Some insurers seem to be using the wrong methods to calculate some types of assets and reserves, according to officials at the New York State Insurance Department.
The draft circular letter would require every life insurer authorized to do business in New York, and every accredited life reinsurer in the state, to report on the estimated effects of complying with the New York department's interpretation of the rules by Dec. 31.
Martin Schwartzman, chief of New York's Life Bureau, says in the draft circular letter that some life insurers have been incorrectly applying two statements of statutory accounting principles, or SSAPs, that have been approved by the National Association of Insurance Commissioners, Kansas City, Mo., and adopted as regulations by New York state.
One of the standards, SSAP Number 51, sets the rules insurers are supposed to follow when they established deferred premium assets and unearned premium reserves. The other standard, SSAP Number 61, governs how insurers treat reinsurance premiums.
The circular letter will explain how insurers should go about establishing deferred premium assets and unearned premium reserves, and it also will remind insurers about how to include reinsurance credit in the DPA and UPR figures, Schwartzman writes in the circular letter draft.
Insurers often use the "mean reserve" method to estimate the reserves they need to back a policy. That method usually produces reserves that are a little too high, because the method assumes the policyholder has paid the entire premium for the current year, Schwartzman writes.
An insurer can offset the reserve overstatement by posting a "deferred premium asset" on the asset side of the ledger.
When the insurer's gross premiums are less than its net premiums, the insurer is supposed to use gross premiums to calculate reserves.
But, in some cases, insurers are using the lower premium figures – gross premiums — to calculate mean reserves, and the higher premium figures – net premiums – to calculate deferred premium assets.
Some insurers say SSAP Number 51 requires them to follow that approach, because it says they are supposed to cut "loading" — items such as agent commissions, premium taxes and administrative costs — from the gross premium figure.
The New York department believes insurers are supposed to adjust the gross premium figure for loading, not simply use the net premium figure, Schwartzman says.
In many cases, the load-adjusted gross premium figure and the net premium figure are the same, but, when they are different, the insurer should use the lower, load-adjusted gross premium figure to calculate the deferred premium asset, Schwartzman says.
"To do otherwise results in an overstatement of the DPA on the asset side of the insurer's balance sheet," Schwartzman writes.
In other cases, Schwartzman says, a reinsurer may establish its own deferred premium asset for business it has assumed, and the insurer that originally wrote the business then fails to adjust its own deferred premium asset proportionally.
"Since the DPA exists solely to offset the overstatement inherent in the mean reserve, failure to reduce the DPA properly also results in a reinsurance reserve credit in excess of the actual risk ceded to the reinsurer," Schwartzman writes.
Some insurers use the "mid-terminal" method to estimate reserves, and they calculate an "unearned premium reserve" figure to make that method work. Insurers are running into double-counting problems with UPR figures just as they are with DPA figures, Schwartzman writes.
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