Nonforfeiture Project Requires Careful Navigating, NAIC Discussion Suggests

Seattle
Regulators and industry should be enthusiast about efforts to update nonforfeiture requirements in life insurance contracts, according to a discussion during the summer national meeting of the National Association of Insurance Commissioners, Kansas City, Mo.

Nonforfeiture values in contracts are minimum amounts that policyholders are entitled to if a policy lapses or is surrendered. Those amounts can be satisfied with cash or insurance contracts.

While the current nonforfeiture reserving system is “not smashed, it is creaky,” according to John MacBain, chair of the nonforfeiture improvement working group of the American Academy of Actuaries, Washington, told the NAIC’s Life & Health Actuarial Task Force. He explained that the current system does not do all it can do in today’s environment and that a revamped system has the potential to bring more products to market, lower consumer costs and offer more simply designed insurance and annuity products.

For companies, MacBain continued, it would make it easier to innovate and to react more quickly to consumers’ needs. For regulators, it would enhance regulatory oversight and create more flexibility, he added.

Nonforfeiture has been a project that has been discussed in various incarnations for the last 20 years by LHATF. One of the reasons, as Paul Graham, chief actuary with the American Council of Life Insurers, Washington, explains, is that there are some major issues including potential tax consequences that could put the industry in a spin. Graham said that he was glad to hear that the Academy group was talking to tax experts, noting that the Treasury department is looking to raise revenue to fund government expenditures and changes to the nonforfeiture law run the risk of putting a bull’s eye on the tax deferred buildup of insurance policies, particularly if nonforfeiture becomes “no more than a glorified bank account.”

Utah regulator and actuary Tomasz Serbinowski distinguished between policy issues and technical issues and said that the working group should focus on technical issues.

The discussion among regulators continued with a discussion of how recent life settlement activity, the sale of a policy to a third party, was in part driven by “a disconnect between nonforfeiture values” and how “someone will find a way to give money [to contract holders].” The result, according to the discussion, is that regulators are left to find regulation that “will squash such economic activities. Other industries that feed on certain features of these policies.”