New York Leery Of Principles-Based Reserving
February 6, 2015 by Arthur D. Postal, arthur.postal@innfeedback.com
WASHINGTON – New York regulators continue to counter pressure from industry officials and the National Association of Insurance Commissioners to adopt a principles-based reserving (PBR) approach to universal life insurance policies with secondary guarantees (ULSG).
Benjamin Lawsky, New York state Superintendent of Financial Services, wants to extend his formulaic approach to ULSGs, which are backed by so-called “AXXX” reserves. A similar reserving approach on time life policies went into effect Jan. 15.
The DFS estimates that the combined impact of these modifications to the existing ULSG formulas, which would apply to policies issued on or after Jan. 1, 2015, will result in a reduction of reserves of up to 15 percent.
The term life reserving requirements, or “XXX” reserves, reduce capital requirements by an estimated 30 to 35 percent.
Lawsky announced his intention in a letter to his fellow NAIC members and through a regulatory proposal that the New York Department of Financial Services (DFS) is exposing for public comment.
Under the proposal exposed for public comment earlier this week, New York said it is prepared to apply a 1 percent mortality improvement factor to the current mortality table for up to 40 years, and then apply a 0.5 percent mortality improvement factor thereafter through attained age 80, followed by a grade-in to the standard table by age 90.
In addition, when calculating reserves for ULSG policies, the proposed amendments will allow for a lapse rate of 2 percent to be used for the first five years, followed by a lapse rate of no more than 1 percent for the remaining life of the policy.
The NAIC has a PBR proposal on the table. In addition, at its annual meeting last October, officials of the American Council of Life Insurers said they were hopeful that the PBR standard will be the law of the land by 2017.
However, New York and other big states are leery and New York officials apparently have been leery for some time.
In comments to the NAIC in September 2013, Lawsky said that the that PBR “represents an unwise move away from reserve requirements that are established by formulas and diligently policed by insurance regulators in favor of internal models developed by insurance companies themselves.”
Lawsky reiterated that position in comments to the Life Insurance Council of New York’s (LICONY) 13th Annual Legislative & Regulatory Conference in Cooperstown in March 2014.
Regarding his rift with most state regulators on the PBR issue, Lawsky said in Cooperstown that New York regulators do not think the reserve formulas “are perfect or that the formulas always result in the right reserves.”
For some specific products, “I wouldn’t necessarily disagree that reserves may be conservative relative to historical experience regarding payouts,” Lawsky said. “But that doesn’t mean we should throw the formulaic system out entirely.”
Lawsky also committed himself to working “constructively with insurers to make smart, targeted, limited adjustments to the historical reserving formulas where there is strong empirical evidence for doing so.”
