Report Recommends Conditional Use of XXX, AXXX Life Reserving Tools
WASHINGTON //BestWire// - Two reserving tools used by some life insurers can be maintained on a short-term, conditional basis until states ratify principles-based reserving, according to a new report to a National Association of Insurance Commissioners panel by an insurance regulatory consulting firm.
Neil Rector of Rector & Associates presented the plan to the NAIC's principles-based reserving task force during a conference call on March 12. The recommendations may color the NAIC's treatment of XXX and AXXX reserving tools that companies selling term-life and universal life insurance with secondary guarantees have been using. Public comment is being accepted through March 21.
Rector was asked in December by the NAIC's principles-based reserving task force to write a report on how the NAIC regulators should address whether to eliminate the reserving tools. Companies selling term-life and universal life insurance with secondary guarantees have used those tools in order to lessen the amount of traditional assets used to reinsure their use. The report follows one issued last summer in which Rector & Associates offered two alternatives on how to proceed, including one allowing reserving tools to continue under a conditional reinsurance ceding arrangement, and another that would allow an insurer to have the same impact without any reinsurance (Best's News Service, Dec. 16, 2013). The new report uses the former approach.
Rector's report indicates its recommendations are not an attempt to regulate captive insurance and do not depend on principles-based reserving ratification. It approaches the issues based not on reserve levels that regulators have focused upon, but on the assets used in reinsurance to support XXX and AXXX use.
The new report's recommendations allow for XXX and AXXX use conditionally and on an interim basis at least until principles-based reserving is ratified by 42 states that must also have 75% of all life premiums.
The main recommendation employs the use of reserve limits as measured by Valuation Manual 20, which will be used to establish a limit on the primary assets that an insurer looking to use XXX or AXXX reserving must have. For instance, the direct ceding insurer can get credit for reinsurance using primary assets at amounts equal to the statutory reserves allowed under principles-based reserving. But they can also get credit for using non-traditional assets that are beyond the principles-based reserving level as long as they are approved by the regulators for the ceding insurer and the assuming insurer, the report said. At least one party to such transactions must perform a risk-based capital calculation, the report said.
The new requirements would take effect on July 1 for newly created financing structures. Disclosure requirements would take effect on Dec. 31. The requirements would impact business ceded to existing financing structures on Jan. 1, 2015, and the risk-based capital rules would take effect on Dec. 31, 2015.
Requirements outlined in VM 20 will be used to ensure that this occurs. Rector said VM 20 is better equipped than other alternatives to meet the initial request of the task force -- to come up with an equitable approach to reserving before principles-based reserving is implemented.
"The modified version of VM 20 is not perfect," Rector said to the panel. "But in our judgment, even in its imperfection, it will do a far better job of leveling the playing field than what's happening today."
The NAIC in 2012 narrowly approved the use of principles-based reserving methods to deal primarily with what supporters claim are redundant reserves that result from the use of XXX and AXXX special purpose vehicles. The changes to the valuation manual containing principles-based reserving are up for ratification by state lawmakers. Only a handful of states have ratified principles-based reserving since and some major states such as New York have been outspoken in opposition to principles-based reserving.
The American Council of Life Insurers offered a brief statement after receiving the report. "We're studying the recommendation and will be commenting before the March 21 deadline," said spokesman Jack Dolan.
(By Thomas Harman, associate editor, BestWeek: Tom.Harman@ambest.com)