NAIC Panel Battles over Interim Plan to Keep Triple-X, AXXX Life Reserves Intact
December 17, 2013 by Thomas Harman
WASHINGTON – The ultimate fate of whether two reserving tools used by some life insurers should be eliminated from use continues to be the subject of vigorous debate among some state regulators who are pushing the concept and life insurers — as well as some state regulators — who believe the controversial tools can still be useful under a principles-based reserving system.
The principles-based reserving working group deliberated on how to proceed at the National Association of Insurance Commissioners’ Fall National Meeting in Washington, featuring debate about possibly developing a framework that would allow for the continued use of those types of reserves at least until principles-based reserving is ratified by states.
The panel was formed after NAIC in 2012 approved an amendment to the valuation manual containing principles-based reserving that put the topic up for ratification by state lawmakers (Best’s News Service, Dec. 3, 2012). Supporters of the approach say PBR was necessary to lessen redundant reserves in the XXX and AXXX reserving tools that companies selling term-life and universal life insurance with secondary guarantees have used.
In mid-September, the panel received a Rector & Associates report that offered the panel two alternatives on how to proceed, including one that allowed the reserving tools to continue under a reinsurance ceding arrangement that must meet several criteria, and another that would allow an insurer to have the same impact, but without using reinsurance. Rector & Associates founder Neil Rector — a former deputy director in the Ohio Department of Insurance — noted a division on the fate of the reserves among the task force during his research and sought more guidance.
Panel co-chairman Joseph Torti, Rhode Island’s insurance commissioner, said some members on the task force who wanted to see the XXX and AXXX plans continue in some form and some members of the task force who wanted a moratorium placed against them. Torti put himself in the camp of those who believe XXX and AXXX plans should be ultimately be eliminated, but said it was unlikely.
But Vermont Insurance Commissioner Susan Donegan said that while the status quo should not remain, Vermont is comfortable continuing these types of special purpose vehicles because “it’s something we understand the nuances of.”
Currently, the panel is considering creating an actuarial standard that would create an interim alternative threshold under which XXX and AXXX could still be used, at least on an interim basis until principles-based reserving is ratified by 42 states that must also have 75% of all life premiums. Currently, only seven states have ratified its use. Among the ideas under consideration as perhaps an interim standard is Valuation Manual 20, which Rector identified as being an idea nobody would choose first.
Some industry officials differ with using an interim reserving standard such as VM-20. Paul Graham of the American Council of Life Insurers said considering capital standards would be the best approach. He said an alternative standard threshold should be set “close to where [principles-based reserving] could be.” He asked that the panel consider capital or reserving standards before moving ahead.
Torti said he sensed no real opposition among task force members to ultimately stop the use of XXX and AXXX reserving, but admitted there were some key issues to address. “It’s still a little bit up in the air,” he said.
(By Thomas Harman, associate editor, BestWeek: Tom.Harman@ambest.com)
