Debate Continues On Regulations For VAs With Guarantees

Larry Gorski, a consulting actuary in the New Berlin, Ill., office of Claire Thinking and chair of the American Academy of Actuaries capital adequacy subcommittee, said the Academy was reaching out to rating agencies such as Standard & Poors Corp., New York.

The Academy is trying to get them to understand the proposal and components of the approach such as credit that would be given for hedging, he explained.

Gorski said concern that RBC requirements will increase dramatically needs to be taken in context. Currently RBC for guaranteed death benefits is zero, so any large increase is starting off a small base. While there are requirements in place for guaranteed minimum income benefits, the current formula does not recognize hedging, he continued.

The proposal, he added, really gives companies the opportunity to determine RBC because the amount of risk-based capital is determined by how sound and effective its hedging strategies are.

How final calculations are apportioned between capital and reserves is important to insurers, says Bill Schreiner, a life actuary with the American Council of Life Insurers, Washington. Reserves are important for reasons of federal income tax requirements while total capital helps determine the soundness of a company, he added.

Schreiner says that if the standard scenario is done correctly, then ACLI could support it. But, he continued, modeling work done by a company that involves testing of numerous scenarios should receive sufficient consideration.

Making capital requirements effective this year would not be appropriate, he said. The Academy still needs to produce information such as the treatment of hedging, Schreiner added.

Dave Sandberg, second vice president and corporate actuary with Allianz Life Insurance Company of North America, Minneapolis, offered a suggestion that capital requirements could be balanced with market disclosure.

And, according to those participating in the discussion, how the proposed changes could affect the volatility of capital is a consideration.

However, Bob Brown, a life actuary who is vice chair of the Academys capital adequacy subcommittee, says that some of these guarantees are similar to options reflecting changes in the market. Consequently, he explained, they need to be properly reserved.

Sheldon Summers, a life actuary with the California insurance department, asked whether there was a way to update factors in the alternative method to reflect changes in the marketplace. For instance, he said, viatical companies are buying contracts for more than the cash value because they are interested in the death benefit. It offers contract holders who are unhappy with a contracts performance a way to separate from the contract, Summers continued.

Doug Barnert of Barnert International, New York, said companies may choose to use the alternative approach because if they choose a modeling approach, they will not be able to switch to the alternative approach. Additionally, he said that small and medium-sized companies might decide to contract with larger companies to run models for them to reduce costs.

But, Gorski noted that if a company decided to use a service provider, then it would need to realize that because it could not change course, it would be a long-term arrangement.

Reproduced from National Underwriter Edition, May 14, 2004. Copyright 2004 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.