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Actuaries Press for Tougher Variable Annuity Capital Testing Approach

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Actuarial consultants at Oliver Wyman Inc. are clashing with the American Council of Life Insurers (ACLI) over how companies should verify whether they have enough capital to back their variable annuity obligations.

Oliver Wyman consultants say issuers should use a tougher forecasting method.

The ACLI says regulators should let issuers use a less harsh forecasting method.

(Related: What If Investment Companies Hate Their Life Insurer Affiliates?)

Members of the Variable Annuities Issues Working Group, an arm of the of the National Association of Insurance Commissioners (NAIC), have talked about the two approaches during a conference call meeting earlier this month.

The NAIC is a group for state insurance regulators. It develops model laws and regulations, or sample documents, that states can use to develop their own insurance laws and regulations.

The NAIC and its member states have been moving away in recent years from use of static formulas for determining how much capital insurers should have, and toward use of modern statistical forecasting techniques, or “stochastic” methods, for analyzing reserve adequacy.

The new, “principles-based reserving” approach relies on actuaries’ ability use of reasonable forecasting assumptions.

Principles-based reserving advocates say the approach should help life insurers do a better job of tailoring reserves to meet their requirements, and, in some cases, free up reserves.

Some regulators still want issuers to provide a standardized analysis, to help regulators see whether issuers are using especially aggressive assumptions, according to the Oliver Wyman actuaries.

The NAIC hired Oliver Wyman actuaries to look at variable annuity capital standards. The firm released a report on its findings in 2018.

Since the Oliver Wyman report came out, the Variable Annuities Issues Working Group has been looking at two standardized capital analysis approaches: the Company-Specific Market Path approach, or CSMP approach, and the Conditional Tail Expectations with Prescribed Assumptions method, or CTEPA method.

Oliver Wyman is supporting the CSMP approach and says it should do a better job of identifying weakly capitalized insurers, even if it also marks some insurers with a good level of capital.

The ACLI is supporting the CTEPA approach. The ACLI has told the working group that the CSMP approach would require insurers to add more to their reserves, without necessarily being more accurate than the CSMP approach.

“This approach creates a disconnect with the expected result of the option to use stochastic modeling,” the ACLI says in a slidedeck presented during the working group conference call.


Documents related to the variable annuity reserving discussion are available here, under the Meeting Materials and Related Documents tabs.

— Read State Regulators to Look at Variable Annuity Drafton ThinkAdvisor.

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