National Harbor, Md.
Twenty eight conference calls and nine national meetings and one final feisty verbal exchange later, amendments to the Standard Valuation Law were fully adopted by the National Association of Insurance Commissioners during its fall meeting here.
The full plenary voted for the key part of principles-based reserving, a dramatic difference from the current use of formulas to establish reserves. New York and Wisconsin opposed the motion.
At the start of the discussion in the executive committee/plenary session, Connecticut Commissioner Tom Sullivan, chair of the Life & Annuities “A” Committee, explained some of the features of the changes, noting that there would be a minimum floor, that changes would be made prospectively and that policies currently in force would not be affected. He also noted that the Valuation Manual that is scheduled to be completed in December, would hold the details to implementing the new SVL.
If the SVL were a car, the Valuation Manual is a roadmap. Or more specifically, like a GPS in which the roadmap moves as the industry moves and changes.
But in a recent conference call last month, reservations were expressed by both New York and Wisconsin about implementing a new law in which many of the details are not yet developed. Wisconsin Insurance Commissioner Sean Dilweg expressed concern over implementing a new reserving system for disability insurance and long-term care insurance when work had really only been done on life insurance reserving. He also said that the SVL should include prescribed minimums and it should not be left in the Valuation Manual. And he said that Wisconsin will not adopt the SVL for long-term care products.
Larry Bruning, chief actuary in Kansas and chair of the Life and Health Actuarial Task Force, said that there is a deterministic component in the Valuation Manual right now. And, he added that that manual can be changed if there is an issue that arises. Bruning also said that if specific product details in the manual are not ready, then the current SVL would remain in place for those products.
Dilweg offered a friendly amendment to reflect these concerns, an amendment which was defeated prior to the vote on the model to adopt the amended SVL. He said that a regulatory “guardrail" is needed to establish protections.
Sullivan said that this proposal had been worked on “since the earth cooled” and that it was time to adopt it so that it could be brought to state legislatures starting in 2010. And South Carolina Director Scott Richardson said that it was a bad precedent to question the work of so many regulators that had devoted so much time to the project.
Utah Commissioner Kent Michie urged plenary members to “vote yes. This is an extraordinary vote. It is history in the making.”
After the vote, Bruning concurred telling The Bellwether that it is one of the biggest changes since a formulaic reserving system was instituted in 1858. Bruning noted that the vote is the culmination of five years of hard work. PBR will fix a “lot of weakness in the formula-based methodology,” he said. It has not measured all asset and liability risks and with a new system, the financial solvency of the insurance industry will be strengthened.
Bruning outlined the timeline for the proposal. Once the Valuation Manual is adopted, a date that is anticipated at year end, state can bring the model to legislatures. Kansas plans to introduce a bill in 2011, he added. A total of three quarters of states need to adopt the Manual for it to become operative, he added. The model will also be an accreditation standard, so states which do not adopt it, may have trouble being reaccredited, he said.
“This means that we move into the 21 Century,” noted Barbara Lautzenheiser, a life actuary with Lautzenheiser Associates, Hartford, Conn. The changes bring us up to speed with the international community, she added.
Paul Graham, chief actuary with the American Council of Life Insurers, Washington, said that “this is a first step in a very long process. It is great to have it completed but we still need to complete the manual.” And, he continued, states need to adopt the new law, a process which will take a couple of years. At that point, there will be “big benefits to the industry and consumers alike.”
PBR more accurately reflects risk with low risk products benefiting and higher risk products will more have prices more accurately reflected. “It is a good day for everyone. Regulators will get to focus on true risks.”
But the Internal Revenue Service must still review PBR to ensure that the new reserving methodology does not change taxes for life insurance, he added.
Staff is still being put in place in the Treasury Department, so there could be a learning curve, according to Graham. But, he noted, the Valuation Manual is flexible enough to react to whatever Treasury decides.