Small Insurer: Avoiding Hard Annuity Math May Be Too Difficult

What You Need to Know

State insurance regulators are building the principles-based reserving approach into a valuation manual section for fixed annuities.
The PBR approach requires sophisticated statistical modeling.
Waylon Peoples says getting an exclusion from the modeling requirements will take complicated statistical modeling.

New draft rules could hurt small fixed annuity issuers that want to stick with traditional reserving methods, according to Waylon Peoples.

Peoples, vice president, life actuarial, with Erie Family Life, says the National Association of Insurance Commissioners has promised to free small, strong life and annuity issuers from having to use the complicated principles-based reserving (PBR) approach.

But a proposed update to Valuation Manual-22 has created a tough process for small annuity issuers that want a PBR exemption, Peoples writes in a comment letter on the VM-22 draft update.

“Demonstration of compliance with any of the exclusion tests in VM-22 will likely require a modeling exercise using multiple interest rate scenarios along with supporting documentation that is not meaningfully less than the work and documentation required for those who do not pass an exclusion test,” Peoples says.

Principles-Based Reserving Basics

The National Association of Insurance Commissioners is a Kansas City, Missouri-based group for state insurance regulators.

Traditionally, life and annuity issuers have used simple formulas to show they have enough financial resources to meet obligations to insurance policyholders and annuity contract holders.

The NAIC has been working with life insurers and actuarial groups for many years to implement a U.S. life insurance PBR system. The PBR system is supposed to be a framework that life insurance and annuity issuers can set aside reserves based on “statistical modeling,” or math-based forecasts, rather than simple formulas.

Many life insurers believe that shifting toward a PBR approach, and away from the traditional, formula-based approach, will help them do a better job of matching resources with obligations and will give them a better understanding of the obligations and the risks they face.

Many small life insurers have argued that meeting the statistical modeling requirements is difficult and expensive and that they should be able to use traditional reserving formulas.

The Proposed Valuation Manual-22 Update

Peoples says one concern about the proposed PBR exemption application process for small annuity issuers is that the NAIC is introducing it in the form of an amendment to an existing valuation manual.

Many states adopt NAIC valuation manual updates automatically, and that means it’s possible that states might adopt the VM-22 change without putting the change through the legislative process, Peoples writes.

“If this is the case, I can’t help but wonder if smaller companies would have been supportive of PBR in general had they been aware that their exemption from it could be placed in jeopardy by future edits to the valuation manual,” Peoples writes.

The NAIC has created a simple, one-page PBR exemption application form for small life insurance issuers, and that form uses information that’s easy to pull from a life insurer’s financial statements, Peoples notes.

The ACLI has suggested in its comment that the VM-22 Subgroup should adopt the same approach for the annuity PBR exemption process that it has for the life insurance PBR exemption process.