Thursday, December 17, 2009

Academy Says PBA Is Close But Much Work Remains in 2010

If 2009 was a turning point for a principles-based approach to reserving and capital requirements, 2010, will be the year to finalize the project, according to speakers during this week’s quarterly call sponsored by the American Academy of Actuaries, Washington.

Donna Claire, who is spearheading the massive four year effort involving regulators, actuaries and the American Council of Life Insurers, Washington, introduced speakers who detailed some of the work that was done and the work that still needed to be accomplished.

Alaska regulator Katie Campbell spoke of a number of major issues to resolve before a piece of the Valuation Manual, VM-20, dealing with life insurance, is finalized. The Life and Annuities “A” Committee of the National Association of Insurance Commissioners, Kansas City, Mo., has given the project until August 2010 to be completed.

The Valuation Manual is the roadmap that is needed to implement changes to the revised Standard Valuation Law, passed in September 2009 by the NAIC. The law and manual are scheduled to go to state legislatures as a package starting in 2011.
Among the issues that need to be resolved on this important piece of the Manual, according to Campbell, are:

􀂄 ACLI’s net premium reserve (NPR) floor – formulaic minimum reserve floor
􀂄 Asset default assumption and reinvestment spread methodology
􀂄 Appropriate level of aggregation
􀂄 Appropriate level of and guidance on margins
􀂄 Prescribed assumptions in the absence of credible relevant data
􀂄 Reporting requirements
􀂄 Experience reporting, and,
􀂄 Economic scenarios

Dave Neve, chair of the Academy’s Life Reserves working group, and a life actuary with Aviva USA, noted that VM 20 is “the most significant remaining outstanding issue.” He said that as part of the remaining work, the ACLI expects to have net premium reserve language ready by the start of January. The NPR, based on prescribed assumptions, would only differ between companies because of differences in policy structure.

By the spring 2010 NAIC meeting, VM-20 language should be ready that will reflect asset default costs including treatment of “all major general account asset types and a fail-safe for “all other” type of assets.

Philip Barlow, a regulator with the insurance department in the District of Columbia, and chair of the NAIC’s Life Risk-based Capital working group, said that there are a number of projects underway that are connected to the PBA initiative. The working group, according to Barlow, has exposed a C3 Phase III report that has received feedback from industry. C3 Phase III examines the interest rate and market risk component of the Life Risk Based Capital framework.

Among the comments received were concerns related to the double counting of a diversification benefit, an altered definition of C3 risk and scope concerns that the focus should be on UL with secondary guarantees and not on group insurance. Other suggestions included simplified documentation and better coordination with asset adequacy analysis.

As a result of the comments, according to Barlow, the working group will consider a materiality test and initially limit the scope provided that there is a clear definition of all products with significant tail risk, risk that is outside the norm. The ACLI agreed to submit specific proposals for both items by Jan. 4, 2010.
Barlow explained that the working group is hoping to finalize C3 Phase III at the spring NAIC meeting at which time it will decide whether a 2010 implementation date is appropriate. If the project is not finalized at the spring 2010 meeting, there will not be a 2010 implementation date, he said.

Barlow also said that the C3 Phase IV project which will roll up annuity business from C3 Phase I and II will begin once the C3 Phase III project is finished. However, he said that it will not be a long project life Phases I and II were.

Todd Erkis of Towers Perrin described a practice note for the C3 Phase III project which is a guideline that can be used to help conform to the new requirements once they are finalized. The practice note is available at:

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