UPDATES WITH OHIO NATIONAL correction and statement:
Insurance commissioners have made a stab at the contentious issue of reserving for universal life with secondary guarantee (ULSG) and Term UL products with a new draft framework that addresses both in-force business and prospective business, and seems to grant insurers away to avoid anteing up hefty reserves for force business.
It is unclear what the size of any impact to reserves will be on business already in force, and there may be some potential for a hit to reserves if stand-alone evaluations show companies need to add to reserves, but the NAIC's approach indicates it won't be as much as feared should the regulators gone strictly on the basis of a states'-based actuarial staff report.
It appears that the new proposed framework offers a reprieve for the most life insurers who have already underwritten many of these products using looser actuarial guidelines than some state actuaries deemed proper.
However, going forward, insurers who write these products will likely have to start increasing reserves for them, meaning the premiums for term UL and USLG will be raised.
The formulaic approach consistent with the Life Actuarial Task Force's (LATF's) interpretation of AG 38 won't be applied to in-force business, as some insurers had feared, according to the draft. Instead, closed blocks of in-force business would be evaluated by actuaries on a stand-alone basis, the draft states.
"The evaluations would consist of asset adequacy analyses incorporating moderately adverse scenarios," the commissioners of the Joint Working Group of the Life Insurance and Annuities (A) Committee and the Financial Condition (E) Committee said in the draft.
Once the concerns came to light, life insurers had pushed for an asset adequacy test for in-force business, and that approach had been rejected by LATF.
"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.
LATF is comprised of staff-level career actuaries from several states, including South Carolina, New York and Kansas, and its approach and concerns set off a chain of events that threw AG 38 into the spotlight, and then catapulted it into the hand of the commissioners in order to smooth things over.
Some actuaries had been concerned companies were exploiting a loophole in AG 38 to keep reserves artificially low.
