WASHINGTON — New York today fell in line with a decision made by the National Association of Insurance Commissioners (NAIC) to shift reserve requirements for universal life insurance with secondary guarantees, and term life insurance products will shift to a more flexible evaluation system.
However, New York will only adopt the system as of Jan. 1, 2018, instead of at the beginning of 2017 under the NAIC plan.
Maria T. Vullo, the new superintendent of the New York Department of Financial Services (DFS), said the state will adopt principle-based reserving (PBR) for its regulated life insurers beginning in January 2018.
She also convened a working group representing industry and consumers to assist DFS in establishing the necessary reserve safeguards. The working group includes representatives of some of the nation’s largest insurers, including MetLife; New York Life; TIAA-Cref; Axa Equitable; Guardian; and Security Mutual. Birny Birnbaum, executive director of the Center for Economic Justice and a representative of the AARP will also serve.
“The adoption of PBR in New York will keep the state at the forefront of insurance regulation,” Vullo said.
“DFS will continue to make certain that New York’s insurance market is fiscally safe and sound and that the reserves to back insurance policies are appropriately set to protect consumers,” she added.
The decision had been expected since the resignation of Benjamin Lawsky as DFS superintendent last June. Lawsky and California commissioner Dave Jones were the primary opponents of adoption of PBR. Jones fell in line after California insurers agreed to provide funds to the department to ensure there were adequate actuaries to police the new system.
Interim successors to Lawsky had balked at the requests of Gov. Andrew Cuomo to ease capital and other standards on insurers and stepped down earlier this year.
NAIC approval was triggered last month after laws approving use of PBR were approved by 45 states, representing nearly 80 percent of the U.S life insurance market.
The major impact will be on reserve requirements for universal life insurance with secondary guarantees and term life insurance products.
In a new report in late June, Fitch Ratings said the new reserving system will have “mixed implications” for U.S. life insurers.
Fitch said it represents a “significant departure” from the formulaic reserving approach that has been in place for over 150 years.
Fitch expects PBR to materially affect the industry’s regulatory reporting, capital and risk management and product pricing and design.
“While near-term impacts on the industry’s overall reserve and capital adequacy are expected to be minimal, longer term impacts could be significant,” Fitch said. The limited near-term impact reflects the prospective nature of the proposed implementation given that PBR only applies to business written after Jan. 1, 2017 and the expectation that life insurers will make use of the transition period and potential exclusions.
Fitch said that PBR will reduce reserving requirements for term policies, which should benefit companies that do not currently reinsure excess XXX reserves to captive insurers. For companies that use captives to finance term reserves, the impact of PBR could be modestly negative due to the effect on tax reserves, Fitch said.
“The magnitude and directional impact on ULSG products is less certain and will vary by company,” Fitch analysts said. The impact on annuities, health insurance and other life insurance products is expected to be minimal, the analysts added. Fitch thinks PBR will reduce but not necessarily eliminate the industry’s use of captive insurers to finance excess XXX/AXXX reserves. “We anticipate that large insurers will move more quickly toward the adoption of PBR, particularly those that write significant amounts of term insurance while UL-focused companies will likely move more slowly,” Fitch said. That means the shift will have a huge impact on New York insurers, amongst the nation’s largerst.
“Smaller companies could be disadvantaged given the resources required to implement PBR,” Fitch said.
Furthermore, “companies that qualify for and elect to adopt the size exemption could face increased competitive pressure due to less favorable pricing,” Fitch said.