Regulators Hear Different Approaches To Reach Principle-Based Reserving

During his discussion, diPaolo said that while he supports efforts to gather more updated experience, creation of a new table also could cause complications in discussions with the Treasury Department. The introduction of a new table shortly after the 2001 CSO Table was introduced as the prevailing table could raise issues with Treasury on tax treatment under sections 807(d), 7702 and 7702(a) of the internal revenue code, he said.

Treasury has the authority to choose the prevailing table and depending on the table it chooses, the definition of life insurance and inside buildup could be impacted, he explained. To have two tables–the existing table and a new table–would make discussions more complicated, he continued.

During further discussion of a principle-based solution, LHATF voted to expose work of the American Academy of Actuaries' life reserve working group. The vote was 12-1, with New York voting 'no.'

The Academy effort would include all individual life insurance products and consider the possibility of creating an actuarial standard of practice rather than a regulation or actuarial guideline. It would also look at methods used to determine earned rates and discount rates. The goal of the Academy group is to present a final draft that can be adopted by LHATF at the December 2006 NAIC meeting.

Governance was another area discussed by regulators as the Academy advances efforts to develop proper oversight in a principle-based system. A regulatory framework was favored by regulators from California, Florida, New York and Texas.

"We are looking at a major change in the valuation law, and I would like to have something to fall back on," said Sheldon Summers, a life actuary with the California department.

Dan Keating, a Florida life actuary, said that during a recent discussion, a Canadian actuary's comments indicated that Canadian actuaries were as concerned with violating their professional standards as they were with violating the law. But, Keating continued, he did not think the same necessarily held true in the United States.

However, Tomasz Serbinowski, a Utah life actuary, said that if efforts move too slowly, the project might not advance. He likened it to trying to break a wood plank with karate in little bits rather than with one whack. The plank doesn't break, he noted.

An industry plan would include using existing CSO mortality tables to create new preferred and standard risk classes