The NAIC has been concerned for months about a universal life product with secondary guarantees — sold by life insurance companies such as The Principal Financial and Lincoln National Corp. — that creates a situation where these companies are holding less than the statutory minimum reserve required.
According to discussions on the matter by the NAIC's life actuarial task force (LATF), the companies are "artificially" increasing premiums used in the reserve calculations above the minimum premiums needed to keep the policy in force. This would reduce reserves below the minimum statutory requirement, they said.
The issue is coming to a head at the NAIC Fall National Meeting outside of Washington this week, and a decision whether to move forward on a position is expected shortly.
"Policy designs which are created to simply disguise those guarantees or exploit a perceived loophole must be reserved in a manner similar to more typical designs with similar guarantees," the task force recorded in its March minutes.
Regulators want reserves to be established for the guarantees, the death benefits, provided by a universal life policy.
One prominent state actuary noted that he had seen a product filing in which the actuarial memorandum indicated that the reserves would be held according to Actuarial Guideline XXXVIII, but that the chart at the end of the document showed an interpretation of the guideline with reserves lower than those indicated by the guideline.
Kansas Insurance Department actuary Mark Birdsall said the universal life product in question was clearly designed to exploit a loophole and asked if the task force should consider a regulatory guidance document.
The LATF issued a statement on Sept. 9 that held that "some companies are holding reserves for universal life insurance products with shadow account secondary guarantees that do not fully reflect the benefits of the secondary guarantees as required pursuant to the NAIC model laws, regulations and actuarial guidelines…These reserves do not properly reflect the full benefits of the secondary guarantee as required by the law, regulation and guideline."
This is known as the Statement on Actuarial Guideline XXXVIII (AG 38), the Application of the Valuation of Life Insurance Policies Model Regulation, or the Exposure.
The American Council of Life Insurers (ACLI) took issue with the direction of the task force and told it so.
"These statements are likely to be interpreted by outside parties to imply that some companies are holding inadequate reserves for these products," it said in a letter Oct. 19, preceding a Wall Street Journal article this week.
Despite the heavy headlines, there is some word that the concern is with technical compliance, not asset adequacy.
"This issue… relates to the details of how to calculate formulaic reserves for a complex product design, and, to the best of our knowledge, is unrelated to reserve adequacy. Therefore a broad statement by a standard setting body is inappropriate…The assertions in the Exposure are potentially very damaging and could have serious negative consequences with various audiences (including rating agencies, analysts, agents, policyholders, etc.)," the ACLI stated.
"Such assertions have no place in a public document issued by the NAIC," the association admonished. The letter was written by ACLI actuary John Bruins and addressed to Leslie Jones, chair of the LATF and a South Carolina Department of Insurance's deputy director and chief actuary.
Affected life insurers agreed, also noting that the LATF statement could override state insurance regulators and that retroactively applying the new standard, if adopted, would be simply unfair.
Also, because the LATF statement does not address all design types, insurers worried it could leave companies uncertain as to what designs and reserve situations are acceptable.
