Moody's reacted strongly to a move by the NAIC that could increase regulatory reserves on universal life insurance with secondary guarantees (USLG) by saying that it could have a negative impact on credit for U.S. insurers if applied retroactively, and even hurt the bottom line of insurers if applied just to future business.
Applying the reserve methodology retroactively is a credit negative "because a number of companies could be forced to immediately add significant reserves, disrupting operations and constraining their capital position and business operations," the Moody's report, written by Ann G. Perry, a Moody's senior credit officer.
Moreover, the additional reserve requirement could lead markets for these reserve financing alternatives to be overwhelmed if multiple companies sought to offload a large volume of reserves at the same time, leading to higher prices, Perry wrote.
The NAIC moved Nov. 4 to establish a new task force to come up with an interim solution on reserving on USLG products after a firestorm around the Actuarial Guideline 38, and if loopholes were being exploited to the detriment of companies' reserves. It may be applied to policies in force retroactively, or just ones written in the future. The group is expected to develop something by the March national meeting, regulators sad at the fall meeting.
Some of those reserves could be significantly increased, Moody's determined.
"We typically view higher reserves as credit positive because they provide policyholders and creditors with a greater cushion against unfavorable performance.," Perry wrote, but then said the retroactive application would have the reverse effect.
And even if reserves are just applied to future business, this would still lead to the "reduced ability of life insurers to absorb the surplus strain from writing business at higher reserve levels would necessitate price increases," leading to lower sales, hurting profitability and internal capital generation, Perry stated.
