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.