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Lawsky renews battle over PBR

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New York insurance regulators will reduce reserving requirements on term life policies by an estimated 30 percent to 35 percent starting in January, but will do so by formulas rather than the “principles-based-reserving” (PBR) approach being considered by the National Association of Insurance Commissioners.

The NAIC is being informed of the decision of Benjamin Lawsky, superintendent of the New York Department of Financial Services through a letter written today. Lawsky’s action was timed to be in advance of the NAIC Spring Meeting, now underway in Orlando.

It is unclear whether the move will result on lower pricing or higher profits for insurers on term life products.

The decision is consistent with Lawsky’s comments last September to the NAIC voicing concern over the NAIC initiative to move to PBR. At that time, Lawsky said that PBR “represents an unwise move away from reserve requirements that are established by formulas and diligently policed by insurance regulators in favor of internal models developed by insurance companies themselves.”

Lawsky released the letter in advance of an appearance this evening at the Life Insurance Council of New York’s (LICONY) 13th Annual Legislative & Regulatory Conference in Cooperstown, N.Y.

Regarding his rift with most state regulators on the PBR issue, Lawsky is scheduled to say that New York regulators do not think the reserve formulas “are perfect or that the formulas always result in the right reserves.”

For example, that for some specific products, “I wouldn’t necessarily disagree that reserves may be conservative relative to historical experience regarding payouts,” Lawsky is scheduled to say.

Lawsky also committed himself to working “constructively with insurers to make smart, targeted, limited adjustments to the historical reserving formulas where there is strong empirical evidence for doing so.”

In the letter, Lawsky said the next step for the DFS will be to update the formulas for universal life insurance policies with secondary guarantees.

An official at an insurer that will be affected by the change said the industry will likely support it. “We agree — as does most of the industry — that term reserves are too high and this DFS move is a step toward fixing that problem,” the official said.

He added that life insurers “have been hoping to solve this problem that PBR was intended to solve.”

The industry official added, “Clearly the DFS has real reservations about PBR — so they’ve decided to try to stick to a formula for reserves that would be the same for all companies. This proposal does accomplish this.”

As to secondary guarantees on universal life policies, the official said there is “less consensus” within the industry on the level of redundancy on those reserves on UL-secondary guarantees.

Again, the insurance industry official said, “the DFS is concerned about PBR and the use of models to determine reserves and it appears from the letter they will try to come up with a formula method for those products as well.”

The industry official added that, “We believe that is the right approach because UL-secondary guarantees is a more difficult task than term due to the complexity of the product, e.g. lots of interest rate risk, etc.”

According to Lawsky’s letter, the updated reserving formulas for term life insurance policies will be effective for new business written after Jan. 1, 2015. The letter said the modifications in the regulation will reflect actuarially sound and evidence-based adjustments regarding mortality data and expenses in acquiring and retaining business for that product.

With regard to mortality, Lawsky said the changes are consistent with evidence that policyholders are generally living longer. He said the DFS will apply a 1.0 percent mortality improvement factor to the current mortality table (2001 CSO) for rates associated with calendar years 2008-2047, and a 0.5 percent mortality improvement factor for each year thereafter. These factors will apply during the initial level premium period.

In addition, DFS intends to introduce a two-year “full preliminary term,” as opposed to the current one-year FPT, to reflect the fact that the upfront expenses for acquiring and retaining term life business are relatively higher as a proportion of premiums paid than for certain other types of business (such as whole life policies). Under the proposal, a two-year FPT will lead to a buildup in reserves after the second policy year. 

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