Wednesday, July 29, 2009

Half A Loaf

The lesson to be learned from yesterday’s conference call of the NAIC’s Life Insurance and Annuities “A” Committee is that something is better than nothing. The first half of the call was devoted to advancing the proposed new Standard Valuation Law up to the next level for ultimate adoption by the National Association of Insurance Commissioners in Kansas City, Mo. But the call really got interesting when a discussion of Model 815 began.

Model Reg 815’s more formal name is the Model Regulation Permitting the Recognition of Preferred Mortality Tables for Use in Determining Minimum Reserve Liabilities. This mouthful in very general terms allows the use of mortality tables reflecting the difference in preferred and standard lives to determine reserves in accordance with the SVL.

The “A” Committee’s Life and Health Actuarial Task Force had adopted 815 after two and a half years of discussion. But the American Council of Life Insurers , Washington, had issue with some of the points in the draft including how reinsurance should be accounted for when determining when the preferred tables could be used. The ACLI’s Paul Graham, chief actuary, suggested wording that would allow use of the tables by more companies and suggested that the reinsurance reserves be tested when a company is doing asset adequacy testing to ensure that there is enough money to cover a company’s assets in the event of financial trouble.

Sheldon Summers, a life actuary with the California insurance department, says that the ACLI amendments would be counter to existing statutory accounting practices and questioned whether it makes sense to allow an accounting offset when the reserves that are being held is 0. “It is inappropriate when you don’t hold enough to cover the value of carrying an asset.”

John Rink, a life actuary with the Nebraska insurance department, said that the LHATF version would allow some companies to use the preferred tables and lower reserves while others would not be able to do so and would conceivably have to post higher reserves.

The interesting part came when it was time to vote. In the first round, 6 voted to adopt the LHATF version without ACLI amendments and 4 voted ‘no.’ But because of recent NAIC policy, in order to be considered for model law status, a 2/3 vote of the “A” Committee is needed. The model could be adopted as a bulletin but not as a model law.

But in order to be in compliance with the Standard Valuation Law, 815 needs to proceed as a model regulation and not a bulletin, LHATF’s Larry Bruning, chief actuary with the Kansas insurance department, explained.

The ACLI version was then put to a vote and received 4 ‘yes’ and 5 ‘no’ votes. The ACLI’s Graham said that the possibility of nothing be advanced had not been considered and that having something in place was better than having nothing in place because at least some companies could see a benefit.

A third vote was taken to reconsider the LHATF version without the ACLI amendments. And this time the vote of 9 ‘yes’ and 1 ‘no’ was enough to advance Model 815 through “A” Committee on a model track rather than a simple bulletin. Some regulators including Cary Krantz of the Florida insurance department said that this was a good thing considering how much energy could be used on other matters including developing a Valuation Manual.

The Valuation Manual is a roadmap for the Standard Valuation Law that two committees, the Principles-Based Reserving (EX) Working Group, and the Solvency Modernization Initiative (EX) Task Force adopted earlier on the call.

The “A” Committee reserved judgment on the issue until it examines the issue more closely. A real concern is adopting the SVL without necessary components such as the Valuation Manual which is still being developed. Some commissioners questioned whether it would be better to advance it through the NAIC’s “A” Committee and then on to full adoption at Executive Committee and Plenary when all the parts are ready. Others such as Al Gross, Virginia Commissioner, stressed that “it is important that the NAIC as an organization not be seen as dragging its feet on this approach to reserving.”

It was decided to hold a conference call in early September to further discuss the issue and conceivably for “A” Committee to vote on the issue.

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