The Three Rs for Variable ProductsRBC, Reserving And Regulation

A discussion with regulators indicated some difference over approach.

But there was sentiment that work should proceed. It is anticipated that the reserving work can build on the RBC efforts, Campbell says. Scenario testing for RBC can also be used for developing formulas for reserving, he adds.

A report presented last month to regulators during the spring NAIC meeting addressed how changing reserves could interact with tax laws that use current statutory reserves methods, mortality tables and interest rates.

Issues to be discussed further include whether the scope of the project should calculate reserves for the entire contract or only the guarantees associated with the contract. Additionally, the issue was raised regarding whether reserves should be calculated using pre-tax or after-tax income projections and discount rates.

During a discussion of the project, the issue of the impact on current reserving for taxes was raised since, it was explained, it could affect current deductions for all or part of VA reserves that some companies take.

The choice of using a formulaic approach as opposed to an approach allowing the actuary more discretion was also raised by regulators. Four regulators offered opinions on the issue with three favoring permitting more actuarial judgment, while New York favored a more formulaic approach. Reasons cited included the fact that actuaries making the judgment are usually an employee of the company or a paid consultant, as well as the potential for balance sheet volatility.

Even as regulators and actuaries attempt to establish guidelines for variable products with guarantees, insurers are lobbying legislators to take a position that VAs and variable life products should be regulated by state insurance regulators rather than a joint regulation that would include state securities regulators.

The American Legislative Exchange Council, Washington, decided to support regulation of these products by state insurance regulators during its spring task force summit on March 28-29. The resolution is expected to receive full approval at the end of this month.

ALEC joins the National Conference of Insurance Legislators, Albany, N.Y., on this position.

The NAIC is still reviewing the issue and could take a position by its summer national meeting in June. A position would be helpful, says Carl Wilkerson, chief counsel, securities and litigation with the ACLI, who expects that the regulation of variable products at the state level is an issue that will surface again during the next legislative session.

The issue already has been raised three times by Kansas Securities Commissioner David Brant, who has argued that variable contracts should also come under the jurisdiction of state securities regulators. This stance prompted the ACLI and the National Association of Insurance and Financial Advisors, Falls Church, Va., to request that the NAIC assert that variable contracts fall under the exclusive state jurisdiction of insurance regulators.

Reproduced from National Underwriter Edition, April 14, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.