The following are some of the issues that were discussed on June 13 during the summer meeting of the National Association of Insurance Commissioners here in Minneapolis.
Annuity Suitability
A new annuity suitability model was exposed in spite of very vocal opposition from groups including the American Council of Life Insurers, the Insurance Marketplace Standards Association, the National Association of Variable Annuities and the National Association of Insurance and Financial Advisors. Iowa and Ohio declined to vote for exposure saying that the changes were less than a day old and that the draft with the changes had not even been handed out to regulators. Jim Mumford of Iowa declined to vote on a document that he hadn’t seen. Other regulators who voted to expose the changes noted that the draft was being exposed in order to provide everyone an opportunity to offer further comment and that it was not being advanced at this point.
Reasons for the strident opposition included the cost of verifying the suitability of contracts and creating a “bright line” test for age. During the discussion, it was also reiterated from a June 12 working group session that the amended model makes the insurer responsible for each sale of an annuity and the suitability review. So, the previous concept of a ‘red flag’ section within the model is no longer necessary. Joe Musgrove of Arkansas says that the insurer can choose the method to accomplish this end, as long as it gets done.
It was also noted that under the Unfair Trade Practices Act in place in most states, a pattern of abuse has to be established, not just a single instance of misconduct.
There was also a lengthy discussion over whether Section 13 should be removed. The section would require producers to compare the features of an annuity and “any financial product, other than a security that is not an annuity that is replaced or is the source of funds for the solicited sale.” It also would prohibit the sale of an annuity if the source of funding was a reverse mortgage.
Don Walters of IMSA recommended that an interpretive guideline be developed rather than a new model because it would provide “clarity” to a model that is already in place in many states. He noted that U.S. Sen. Herb Kohl, D-Wisc., is promising to revisit the issue and that it is specious to believe that this model will be put in place in states. If the issue is revisited by the senator, Walters asked “What will the NAIC have to report?”
Lee Covington of NAVA said that the draft references FINRA rules and it would be good to get FINRA’s input and see if there should be a discussion about harmonizing FINRA Rule 2821 which addresses VA suitability with the NAIC suitability draft.
National Health Insurance Reform
Sally McCarty, former Indiana insurance commissioner and currently, an NAIC funded consumer representative urged commissioners to support a public health option as Congress develops bills to address health care reform. The request was made during the NAIC Consumer Liaison Committee session. Pennsylvania insurance commissioner Joel Ario explained that the NAIC has not taken a position in the debate because there is no consensus among membership. To speak on an issue in which there is no consensus will diminish the NAIC’s voice when it speaks on issues in which it does have consensus, Ario added.
Credit Scoring
Credit scoring was also addressed during the session. Birny Birnbaum, a funded consumer who is also executive director of the Center for Economic Justice, cited statistics indicating a worsening economy and said that factors such as banks closing credit card accounts are negatively affecting the credit scores of responsible consumers. To use credit scores in underwriting without actuarial proof to justify the use of those scores is wrong, he said. He noted that the NAIC does not have a credit scoring model while the National Conference of Insurance Legislators does, although he noted that the NCOIL model could be improved. Earlier in the day, during the NAIC State Government Liaison Committee, Oklahoma Commissioner Kim Holland said that both consumer reps and insurers had offered cogent arguments regarding the use of credit scoring during a recent NAIC hearing in Washington and insurers had emphasized that it was a legitimate underwriting tool.
Market Conduct Annual Statement
During that session, responding to a question from state Rep. George Keiser, R-Bismarck, and an NCOIL vice president, Holland said that a lengthy survey is being sent to seven states of varying sizes to find out which market conduct ratios they use or don’t use. The survey will help provide clarity and offer consumers valuable information that will help them assess a company before buying a product, Holland says.
Systemic Risk and Principles-Based Reserving
Also during the Government Liaison session, the question of a systemic risk regulator was raised. Terri Vaughan, the NAIC’s CEO, said emphatically lawmakers are “clearly going to create” systemic risk oversight and regulators must now determine how to organize themselves in a national system. But NCOIL’s Keiser said that the constant use of the term “a seat at the table” creates the public perception that NAIC supports federal regulation and it is necessary to get the message out that a “state solution is the right solution.”
The issue of a principles-based reserving system was also raised. The discussion comes on the heels of a critical article in The Washington Post which cites campaign contributions to commissioners involved with the development of PBR received from insurers who support PBR. It notes PBR is being developed at a time when there is great concern about government giving all companies too much freedom and not enough regulatory oversight.
When asked, the NAIC’s Vaughan responded that in the current environment, there is a need to rethink the use of internal models which would change the ability of regulators to oversee what is going on as companies determine reserving. She says that the current project is a combination of principles-based and rules-based reserving that has both a minimum floor and a deterministic approach to reserving that is more conservative. A new system is needed because regulators were spending countless hours creating new actuarial guidelines as new products and product features were developed.
Climate Change and Global Warming Task Force
Industry representatives say that a decision not to develop guidelines to determine how to answer a survey of 8 questions is disappointing because the guidance would have helped create more uniform answers.
Reinsurance
The Reinsurance “E” Task Force voted to open up the Credit for Reinsurance Model Act and Regulation for further work. One interested party wondered if it would provide an opportunity to bring national reinsurers and port of entry reinsurers, two new categories for reinsurers for other countries more firmly under the auspices of the NAIC. The two categories were created under the Reinsurance Regulatory Modernization Act of 2009 which seeks to address a global world in which many countries have one insurance regulator rather than a system of many jurisdictional regulators such as the U.S. state-based system of regulation.
Sunday, June 14, 2009
Thursday, June 11, 2009
Pop Open The Champagne (Well At Least Crack A Smile)
After 4 years, efforts to create a principles-based system of reserving took a major step forward when the Life & Health Actuarial Task Force of the National Association of Insurance Commissioners, Kansas City, Mo., adopted a revised Standard Valuation Law model. The vote of 10 to 0 with New York abstaining took place late this afternoon in Minneapolis at the start of the NAIC’s summer meeting here.
New York abstained because there are still questions that are unanswered, according to the discussion. It had proposed two amendments both of which were not brought to a vote because of motions other regulators adopted. The proposed New York amendments addressed the issue of whether deposit contracts are covered and whether the SVL should be applied retroactively.
LHATF regulators maintained that the model allows states to cover deposit contracts if their laws require it and making language in the model more restrictive was not necessary and might even require another exposure of the document. They also said that previous contract restrictions would prevent retroactive application of an amended SVL because earlier versions of the law are actually named in many older contracts.
The reaction following approval of the project which had hundreds of actuaries, regulators and industry executives working thousands of hours ranged from joy to cautious optimism. Some reaction is more tempered because a major issue that still needs to be considered is whether a change to the SVL will impact the tax treatment of life insurance and how a solution can be developed.
The project was advanced but with the provision that LHATF will recommend that it not be fully adopted by the NAIC until a Valuation Manual, a living document that explains how to apply the SVL, is completed. John Bruins, a life actuary with the American Council of Life Insurers, Washington, and Norm Hill, a life actuary, said that principles-based reserving should not be brought to legislatures in pieces but as a comprehensive package.
Life insurers argue that the current reserving system does not accurately reflect the risk in a life insurance company and regulators criticize how the 150-year old system does not provide nimble, flexible reserving.
Donna Claire, who is spearheading the effort of the American Academy of Actuaries, Washington, to put a principles-based reserving system in place, expressed her joy that a major piece of the PBR project had received the nod, with a pithy, “Yes! Yes! Yes!” when asked for her reaction.
“We have a piece of the package-a significant piece,” offered the ACLI’s Bruins. And, Paul Graham, a life actuary who is also arguing the case for the ACLI, said, “a lot of hard work has culminated [in this vote] but there is still a lot to do.”
Larry Bruning, chief actuary with the Kansas insurance department and LHATF vice chair with Leslie Jones of South Carolina, said that the new SVL model will help to create a system where regulators do not have to apply band-aids to reserving products that come up as products are developed or change.
And, he said, a complete package that is ready to be brought to legislatures does not have to wait until all products have new reserving guidelines but could be ready if life insurance requirements are created. A portion of the new reserving requirements addressing term insurance and universal life insurance would be a sufficient start to show how the system is being developed.
What still remains to be addressed and what is critical, said Bruning, is how the Treasury will view a new SVL. Technically, the tax treatment of life insurance is tied to an older, more conservative version of the SVL. Treasury can give its blessing to the new SVL. Or, if it declines, Bruning said that regulators will have to see if a net premium methodology offered by ACLI will be acceptable to regulators.
Bruning said that the SVL and the Valuation Manual could be fully adopted by the NAIC in 2010-2011. However, it would not become operative until 75% of states adopt the new model.
He also addressed the issue of bringing a new system to legislatures that some view as relaxing requirements following a national financial meltdown that many Americans attribute to lax regulation-although not necessarily lax insurance regulation.
The new system is actually requiring better protection by looking at risk that go beyond mortality and interest rate risk, Bruning explained. Companies will have to account for counterparty, liquidity, legal and business risks, among other risks, he added.
New York abstained because there are still questions that are unanswered, according to the discussion. It had proposed two amendments both of which were not brought to a vote because of motions other regulators adopted. The proposed New York amendments addressed the issue of whether deposit contracts are covered and whether the SVL should be applied retroactively.
LHATF regulators maintained that the model allows states to cover deposit contracts if their laws require it and making language in the model more restrictive was not necessary and might even require another exposure of the document. They also said that previous contract restrictions would prevent retroactive application of an amended SVL because earlier versions of the law are actually named in many older contracts.
The reaction following approval of the project which had hundreds of actuaries, regulators and industry executives working thousands of hours ranged from joy to cautious optimism. Some reaction is more tempered because a major issue that still needs to be considered is whether a change to the SVL will impact the tax treatment of life insurance and how a solution can be developed.
The project was advanced but with the provision that LHATF will recommend that it not be fully adopted by the NAIC until a Valuation Manual, a living document that explains how to apply the SVL, is completed. John Bruins, a life actuary with the American Council of Life Insurers, Washington, and Norm Hill, a life actuary, said that principles-based reserving should not be brought to legislatures in pieces but as a comprehensive package.
Life insurers argue that the current reserving system does not accurately reflect the risk in a life insurance company and regulators criticize how the 150-year old system does not provide nimble, flexible reserving.
Donna Claire, who is spearheading the effort of the American Academy of Actuaries, Washington, to put a principles-based reserving system in place, expressed her joy that a major piece of the PBR project had received the nod, with a pithy, “Yes! Yes! Yes!” when asked for her reaction.
“We have a piece of the package-a significant piece,” offered the ACLI’s Bruins. And, Paul Graham, a life actuary who is also arguing the case for the ACLI, said, “a lot of hard work has culminated [in this vote] but there is still a lot to do.”
Larry Bruning, chief actuary with the Kansas insurance department and LHATF vice chair with Leslie Jones of South Carolina, said that the new SVL model will help to create a system where regulators do not have to apply band-aids to reserving products that come up as products are developed or change.
And, he said, a complete package that is ready to be brought to legislatures does not have to wait until all products have new reserving guidelines but could be ready if life insurance requirements are created. A portion of the new reserving requirements addressing term insurance and universal life insurance would be a sufficient start to show how the system is being developed.
What still remains to be addressed and what is critical, said Bruning, is how the Treasury will view a new SVL. Technically, the tax treatment of life insurance is tied to an older, more conservative version of the SVL. Treasury can give its blessing to the new SVL. Or, if it declines, Bruning said that regulators will have to see if a net premium methodology offered by ACLI will be acceptable to regulators.
Bruning said that the SVL and the Valuation Manual could be fully adopted by the NAIC in 2010-2011. However, it would not become operative until 75% of states adopt the new model.
He also addressed the issue of bringing a new system to legislatures that some view as relaxing requirements following a national financial meltdown that many Americans attribute to lax regulation-although not necessarily lax insurance regulation.
The new system is actually requiring better protection by looking at risk that go beyond mortality and interest rate risk, Bruning explained. Companies will have to account for counterparty, liquidity, legal and business risks, among other risks, he added.
NAIC's LHATF passes amended SVL model
At the LHATF meeting of the National Association of Insurance Commisioners summer meeting, an amended SVL passed 10 to 0 with N.Y. abstaining. The vote was half an hour ago. Details later.
Friday, June 5, 2009
Capital and Surplus—The Debate Continues
The capital and surplus argument continues. If you remember, late last year, there was a request by the American Council of Life Insurers, Washington, to advance a 9-point proposal to release what it says are redundant reserves to help insurers cope with what everyone would agree are trying financial times. It is the corporate equivalent of the average Joe and Jane digging for change in their sofa.
The request culminated in a Jan. 27 public hearing and a cliff-hanger public vote which denied immediate relief but did allow for the request to be considered using the typical process at the National Association of Insurance Commissioners, Kansas City, Mo.
Well, fast forward to early June. Task forces are taking action in order to move their capital and surplus assignments up to their parent committees so commissioners can take action on it either at the summer NAIC meeting next week or shortly thereafter. The NAIC’s Life & Health Actuarial Task Force did so earlier this week. It reviewed Model 815 which addresses using preferred mortality tables retroactively, one of the proposals that life insurers say would help them pinpoint the correct amount of reserves they should hold.
The group looked at three amendments: two from the ACLI and one from California. One amendment to the model which allowed for commissioners to rely on the opinion of a company’s domestic commissioner sailed through. The other two required enough discussion to push back a potential vote of LHATF’s parent, the Life & Annuities “A” Committee to the NAIC summer meeting next week.
ACLI’s Paul Graham argued that if a company seeks retroactivity, it would have to show reserves are adequate when the request is made, that any accounting issues can be worked out later and that the test would have to apply to all 2001 CSO policies so that there would not be any gaming.
But regulators expressed concerns ranging from locking into retroactivity by block of business to issues of discrepancy with reinsurance requirements in the NAIC’s accounting practices and procedures manual. For instance, Sheldon Summers, a life actuary with the California department, asked what would happen if the amount of reserve credit exceeds the income it expects to receive from a policyholder.
The motion to allow retroactivity failed in a 7-6 vote with New York abstaining.
LHATF then looked at a motion from California which replaced the current document up for exposure with a version that reflects California’s issues on accounting and reinsurance. That motion passed with a 7-4 vote and Connecticut and New York abstaining.
The ACLI then withdrew a request to review a related request on Model 830 because it paralleled its requests it made in Model 815. LHATF then advanced guidelines 1C which addresses segmentation and 822 which reduces X-factors on deficiency reserves, in preparation for the summer meeting.
The request culminated in a Jan. 27 public hearing and a cliff-hanger public vote which denied immediate relief but did allow for the request to be considered using the typical process at the National Association of Insurance Commissioners, Kansas City, Mo.
Well, fast forward to early June. Task forces are taking action in order to move their capital and surplus assignments up to their parent committees so commissioners can take action on it either at the summer NAIC meeting next week or shortly thereafter. The NAIC’s Life & Health Actuarial Task Force did so earlier this week. It reviewed Model 815 which addresses using preferred mortality tables retroactively, one of the proposals that life insurers say would help them pinpoint the correct amount of reserves they should hold.
The group looked at three amendments: two from the ACLI and one from California. One amendment to the model which allowed for commissioners to rely on the opinion of a company’s domestic commissioner sailed through. The other two required enough discussion to push back a potential vote of LHATF’s parent, the Life & Annuities “A” Committee to the NAIC summer meeting next week.
ACLI’s Paul Graham argued that if a company seeks retroactivity, it would have to show reserves are adequate when the request is made, that any accounting issues can be worked out later and that the test would have to apply to all 2001 CSO policies so that there would not be any gaming.
But regulators expressed concerns ranging from locking into retroactivity by block of business to issues of discrepancy with reinsurance requirements in the NAIC’s accounting practices and procedures manual. For instance, Sheldon Summers, a life actuary with the California department, asked what would happen if the amount of reserve credit exceeds the income it expects to receive from a policyholder.
The motion to allow retroactivity failed in a 7-6 vote with New York abstaining.
LHATF then looked at a motion from California which replaced the current document up for exposure with a version that reflects California’s issues on accounting and reinsurance. That motion passed with a 7-4 vote and Connecticut and New York abstaining.
The ACLI then withdrew a request to review a related request on Model 830 because it paralleled its requests it made in Model 815. LHATF then advanced guidelines 1C which addresses segmentation and 822 which reduces X-factors on deficiency reserves, in preparation for the summer meeting.
Wednesday, June 3, 2009
Variable Annuities Discussed During S&P’s Insurance Conference
There was a very interesting and very crowded session on variable annuities yesterday during the annual insurance conference offered by Standard & Poor’s Corp. The session started with a question from Robert Hafner, associate director with Standard & Poor’s Corp. on the state of the variable annuity market.
In the short term, VA carriers will be adjusting their products, offering lower interest rates and increasing fees as well as bolstering their hedging programs, according to Kenneth Mungan, principal and financial risk management practice leader with Milliman, Inc. In the long term, they will need to rethink their whole product.
While adjustments will be made, there will be “no sharp turns to the left or to the right,” according to Frederick Crawford, executive vice president & chief financial officer with Lincoln Financial Group. Lincoln will review product design, pricing, and its guarantees, he told attendees of a session on variable annuities.
Milliman’s Mungan pointed out that investors in VA writers do not have the appetite for leverage and unhedged product lines and insurers will need to offer guarantees on a sustainable basis, keeping this in mind. “As long as there is a sustainable model, there will be plenty of investors,” he said.
Mungan also cautioned that “the solution might be sewing the seeds of the next crisis.” If business sold now is later viewed as unattractive to the contract holder, then there may be disintermediation in the future, he explained.
Michael Wells, chief operating officer with Jackson National Life Ins. Co., says that his company has a different approach. A portion of Jackson National’s VA portfolio has subaccounts in passive index products that are easier to hedge and efforts are made to sell products that can be internally hedged. Additionally, products are sold that allow the company to adjust features and withdraw features which have unfavorable pricing. Wells also says that if a GMAB annuity is going to be sold, there needs to be more flexible pricing at the point of sale.
Milliman’s Mungan said that while any carrier can buy a derivative hedge, reinsurance may be even more valuable because it is a validation of the product. If a reinsurer feels confident enough to offer reinsurance on a particular product, “it is an external validation of that product.”
In the short term, VA carriers will be adjusting their products, offering lower interest rates and increasing fees as well as bolstering their hedging programs, according to Kenneth Mungan, principal and financial risk management practice leader with Milliman, Inc. In the long term, they will need to rethink their whole product.
While adjustments will be made, there will be “no sharp turns to the left or to the right,” according to Frederick Crawford, executive vice president & chief financial officer with Lincoln Financial Group. Lincoln will review product design, pricing, and its guarantees, he told attendees of a session on variable annuities.
Milliman’s Mungan pointed out that investors in VA writers do not have the appetite for leverage and unhedged product lines and insurers will need to offer guarantees on a sustainable basis, keeping this in mind. “As long as there is a sustainable model, there will be plenty of investors,” he said.
Mungan also cautioned that “the solution might be sewing the seeds of the next crisis.” If business sold now is later viewed as unattractive to the contract holder, then there may be disintermediation in the future, he explained.
Michael Wells, chief operating officer with Jackson National Life Ins. Co., says that his company has a different approach. A portion of Jackson National’s VA portfolio has subaccounts in passive index products that are easier to hedge and efforts are made to sell products that can be internally hedged. Additionally, products are sold that allow the company to adjust features and withdraw features which have unfavorable pricing. Wells also says that if a GMAB annuity is going to be sold, there needs to be more flexible pricing at the point of sale.
Milliman’s Mungan said that while any carrier can buy a derivative hedge, reinsurance may be even more valuable because it is a validation of the product. If a reinsurer feels confident enough to offer reinsurance on a particular product, “it is an external validation of that product.”
Tuesday, June 2, 2009
Level Talk About A Jolted Industry
I always look forward to the Wall Street analysts’ panel during Standard & Poor’s annual insurance conference because the talk gets right to the heart of the matter. This year was no different, with the discussion tackling everything from variable annuities to CDS. It started with David Havens, a managing director with Hexagon Securities warning attendees that “it is way too early to say that the worst is over. We may be scraping the bottom, but some of the [current] problems may be weighing on the insurance industry for quite some time.”
That’s enough to get anyone’s attention. Just to make sure the crowded room was listening, Jimmy Bhullar, a senior life insurance analyst with J.P. Morgan followed with the observation that variable annuities do have a future. “The product has a future but I don’t know if some of the companies selling them have a future,” he remarked. Those that can do a good job of risk management will have a future ahead of them, he noted.
Part of the issue, are the generous terms carriers offered to distributors and generous guarantee terms in the product that can be as high as 7% return on the product, according to the discussion. For those who can offer ‘plain vanilla’ products without aggressive guarantees, there is a good future, Bhullar says.
When the issue turned to a discussion of accepting TARP money, there was a general opinion that accepting it was a negative for a company, suggesting an “underlying issue.” It was also noted that banks want to pay back TARP money to be free of any government requirements.
The impact of future inflation was also raised during the analysts’ discussion. Jay Cohen, a managing director of Bank of America-Merrill Lynch, cited risks such as the devaluing of financial assets and on the liability side, the impact on loss reserves. The real risk is not inflation so much as “surprising inflation,” he added.
On insurance linked securities, it was acknowledged that CAT bonds are on ice for a while. Havens explained that TALF related assets need to be securitized first before insurance related markets are securitized.
That’s enough to get anyone’s attention. Just to make sure the crowded room was listening, Jimmy Bhullar, a senior life insurance analyst with J.P. Morgan followed with the observation that variable annuities do have a future. “The product has a future but I don’t know if some of the companies selling them have a future,” he remarked. Those that can do a good job of risk management will have a future ahead of them, he noted.
Part of the issue, are the generous terms carriers offered to distributors and generous guarantee terms in the product that can be as high as 7% return on the product, according to the discussion. For those who can offer ‘plain vanilla’ products without aggressive guarantees, there is a good future, Bhullar says.
When the issue turned to a discussion of accepting TARP money, there was a general opinion that accepting it was a negative for a company, suggesting an “underlying issue.” It was also noted that banks want to pay back TARP money to be free of any government requirements.
The impact of future inflation was also raised during the analysts’ discussion. Jay Cohen, a managing director of Bank of America-Merrill Lynch, cited risks such as the devaluing of financial assets and on the liability side, the impact on loss reserves. The real risk is not inflation so much as “surprising inflation,” he added.
On insurance linked securities, it was acknowledged that CAT bonds are on ice for a while. Havens explained that TALF related assets need to be securitized first before insurance related markets are securitized.
Monday, June 1, 2009
Standard & Poor's Insurance Meeting Coverage
Standard & Poor's is holding its annual insurance meeting today and tomorrow in New York. Look for live updates at Jimsconn at twitter.com and Jim Connolly on Linkedin.
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