Friday, December 4, 2009

PBA Details Create A Devil Of A Discussion

San Francisco

Regulators are planning to ask for more time to develop a Valuation Manual that is the roadmap for a new principles-based approach to reserving and capital.

In a proposed letter that is being discussed and could be sent to the Life and Annuities “A” Committee during the winter meeting of the Kansas City, Mo.-based National Association of Insurance Commissioners here, a request will be made to give member of the Life & Health Actuarial Task Force until mid-2010 to hammer out details of the Manual. The Manual provides direction for revisions to the Standard Valuation Manual that was adopted during the fall NAIC meeting in National Harbor, Md. But those revisions were adopted with the understanding that the SVL and Manual would be delivered to legislatures as a package and the Manual would be completed by the end of 2009. Because of this timeline, the technical nature of the work and differences of opinion that have resulted in extended discussion over points in the Manual, LHATF regulators have to request permission to extend the deadline for a finished product.

That difference of opinion was evident during a discussion about creating a methodology to calculate asset default costs as part of a principles-based approach. The report was delivered by Gary Falde and Alan Routhenstein who were representing the American Academy of Actuaries, Washington.

Fred Andersen, a New York regulator, said that “regulators could spend thousands of hours creating models or just limit spreads that are offered.”

During the ensuing discussion, Joe Musgrove, an Arkansas regulator said that any system that is put in place must ensure that regulators are not inadvertently encouraging companies to lead on the forefront of investing in exotic securities. “Had we done that two years ago, we wouldn’t have had companies with credit default swaps sitting on their books right now.” Later, he added, that “if a company wants to take a risk, it should be done with an investor’s share of the money and not with the insured’s share.” He noted that companies had to come to regulators over the last two years with an emergency, and if regulators don’t oversee more exotic investments there may not be as big a reserve the next time a situation arises.

But the Academy’s Falde argued that commercial mortgages are a “core investment,” one that insurers are well practiced in managing. New York’s Andersen responded that it is a regulator’s duty to develop standards that reflect the lessons of the current financial crisis. Falde told regulators that the current residential mortgage-backed securities project at the NAIC would help address the types of securities that wouldn’t fit into the Academy’s new methodology.

To address his concerns, Andersen proposed a motion that securities or assets not independently rated would have a prescribed investment return rate within the proposed Academy methodology. The valuation net investment earned rate would be capped at the prescribed rate and deterministic reserves would be capped at a prescribed rate.

Prior to the vote, Paul Graham of the American Council of Life Insurers, Washington, suggested that there are other considerations that should be factored into the motion such as how to treat prepayments and call provisions. He noted that the NAIC’s Valuation of Securities Task Force is struggling with these issues right now and that the motion was “too simplistic of a solution to really reflect the risk of the products.”

And, Ed Stephenson of Barnert Global and the Group of North American Insurance Enterprises, both in New York, recommended that RMBS not be in the scope of the motion because the issue was currently being looked at in the VOS Task Force.

When the motion was called, LHATF members approved it by a vote of 8 to 4, with one Utah abstaining.

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