smaller companies.
The American Council of Life Insurers (ACLI)’s nascent proposal would allow a life insurance company with direct life insurance premiums of less than $500 million per year and direct first-year premium less than $50 million to comply with the requirements of the adopted Valuation Manual-20 for PBR in four to five years after PBR is accepted as the standard.
PBR itself still needs the okay from 42 state legislatures enveloping 75 percent of total U.S. premiums, and New York’s rejection of PBR may stall implementation further.
The small insurer extension proposal, discussed today during the Life Actuarial Task Force (LATF) conference call, is meant to “help control expenses for smaller companies in the process of implementing PBR.” More discussion on a more developed ACLI proposal is expected at the NAIC Winter Meeting in December in Washington.
The amendment proposal put forth by John Bruins of the ACLI reasons that “during the first three years after adoption in particular resources will be at a premium. This will allow smaller companies to delay implementation to a point where resources may be more affordable.”
Bruins asked LATF members on the call how to best define small companies under PBR, though, considering its impact.
One actuary raised the point that he doesn’t want to encourage a possible situation whereby big insurers try to game the system by spinning off their universal life with secondary guarantees (USLG) businesses into a subsidiary in order to fit under the small business category and get an extension.
Another state actuary said the standard should not be on size but on risk. “It’s risk that matters, not size of company,” the actuary said.
Bruins said on the call that if 80 percent to 90 percent of the industry premiums are captured during the first years of PBR, that would be considered a success, and that the other 10 percent to 15 percent of premiums representing perhaps more conservative products could wait until methodologies under PBR are down pat before PBR becomes a 100 percent requirement.
The ACLI notes that a company may elect to establish minimum reserves under applicable requirements for business otherwise subject to VM-20 requirements and issued during the first five years following the operative date of the Valuation Manual.
If a company during the five years elects to apply VM-20 to a block of such business then a company must continue to apply the requirements of VM-20 for future issues of this business, the ACLI proposes.
A state commissioner may also require the company to apply VM-20 beginning in the fourth year following the operative date of the VM, the ACLI suggested.
Minimum reserve requirements for annuity contracts and credit life contracts are provided in sections of the Valuation Manual.
Work on the VM and PBR work is expected to continue on the parent Life Insurance and Annuities Committee and the PBR Implementation (EX) Task Force.
Actuaries on the call also discussed asset adequacy assumptions. One member noted that on asset adequacy analysis, it is “pretty loosey-goosey” on the description of where the assumptions come from, although the assumptions themselves are described well.
He said actuaries should take a fresh look with PBR on what can be done to improve requirements under the Actuarial Opinion and Memorandum (AOM) and enhance the diverse communication by companies with their regulatory actuaries. There is already an Actuarial Opinion and Memorandum Regulation (AOMR) Communication Discussion Group with the American Academy of Actuaries but a member said that may be beyond the cope of the group.
Bruins and others worried it would open it up AOM more generally and, given the current situation, it might be best to look at other improvements that could also be made with PBR.
There was also concern that some actuaries are ignoring the so-called New York Seven analysis of scenarios that consider interest rates may drop.
Discussion of these and other items is expected to continue on a call next week.