Wednesday, April 28, 2010

Industry Groups Comment on IRS Guidance on AG 43

Industry groups are responding to recent guidance from the Internal Revenue Service on how to reserve for variable annuities with guaranteed benefits for tax purposes.

On March 25, the IRS issued Notice 2010-29 providing interim guidance on Actuarial Guideline 43 which was fully affirmed by the National Association of Insurance Commissioners, Kansas City, Mo.

AG 43 affects contracts issued on or after Dec. 31, 2009. The IRS ruling states that “Generally, AG 43 requires that the aggregate reserve for contracts falling within its scope equal the Conditional Tail Expectation Amount (the “CTE Amount”)1 but not be less than the Standard Scenario Amount.“

The American Council of Life Insurers, Washington, issued the following statement:

“Notice 2010-29 set forth partial guidance on the way in which life insurance companies should implement, for tax purposes, basic reserving for variable contracts under AG 43. The guidance is in line with what was expected, and the industry is pleased with the result as far as it goes. The IRS left some issues open, which was also expected, and we look forward to working with the IRS and the Treasury Department on addressing those issues.”

The American Academy of Actuaries, Washington, through Tom Campbell and Barbara Gold, co-chairs of its Life Practice Council, offered the following points:

--“The Academy Life Practice Council continues to appreciate Treasury’s willingness to provide guidance on calculating VA-CARVM tax reserves. The Academy Life Practice Council has recently appointed a working group to consider making comments to the Treasury regarding Notice 2010-29.
--A representative of the Academy Life Practice Council has met with Treasury in the past on principle-based reserves and the Academy Life Practice Council responded to the Treasury’s request for comments to Notice 2008-18 nearly two years ago. (Notice 2008-18, published on Feb. 4, 2008, described two reserve methodologies under way at the NAIC—a principles-based approach and AG 43. It also alerted life insurers to possible federal tax issues.)
--For those areas where Treasury has provided guidance in Notice 2010-29, our initial belief is that the guidance in the recent notice is fundamentally consistent with the Academy Life Practice Council’s views expressed in our comments to Notice 2008-18.
--There are still areas of uncertainty that need to be addressed, including the inclusion of the stochastic reserve in the statutory reserve limitation on the tax reserves. The Academy work group is preparing comments on this treatment and other areas of uncertainty not clearly addressed in Notice 2010-29.”

The Standard Scenario, a minimum reserve included in AG 43, plays an important role in the IRS guidance. The Notice states that “The Standard Scenario Amount determined under AG 43 will be treated as a life insurance reserve for Federal income tax purposes if the requirements of that guideline, including the account value return assumptions, are met.”

Companies which are given permission to delay implementation of AG 43 by an insurance commissioner must do so consistently and does not affect the amount of the reserve that must be established.

And, if the reserve determined under AG 43 differs from the amount if AG 43 was not used, it must be spread over 10 taxable years. If a delay is granted, it must consistently delay implementation of the 10-year spread.

Tuesday, April 27, 2010

PPACA Work Starts With Discussion of Health Improvement Costs

As state insurance regulators start tackling the medical loss ratio issue in an effort to meet a tight deadline to provide their expertise to federal regulators by a May 14 deadline, one of the questions being raised is what will count as health care improvement costs and will that be included in a medical loss ratio.

The issue will be one of the “big battle grounds,” according to one regulator who offered comment during a recent discussion among regulators of the National Association of Insurance Commissioners, Kansas City, Mo.

Regulators have been asked to respond to over 40 questions posed by the Department of Health and Human Services Secretary Kathleen Sebelius. The questions are part of a mammoth effort to implement the new Patient Protection and Affordable Care Act. The issue of medical loss ratios is one of the first issues that regulators need to address.

As part of that effort several regulators are spearheading the work. The NAIC’s Accident and Health working group is organizing the project under the direction of Steve Ostlund, an Alabama regulator. Julia Philips of Minnesota is handling rate review and Rick Diamond of Maine working on the medical loss ratios.

The new law requires that there be a payout of 80 cents on the dollar. Some states have lower payout requirements but if items like disease management are included, the ratios may meet the new federal requirement.

Lou Felice, a New York regulator, said that how these payments are treated could also impact the medical loss ratio for solvency purposes. If there is a reallocation, he said, it could affect what is considered a claim and what is a quality care payment. New York intends to discuss a reporting form that will pull out what pieces of the medical loss ratio look like, he said. “I don’t know if you can give a standard to HHS without some directorial guidance behind it,” Felice added.

Regulators also briefly discussed the issue of high risk pools. Commissioners are currently talking with HHS and states are required to state their intentions on how they will handle these pools by this Friday, April 30. HHS will issue contracts next week, according to the discussion.

Saturday, April 24, 2010

NCOIL Urges Senators to Remove ONI from S. 3217

The National Conference of Insurance Legislators (NCOIL), Troy, N.Y. , is urging U.S. Senators to remove a provision in S. 3217, the Restoring American Financial Stability Act of 2010, which would create an Office of National Insurance (ONI).

In an April 22 letter to senators, NCOIL leadership asserted that S. 3217 would preempt state law and eventually threaten successful insurance oversight. The letter is signed by state Rep. Robert Damron (Ky.), NCOIL president; state Sen. Carroll Leavell (NM), NCOIL vice president; and 8 state legislators.

The letter says that “While the Restoring American Financial Stability Act of 2010 has been drawn to focus on regulatory answers to the nation’s financial crisis, Title V—by inserting a federal presence into the regulation of insurance—seeks a solution to a problem that does not exist. As has been evidenced and attested to over and over again, and despite the wishes of those who would seek to avoid the protections of state regulation, insurance regulation did not contribute to the crisis and does not need federal intervention.”

The letter goes on to say that NCOIL, the National Conference of State Legislatures (NCSL), Denver, and the Council of State Governments (CSG), Lexington, Ky., strongly oppose an ONI. The letter adds that several state insurance commissioners and consumer organizations, and the National Association of Professional Insurance Agents (PIA), Alexandria, Va., have also opposed such an Office.

However, the NCOIL letter states that “Though opposed to an ONI, NCOIL does support enhanced coordination between state and federal regulators and has asserted that state and federal officials must work together to communicate and share information on systemic risk.”

Friday, April 23, 2010

Maine Wins Anthem Case; States Prime for PPACA Work

Late yesterday, the Maine insurance department announced that the states’ superior court affirmed a May 18, 2009 decision by Superintendent Mila Kofman denying Anthem Health Plans of Maine a proposed 18.1% average rate increase for individual health plans in 2009.

In his April 21 decision, according to the Department, Superior Court Chief Justice Thomas Humphrey stated that it was not improper for the Superintendent to consider the state of the economy and the profits from Anthem’s other lines of insurance in making her decision on the proposed increase.

In January of 2009, the Department chronicled that Anthem requested an average increase of 18.1% on its HealthChoice and Lumenos products. Following public comment sessions and a public hearing in March 2009, Kofman denied the request and instead approved an average increase of 10.9%. The increase became effective on July 1, 2009. Anthem had requested a 3% profit and risk margin in its rates, and appealed the portion of the Superintendent’s decision denying any profit and risk margin for individual plans in 2009. Oral arguments in the appeal were held on March 23, 2010.

Anthem’s 2010 individual rate filing is still pending, the Department says.
The decision comes as states are pooling their efforts to address the new health care law, The Patient Protection and Affordable Care Act. Kathleen Sebelius, Secretary of the Department of Health and Human Services, outlined the joint efforts such as better fraud prevention oversight that will be needed in order to improve health care for Americans. Sebelius outlined joint federal state initiatives during her testimony on the 2011 proposed HHS budget before a subcommittee of the House Appropriations Committee.

At the National Association of Insurance Commissioners, Kansas City, Mo., state insurance regulators are already starting the work that they discussed during the spring meeting in Denver immediately after the new law was signed by President Barack Obama.

One of the first items regulators need to address with very quick turnaround is preparing a response for a May 14 deadline to a list of over 40 questions posed by the HHS and published in the Federal Register. In order to do that, regulators have to present their findings to commissioners by the end of April so that commissioners can come to a decision and weigh in to HHS by May 14.

After completion of this task, regulators will then need to turn their attention to a June 1 deadline to respond to a letter from Secretary Sebelius.
Toward that end, the NAIC’s Accident and Health working group will be holding conference calls twice a week and possibly more if needed. Steve Ostlund, an Alabama regulator is overseeing the effort with Julia Philips of Minnesota handling rate review and Rick Diamond of Maine handling the medical loss ratios.

During a recent discussion on how the issue will be handled, Bill Weller of Omega Squared requested time between calls so that interested parties could offer comments. But Philips and other regulators explained that because of the tight time frame, regulators will not be taking comments but discussing these two issues on calls with interested parties and then developing their position.

Updated information on the progress of state regulators’ work at the NAIC can be viewed at a new website created by the NAIC:

NAIC Health Reform website

According to the NAIC, there are 12 issues that regulators will address including:
--medical loss ratios;
--rate reviews;
--standard definitions, disclosures and uniform summary of benefits;
--uniform enrollment;
--individual and group market reforms;
--data collection by the HHS Secretary and states;
--Medigap reforms;
--interim reinsurance program and risk adjustment mechanism;
--uniform fraud reporting form;
--interstate compact standards; and,
--external review.

Wednesday, April 21, 2010

Wisconsin Settlement Bill Ready For Governor’s Signature; Annuity Suitability Bill Also Advances

A Wisconsin life insurance settlement bill, SB 513, was taken up by the state Assembly on April 20 and was approved in the early hours of April 21. It is expected to be signed by Wisconsin Gov. Jim Doyle in the next few weeks.

Separately, an annuity suitability bill, SB 572, will be taken up by the Assembly on April 22. It is expected that the bill will also pass and be sent to the Governor for his signature.

The life settlement bill was passed without an amendment that would require disclosure that there are options available to lapsing a policy or surrendering a contract that include life settlements.

A disclosure amendment was offered on April 12 by state Rep. Louis Molepske, Jr., D-71 A.D (Stevens Point, Wisc.) It received a tie 5-5 vote. But a majority vote was needed in order for the amendment to be included in the bill.

However, Wisconsin Commissioner Sean Dilweg wrote to legislators promising to promulgate a rule that would provide such clarification to consumers, according to a representative for state Sen. Robert Wirch, D-District 22 (Kenosha County), who introduced SB 513.

The rule could take a couple of months to develop and must be brought before the legislature to receive legislators’ approval, according to the representative for Sen. Wirch. Legislators agreed that it would be a good thing to promulgate a rule that would provide disclosure to consumers, according to the representative for Sen. Wirch.

Tuesday, April 20, 2010

Regulators Decide to Allow Product Aggregation for PBA, With Disclosure

A debate over whether products should be able to be aggregated for reserving purposes in a new reserving system being developed for life insurance products ended with a decision to allow aggregation but to require disclosure of specific product information.

The discussion centered on VM-20 which is a component of the Valuation Manual state insurance regulators are currently developing at the National Association of Insurance Commissioners, Kansas City, Mo. The Valuation Manual is a roadmap which will help insurers comply with new reserving requirements that a principles-based approach for reserving and capital would create. That would be done through an amended Standard Valuation Law that has already been adopted and through changes to capital adequacy requirements.

The goal is to fully adopt the Valuation Manual by the summer NAIC meeting in August. The amended SVL and the Manual would then be brought as a package to state legislatures.

Regulators decided to allow aggregation of product lines in VM-20 and to require disclosure of specific product lines in VM-31, another component of the Manual. The motion was recommended and made by Katie Campbell, an Alaska regulator. It was seconded by Tomasz Serbinowski, a Utah regulator. The vote which was taken by the Life & Health Actuarial Task Force was nearly unanimous with the exception of New York which opposed the proposal.

Dave Neve, representing the American Academy of Actuaries, Washington, said that if there is concern over quantifying the impact of aggregation and diversification, it could be achieved through disclosure. To not recognize aggregation in reserve calculations would be a huge oversight in PBR, he said.

But Fred Andersen, a New York regulator, noted that LHATF had originally decided not to allow aggregation and had reversed its position. He expressed concern over the reversal and said that the group had debated the issue in a “lengthy process.” He also questioned the premise made by the Academy that a given scenario such as a change in interest rates would have different impacts on different products and that those impacts would offset each other. Andersen requested that the Academy produce a “real life example.”

Andersen further added that a product such as universal life with secondary guarantees is very complex and it is important to understand the specific dynamics of that product which would be difficult if it was combined with other products.
He said that the ability to look at products and their reserving individually would help regulators who want to see if a company is reserving inappropriately.

Larry Bruning, chief actuary of the Kansas insurance department and LHATF chair, said that property-casualty companies have been using principles-based reserving for some time and wanted to know if auto and homeowners’ insurance are aggregated.

John Bruins, a life actuary with the American Council of Life Insurers, Washington, said that the ACLI supports broad aggregation of life insurance products for reserving purposes which will right size reserves by assessing risks. Reliance on the use of product lines would cause reserves to be driven by the quality of allocations rather than cash flows that are the basis for deterministic and stochastic cash flows, he noted.

Monday, April 19, 2010

Society of Actuaries Releases Life Settlement Survey

A survey on how direct writers and reinsurers feel about life settlements found that while 79% of 19 respondents felt that the growth of the life settlement market was either ‘negative’ or ‘very negative’ for the life insurance industry, there were companies that had mixed feelings about what the growth of life settlements means.

The survey was conducted by the Society of Actuaries, Schaumburg, Ill., during July-August 2008, just before the full force of the financial crisis hit in September 2008. A total of 19 direct writers and 4 reinsurers participated. Among direct writers, 84% of the representatives for respondents were actuaries and among reinsurers, 75%, with the fourth a part of senior management. Among direct writers, a third of respondents had in-force volumes of less than $50 billion; 37%, between $50-499 billion and another third, volumes of $500 billion or more. The reinsurers were evenly split with two that had life reinsurance in-force at year-end 2007 of between $100-499 billion and two with totals of $500 billion or more.

The negative reaction registered by the industry may in part be due to concern over the risk of losing tax-exempt status on all policies. Of 15 respondents, 79% were either very concerned or extremely concerned. Four responded to the SOA survey by saying that they were concerned. All the reinsurers said that they were at least concerned.

While 79% expressed negative feelings about the life settlement industry’s growth, the results were somewhat better when asked if the growth of life settlements was a positive as far as the growth in premium for the life insurance industry: 39% offered responses ranging from neutral to slightly positive or positive. A total of 42%, or 8 of the 19 respondents, were neutral to slightly positive or positive when asked whether it would be a positive as far as the growth in new clients and marketing channels is concerned.

While 63% of the 19 respondents indicated they had no plans to enter the life settlement market, 32% indicated that they are actively investigating future participation, according to the survey. One direct writer indicated that it actively purchased policies for investment and one indicated that it actively purchases policies for securitization.

The SOA survey asked those respondents monitoring settled policies what percentage of the policies with face amounts of $250,000 and above were settled in 2007. Seven respondents, according to the survey, estimated the percentage to be less than 1%.
Companies are changing their pricing assumptions because of exposure to life settlements, according to the survey. Of 13 respondents, eight or 52%, have
updated lapse assumptions and three, 23% have updated mortality assumptions. One has changed guarantees offered, and one commissions offered.

But when asked to characterize their concern about how the growth of life settlements could result in the loss of proceeds to original beneficiaries, 74%
were at least concerned while 26% were slightly or not at all concerned.

And when asked whether there was concern about the potential loss of the insured’s ultimate capacity to purchase insurance, 58% were at least concerned while
42% were slightly or not at all concerned.

But 74% were concerned about how the growth of life settlements would impact the reputation of their own companies and 58% were at least very concerned about
reduced profitability. And 79% were at least concerned about possible lawsuits from original beneficiaries.

A total of 44% felt that the life settlement market was a positive for their own company in terms of flexibility while five were neutral on the issue and
three were slightly positive. Two respondents were not positive at all, according to the SOA survey.

Some of the comments offered by respondents were as interesting as the survey responses themselves.

One respondent noted that “Nonforfeiture benefits need to be reflective of the economic value of the policy. If so, you wouldn't need the life settlement;”

Another noted that “It is not a coincidence that the STOLI and Life Settlement markets have grown at the same time that aggressively-priced UL products with
secondary guarantees and low or no cash values have proliferated. Investors have seized upon pricing that relies on policyholders acting contrary to their own best interests (lapsing for no value rather than settling for pennies on the dollar of real economic value) andpolicy designs that make a mockery of the standard nonforfeiture law. If the Life Settlement market ultimately forces companies to return to rational pricing and provide fair cash values, then it will have served a purpose;”

For the complete survey, go to: SOA Life Settlement Survey.

Wednesday, April 14, 2010

Removing the Fear of Giving and Not Getting

One of the big fears most people have is investing something—time, money, both—and not getting anything in return. This seems to be particularly so when it comes to a product like long-term care. It partially explains why a product that makes sense hasn’t taken off in the way that one would expect.

The risk of not having enough for care is very real. A one year stay in a nursing home currently averages $75,000 and home health care can run as high as $46 per hour, according to the ‘2009 Cost of Care Survey’ sponsored by Genworth Financial, Richmond, Va.

That’s why a recent announcement from Genworth about the launch of a single premium hybrid LTC/annuity “hybrid” called Total Living Coverage Annuity bears watching.
The new product is one of two or three linked products that are starting to appear in the market. The reason this new product type is emerging is because of a provision in the Pension Protection Act of 2006 which became effective on Jan. 1 of this year that allows a contract holder to make tax-free claim payments for covered long-term care expenses, allowing consumers to keep more of their own money.

Katie Liebel, vice president-linked benefit products with Genworth, explains why she thinks that this market has the potential to take off. She says that there are many consumers who “worry about paying premium and not having anything to show for it.” But with a linked product one gets the advantage of accumulating assets with an annuity and being able to withdraw from it if there is financial need and also have the option of using the money accumulated for long-term care.

As an example, she said that because of the new provision in the law kicking in, if one chose 3x leverage, on a $100,000 investment in the product there would be an initial LTC coverage maximum of $300,000 that could be taken out without taxes for qualified expenses.

If a contract holder dies, beneficiaries will receive a death benefit that is the greater of the annuity value or the single premium less long-term care expenses and other withdrawals.

Maybe the power of fear can be removed from the LTC decision. Or more specifically, the fear of paying something out and not getting anything back. The power of fear of not having enough to pay for proper care is an emotion that perhaps should be harnessed to make people aware that planning for the future, even if not pleasant, can minimize a burden on both the individual and that person’s family.

Wisconsin Settlement, Suitability Bills Under Consideration

As the Wisconsin Assembly considers life settlement legislation this week, an amendment that would have required life insurers to disclose the life settlement option was unsuccessful.

The Wisconsin Senate has passed SB 513 and the Assembly passed it out of the Assembly insurance committee on April 13 without amendments, according to a representative for State Sen. Robert Wirch, D-District 22, (Kenosha County.) State Sen. Wirch introduced SB 513. The bill could be on the Assembly floor as early as tomorrow. There is currently no word on whether there will be additional amendments. If it passes without amendments it would be sent to Wisconsin Gov. Jim Doyle for his signature. If amendments are added, the amended bill will be messaged to the senate, according to Sen. Werch’s representative. The Senate then can concur with the message, return it to the Committee on Small Business, Emergency Preparedness, Technical Colleges, and Consumer Protection for additional work, or send it back to the Assembly and request that it reconsider the changes, the representative adds.

Wisconsin Insurance Commissioner Sean Dilweg has indicated that the disclosure amendment is not needed since the commissioner currently has the authority to require such a disclosure, according to Jim Guidry, a department spokesperson. When asked why the Commissioner had not favored making it a requirement in the bill, Guidry said that the Commissioner had not provided a reason.

Dilweg supports the bill in the legislature. He convened a department working group to examine the issue. That group spent seven months examining what kind of legislation should be introduced in the Wisconsin legislature, according to Guidry.

The disclosure amendment was offered on April 12 by state Rep. Louis Molepske, Jr., D-71 A.D (Stevens Point, Wisc.) It received a tie 5-5 vote. But a majority vote was needed in order for the amendment to be included in the bill. The proposed change to AB 758 and its Senate equivalent, SB 513, would have required that an insurer provide the disclosure notice to an owner at all of the following times:

--When the insurer receives from the owner a request to surrender, in whole
or in part, an individual policy;
--When the insurer receives from the owner a request to receive an accelerated
death benefit under an individual policy;
--When the insurer sends to the owner any notice of lapse of an individual
Policy; and,
--At any time the commissioner prescribes by rule.

The amendment would have allowed the commissioner to apply the disclosure statement to contracts with a net death benefit of $100,000 or more. However, that condition would have applied only if it did not discriminate against owners of life insurance based on a wide range of criteria including economic status.

Separately, the Assembly Insurance Committee is also considering SB 572 and AB 811 which establishes suitability standards for annuities reflecting recent changes made at the National Association of Insurance Commissioners, Kansas City, Mo. The state Senate passed SB 572 and the Assembly Insurance Committee voted on the bill on April 13. The bill could be finalized in the legislature next week.
Guidry says that the Commissioner supports the measure.

Tuesday, April 13, 2010

Maine’s Kofman Details Health Care Challenges Facing Regulators

State insurance regulators are facing health care challenges on two fronts: deciding what rates are fair both to consumers and health insurers; and using all the resources at their disposal to implement elements of new federal health care reform in a very short time.

The challenges confronting Maine’s Superintendent Mila Kofman typify the work that state insurance commissioners across the country face.

On April 15, the Maine Bureau will hold a public hearing on a request by Anthem Blue Cross and Blue Shield for a proposed rate adjustment for its HealthChoice and Lumenos products which would become effective on July 1, 2010. Anthem, according to the Bureau, says that these adjustments will cause average increases of 22.9% and affect 11,066 policyholders.

Anthem and Kofman are currently involved in a dispute on a premium increase that was recently heard in state court. A ruling is expected in the near future.

The issue of rate increases also surfaced recently in California when Anthem was asked to justify a 39% increase by both Health and Human Services Secretary Kathleen Sebelius and California Insurance Commissioner Steve Poizner.

But if rate increases are keeping regulators busy, the imminent implementation of the new Patient Protection and Affordable Care Act promise to have them stretching already thin department resources.

In a recent interview with the Bellwether, Kofman discussed just some of the challenges that insurance commissioners face. She said that one thing that will help states that have stronger standards than the requirements in the new law is that those states will be able to keep their standards in place. For instance, she said that in her state, there are already strong guidelines on guaranteed access to health care. If states can keep these stronger standards in place, they can focus on areas of the new law where there will need more work to develop, Kofman added.

And team work will be necessary both within state insurance departments and among those departments nationwide to get implementation of regulations completed, she said. For example, Maine Governor John Baldacci has formed a steering committee of state officials who will work to put the law into effect. And within the department, Kofman is implementing teams to start the work.

The National Association of Insurance Commissioners, Kansas City, Mo., has already started marshalling its resources to meet the 12-14 places in the new law that require the organization to take action. One of the first items to address will be defining medical loss ratio.

But Kofman said that there are ambiguities that have to be clarified. For instance, in Maine small businesses covered in the small group market have to pay out 78 cents on the dollar in order to get prior approval on products. But the new federal law requires an 80 cent payout on the dollar. However, the federal law, she explained, allows that ratio to include disease management while the Maine requirement does not. So, Kofman asked, ‘Does the more stringent Maine requirement actually meet the federal requirement?’ These are the types of issues that will have to be worked out, she continued.

She said that in the 1990s when the HIPAA was being implemented, there were regular calls between federal and state officials and that kind of regular dialogue is needed again. For instance, the tax credit for small business owners depends on what HHS ultimately determines is an acceptable formula, Kofman said. But, states will have to begin providing guidance in the near future so that local business owners will know how much to deduct when they file estimated quarterly taxes.

Saturday, April 10, 2010

Academy Says PBA Project Could Be Ready For Legislatures By The Fall

This past week, the American Academy of Actuaries, Washington, detailed just how close the principles-based approach to reserving is to being completed and how associated projects are progressing.

During a recap of the work at the spring meeting of the National Association of Insurance Commissioners, Kansas City, Mo., Donna Claire, chair of the Academy’s PBA Steering Committee, noted how far the work had come and introduced regulators and actuaries closely associated with the project.

Larry Bruning, chair of the NAIC’s Life and Health Actuarial Task Force and chief actuary of the Kansas insurance department, said that the Valuation Manual, the roadmap for implementing PBA, should be adopted by LHATF at the end of June or early July followed by adoption by its parent Life & Annuities “A” Committee by the end of July. That would clear the way for the NAIC’s plenary to adopt the Manual at the August NAIC meeting in Seattle.

The NAIC has already adopted changes to the Standard Valuation Law but agreed as part of its adoption to wait for the Manual’s adoption and present it to state legislatures as a package. If the Manual is fully adopted, the package would be ready for the 2011 legislative sessions.

During its work on the Manual, according to Bruning, LHATF decided that VM-20, a key piece of the Manual, should include all life insurance products with the exception of credit life and pre-need life. And, the body of regulators, many of whom are actuaries, decided to reverse a decision and to allow aggregation of life insurance products for reserving purposes although that changed has not been finalized.

Dave Neve, chair of the Academy’s Life Reserve Work Group and a vice president of capital management with Aviva USA, said that a full aggregation approach is important for reasons including creating an incentive for a company to make a non-economic decision by deciding against issuing a new product with risks that offset current products. He pointed out that regulators can audit and analyze aggregation’s impact by using appropriate disclosure requirements.

PBA work is also being undertaken by the NAIC’s Life Risk-based Capital working group led by Philip Barlow, chair of the group and associate commissioner of the insurance bureau for the District of Columbia.

Barlow discussed the latest stage of the C3 project, C3 Phase III, noting that the earliest potential date for implementation would be in 2011. The first step which will start after April 10, is to develop a list of outstanding items to address regarding C3 Phase III. The goal of the LRBCWG is to complete this project by the end of the year.

The LRBCWG also discussed observations on C3 Phase II of a subgroup which was gathered from a review of actuarial memoranda from companies that participated in the effort.

Among the observations observed was that C-3 Phase II was low for companies reviewed, which may be explained by several companies ceding business to offshore affiliates that are not subject to U.S. RBC requirements. Another possible reason is that most companies are increasing reserves so that it equals total asset requirements to maintain a higher RBC ratio than if they reported TAR as RBC. This “optics issue” is driven by stakeholders including ratings agencies, Barlow explained.

A second observation was that current disclosures and assumptions for C-3 Phase II are not adequate because of a “formulaic ‘cookbook’” approach and a lack of identification and quantification of key risk factors, he added.

Other findings by the subgroup, Barlow said, included the fact that lapse assumptions on deep in-the-money guaranteed living benefits are developed in a variety of ways.

The Academy update concluded with Nancy Bennett, a senior life fellow with the Academy giving an update on the NAIC’s Solvency Modernization Initiative. One of the first goals she discussed was the NAIC’s intention of creating a roadmap outlining the current U.S. regulatory system, what is being done such as PBA and what still needs to be done such as implementing new ideas on solvency.

Bennett noted that the NAIC is aware of how its activities may impact an insurer’s ability to compete globally. Another area that has to be examined, she said in her recap of events at the NAIC meeting, is what the role of regulators will be in a new system.

The convergence of global accounting methods was also discussed but the NAIC has not yet made a commitment on what approach it will follow, she said. The standing policy between the International Association of Insurance Supervisors, Basel, Switzerland and the NAIC is to have as few differences as possible, Bennett explained.

Friday, April 2, 2010

The Other “Heavy Lifting” Project

There are two “major heavy lifting” projects that the National Association of Insurance Commissioners, Kansas City, Mo., faces this year, according to Susan Voss, Iowa insurance commissioner and NAIC president-elect. One is implementing health care, she said during the spring NAIC meeting this past week. The other is the regulatory modernization effort, Voss added.

Part of that regulatory modernization, is focusing on solvency modernization including potential changes to risk-based capital calculations, supervising insurance companies in groups and the type of accounting that insurers will be required to perform.

The effort is being driven by a variety of factors including efforts to more efficiently regulate companies in the aftermath of New York-based American International Group’s seizure; convergence of accounting standards currently being worked on by the Financial Accounting Standards Board, Norwalk, Conn., and the International Accounting Standards Board, London, and ongoing solvency efforts.

Much of the work is being done by the NAIC Solvency Modernization Initiative Task Force chaired by Christina Urias, Arizona Director of Insurance.

One of the key areas of concern for many interviewed during the spring meeting was how accounting changes would be implemented. If regulators decide to use GAAP accounting, mutual companies would be introduced to accounting that they previously did not have to adhere to. If the accounting requirements are blended using the current GAAP and statutory accounting, and IFRS, companies will have multiple reporting responsibilities. Is it possible to use GAAP and then for certain select information require statutory reporting? These are just some of the questions that regulators will attempt to answer in the coming year.

Insurers recognize the need for modernization but a number of companies are saying that the way it is done will be key to whether it ultimately benefits the U.S. market or not. Changes have to be done in a coordinated method so that “we don’t have a layer cake method of regulation” in which multiple regulatory requirements are made of companies, says Steve Broadie, vice president-financial legislatin and regulation with the Property Casualty Insurers Association of America, Des Plaines, Ill.

Broadie also expressed reservations about the discussions over risk management and how corporate governance will be treated. He said that the property casualty industry has been able to function well, citing how the industry paid claims during Hurricane Ike at the same time that Lehman Brothers was melting down.

Jim Olsen, the PCI’s senior director-insurance accounting and investment, said that regulators are trying to make sense which system of accounting should be used by insurers and the costs involved in maintaining those systems. The change could impact the way all ratios are done as well as RBC calculations. “It is a massive change,” he noted.

And, Dave Snyder, vice president and assistant general counsel with the American Insurance Association, Washington, said that the AIA is pleased that the NAIC is looking at modernization and as part of that modernization regulators should be looking at streamlining business in the states with processes such as the “use and file” approach to introducing products to the market. He says that the AIA is not suggesting reducing capital requirements.