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New drafts of risk-based capital and reserving proposals will be presented to regulators who are trying to make sure there is sufficient capital safety in variable products with guarantees.
The discussions will take place during the fall meeting of the National Association of Insurance Commissioners, Kansas City, Mo., this month.
The risk-based capital effort, called the C-3, Phase II project, has been under way for nearly two years, while the reserving project, the more recent effort, is using much of the work developed from the C-3 effort. Representatives of the American Academy of Actuaries, Washington, are working on both issues.
The C-3, Phase II draft currently would allow companies to apply actuarial factors to determine adequate RBC to back up guarantees in variable products.
Factors are being recommended because modeling requires a lot of resources, says Bob Brown, vice chair of the Academys life capital adequacy subcommittee. While many large companies perform modeling, others often do not, he explains, and consequently, it would be a large commitment of resources to create models. The proposal offers "good precision without an inordinate amount of work," he says.
Brown says the proposal should be exposed so regulators can make a decision by the end of the year, and it can become effective for year-end 2004.
Other issues related to the RBC project that are being discussed include whether there should be a smoothing technique to offer relief for any volatility created by the approach and whether the new approach should be applicable to all in-force business or all new business.
On the separate issue of reserving for guarantees in variable products, regulators are weighing whether any guidance should come in the form of an actuarial guideline, a regulation or a change to the Standard Valuation Law.
Uniformity and quick enactment are two criteria being considered as well as ease by which criteria can be modified as needed.
While discussions suggest a model regulation or a change to the SVL could spell out requirements, there are indications it could also take longer to adopt and could result in different legislatures enacting variations of the final outcome of the project.
Regulators debated the benefits of capital safety by having in-force business covered by any new guidance as well as the possibility this could make some companies statutorily insolvent.
When the Academys reserving report is presented to regulators at the NAIC, it will be a step toward more long-term solutions to issues such as reserving for dollar-for-dollar annuity contracts, according to Tom Campbell, vice president and corporate actuary with Hartford Life, Simsbury, Conn., and chair of the Academys variable annuity reserve working group.
