We’re Getting Warmer. Really!

For advocates of principles-based reserving, the American Academy of Actuaries has a message for you: keep the faith, the project is making progress. The message was delivered by the Academy’s Donna Claire, who is spearheading the massive effort, on April 9 during the Academy’s quarterly update.
Larry Bruning, who is chair of the NAIC’s Life & Health Actuarial Task Force, regulators who are actuarial specialists, explained the detail work that needs to be done to bring the project to the finish line. And, he expressed surprise at a question posed by a participant—“Is PBR really going to happen?” Bruning responded by saying that it is already happening in pieces as evidenced by C3 Phase II and AG 43. And, he added, it is still the goal to pass a new Standard Valuation Law in 2009. That adoption by the NAIC would start a 2-3 year adoption process in state legislatures, Bruning adds.
One of the big issues that everyone is trying to figure out is how to advance the project and keep Treasury and IRS happy. In meetings last year, one of things that became clear was that there was a question about whether the IRS approved of how lapse rates would be treated under the new reserving approach and concern over a gross premium approach to reserving, according to Tom Campbell, a Hartford Life actuary who also represents the Academy.
LHATF’s Bruning told participants that as a result, the ACLI has brought a net premium approach before the regulatory group as a way to clear a potential objection to the project.
Among the items that are being examined to bring the project to completion is the use of potential new valuation mortality tables that would be incorporated into a valuation manual that is being put together. The current proposed loading formula would be consistent with the 2001 CSO Table. A total of 40 companies have contributed data to this table compared with 20 used to produce the 2001 Table, according to Bruning. Consequently, a “valid question” is raised about whether there is a need to address adverse deviation if there are a larger number of companies who have provided data. While the issue is ultimately a regulatory decision, Bruning explained that the impact on the cost of repricing and reformulating policy forms does need to be given attention.
Other issues discussed on the Academy call included an update on LHATF actuarial decisions on capital and surplus relief questions first raised by the ACLI late last year in order to provide some relief to companies in troubled times. The task force hopes to report its recommendations to the NAIC “A” committee by the June summer meeting in Minneapolis.
The Academy’s Campbell also gave an update on variable annuity reserving issues, noting that now that AG 43, better known as VA-CARVM, is in force companies need to be working on implementing the systems needed to comply with the new requirements. And, he said in the coming week there will be there will be an update on the Life Practice Note on AG 43 posted on the Academy site. He also encouraged those who want to learn more to participate in a joint SOA/AAA seminar on May 19-20.
Phil Barlow, chair of the NAIC’s Life RBC working group, said that the C-3 Phase III project capital requirement is nearing completion. The capital project applies to life insurance products for both direct and reinsured contracts and covers UL, VL, VUL, WL and indexed life and indexed UL policies. All in-force policies, not just newly issued policies, would be covered. Even if the project is delayed, it is likely that RBC instructions can be put in place, he added. And, as a principles-based approach is put into place, conceivably C-3 Phase III could be adjusted to include annuities, he explained.