Thursday, June 11, 2009

Pop Open The Champagne (Well At Least Crack A Smile)

After 4 years, efforts to create a principles-based system of reserving took a major step forward when the Life & Health Actuarial Task Force of the National Association of Insurance Commissioners, Kansas City, Mo., adopted a revised Standard Valuation Law model. The vote of 10 to 0 with New York abstaining took place late this afternoon in Minneapolis at the start of the NAIC’s summer meeting here.

New York abstained because there are still questions that are unanswered, according to the discussion. It had proposed two amendments both of which were not brought to a vote because of motions other regulators adopted. The proposed New York amendments addressed the issue of whether deposit contracts are covered and whether the SVL should be applied retroactively.

LHATF regulators maintained that the model allows states to cover deposit contracts if their laws require it and making language in the model more restrictive was not necessary and might even require another exposure of the document. They also said that previous contract restrictions would prevent retroactive application of an amended SVL because earlier versions of the law are actually named in many older contracts.

The reaction following approval of the project which had hundreds of actuaries, regulators and industry executives working thousands of hours ranged from joy to cautious optimism. Some reaction is more tempered because a major issue that still needs to be considered is whether a change to the SVL will impact the tax treatment of life insurance and how a solution can be developed.

The project was advanced but with the provision that LHATF will recommend that it not be fully adopted by the NAIC until a Valuation Manual, a living document that explains how to apply the SVL, is completed. John Bruins, a life actuary with the American Council of Life Insurers, Washington, and Norm Hill, a life actuary, said that principles-based reserving should not be brought to legislatures in pieces but as a comprehensive package.

Life insurers argue that the current reserving system does not accurately reflect the risk in a life insurance company and regulators criticize how the 150-year old system does not provide nimble, flexible reserving.

Donna Claire, who is spearheading the effort of the American Academy of Actuaries, Washington, to put a principles-based reserving system in place, expressed her joy that a major piece of the PBR project had received the nod, with a pithy, “Yes! Yes! Yes!” when asked for her reaction.

“We have a piece of the package-a significant piece,” offered the ACLI’s Bruins. And, Paul Graham, a life actuary who is also arguing the case for the ACLI, said, “a lot of hard work has culminated [in this vote] but there is still a lot to do.”
Larry Bruning, chief actuary with the Kansas insurance department and LHATF vice chair with Leslie Jones of South Carolina, said that the new SVL model will help to create a system where regulators do not have to apply band-aids to reserving products that come up as products are developed or change.

And, he said, a complete package that is ready to be brought to legislatures does not have to wait until all products have new reserving guidelines but could be ready if life insurance requirements are created. A portion of the new reserving requirements addressing term insurance and universal life insurance would be a sufficient start to show how the system is being developed.

What still remains to be addressed and what is critical, said Bruning, is how the Treasury will view a new SVL. Technically, the tax treatment of life insurance is tied to an older, more conservative version of the SVL. Treasury can give its blessing to the new SVL. Or, if it declines, Bruning said that regulators will have to see if a net premium methodology offered by ACLI will be acceptable to regulators.
Bruning said that the SVL and the Valuation Manual could be fully adopted by the NAIC in 2010-2011. However, it would not become operative until 75% of states adopt the new model.

He also addressed the issue of bringing a new system to legislatures that some view as relaxing requirements following a national financial meltdown that many Americans attribute to lax regulation-although not necessarily lax insurance regulation.
The new system is actually requiring better protection by looking at risk that go beyond mortality and interest rate risk, Bruning explained. Companies will have to account for counterparty, liquidity, legal and business risks, among other risks, he added.

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