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State Regulators to Look at Variable Annuity Draft

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State regulators could change the rules life insurers use when accounting for efforts to hedge against variable annuity interest rate risk.

A panel of regulators, the Variable Annuities Issues Working Group, plans to talk about a hedge accounting draft in December, in Honolulu, at an in-person meeting of the National Association of Insurance Commissioners.

The working group will be holding a session at the meeting Dec. 1. Jim Armstrong, the Iowa regulator who serves as the chair of the working group, will present a new draft of a variable annuity statutory accounting framework at the session, according to a session agenda.

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The NAIC is a Kansas City, Missouri-based group for state insurance regulator. It does not have the direct ability to set state insurance laws or regulations, but regulators in states and other jurisdictions, such as the District of Columbia, often use NAIC models to develop their own laws, regulations, guidelines, and other rules and materials.

The Honolulu meeting is set to run from Nov. 30 through Dec. 4.

The Variable Annuities Issues Working is part of the NAIC’s Financial Condition Committee.

The committee and its working groups have been trying for years to develop a new approach to interest rate hedge accounting for variable annuity issuers, according to a working group document posted in June.

Armstrong says in the June document that the fair market accounting rules might punish the user of an effective hedging strategy that tries to keep a hedging strategy in place for the entire life of a contract, by requiring an issuer to record an unrecognized loss when interest rates are going in the expected direction, and the hedging strategy is not paying off. One response regulators might have “is that the hedges provide benefits, and the statutory framework should not discourage their use in managing the ongoing risk,” Armstrong writes in the June document.

The hedge accounting rules could also lead to concerns when the overall hedging strategy is ineffective, Armstrong writes.

Armstrong proposed in June that the working group should recognize both sides of the issue. He said the working group should develop a framework for recognizing the value that a hedge can provide throughout the period the hedge is in effect, while also giving regulators and others the information they need to see whether a hedging strategy has been ineffective.

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