Work being done by the NAIC on resolving the thorny Actuarial Guideline 38 for universal life products with secondary guarantees (USLG) is focused now on reserving methodologies for business written before or after Jan 1, 2013.
However, some parties are still concerned about capturing the right reserve levels, and those that may have to cough up more reserves for prior years are worried about the impact on their financial statements.
One person wondered aloud if the NAIC were creating some new regulatory body of actuaries who would make the rounds from company to company, state to state, and either approve or disapprove their reserving methodologies, an idea the NAIC tele-conference leadership quickly tried to quash.
On a conference call today hosted by the NAIC's Joint Working Group of the Life Insurance and Annuities (A) Committee and Financial Condition (E) Committee and its hired consultant, Neil K. Rector, a variety of concerns were aired about proposed reserving methods either causing reserves to go up or not being stringent enough.
The Joint Working Group emphasis is now on using a stochastic reserve methodology for in-force business if it is greater than the reserving methodology currently used by the company.
New York's Rob Easton, Executive Deputy Superintendent, Insurance Division, of the Department of Financial Services, weighed in, questioning the modern, principles-based reserving (PBR) model's stochastic approach as opposed to a "one interest rate scenario" that the Life Actuarial Task Force (LATF) had floated as its preference even earlier today.
Rector, a long-time and respected insurance regulatory consultant, Neil Rector of Rector + Associates Inc., Columbus, Ohio, was hired to hammer out some of the fine points after canvassing the industry for input and information on the issue. He responded that there was concern about the level interest rate scenario and that there is a need to make sure companies' existing assets are taken into account. In most scenarios, he explained, those with assets above or below the line aren't reflected in that one-interest-rate economic approach, he said.
The proposed NAIC guideline, subject to further exposure and review, states that a company can report in its financial statements the greater of the PBR stochastic reserve or the company's current reserving methodology.
Stochastic reserve modeling, as opposed to a deterministic approach, under PBR refers to generating a set of economic scenarios and using those economic scenarios to project insurance company assets and liabilities as of a valuation date using many assumptions about premium patterns, policy terminations including death rates, and so forth, all derived according to methods specified in the NAIC's Standard Valuation Manual currently being worked on by the NAIC.
The AG 38 matter was taken from LATF,where state actuaries from new York and other states first raised concern about USLG under-reserving. It was handed off to a new high-level committee of regulators to resolve the issues. The new group, the Joint Working Group led by Texas Insurance Commissioner Eleanor Kitzman, has been meeting with regulators and industry on the issue since at least January on the issue, and guiding the process. The Joint Working Group was formed in the wake of the NAIC national fall meeting. Kitzman made it clear early on, after listening to industry concerns that of the "many things to be worked out but a level playing field is at the top of the list." The issue was a hot-button actuarial reserving concern centered around universal life products with secondary guarantees, and the way some companies may be under-reserving for them.
Most interested parties supported the framework, which represents a bifurcated approach to in-force business and prospective business. The goal is consensus on all methodology calculation matters, for possible adoption at the NAIC summer national meeting next month in Atlanta.
For prospective business — written on Jan. 1, 2013 forward — as reviewed by Rector on the call, there is a proposed blended approach to reserving, with safe harbors, as well as a fall-back "greatest deficiency" reserve methodology.
Some favor two safe harbors, while others favor three, but under the blended approach, those products that don't fit into a safe harbor would be reserved using the greatest deficiency reserve approach. For all ULSG policies, the company would then go through a calculation method — what would lead to the largest deficiency conserve and that would be the one used for the company.
