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WINTER 2014

PBA Perspectives is a new Academy publication to keep you up to date on activities surrounding the implementation of the principle-based approach for life insurance.

NAIC FALL MEETING

The National Association of Insurance Commissioners’ (NAIC) Principle-Based Reserving Implementation (EX) Task Force (PBRITF) met during the NAIC’s Fall Meeting in Washington from Nov. 16-19 and voted to expose several documents, including a proposal for a small-company exemption from the PBR requirements in VM-20. After a regulator-only call on Dec. 10, the task force proposed a small-company exemption for insurers with premium levels of less than $50 million for an individual company and $300 million for an insurance group.

This modifies the PBRITF’s November proposal that would have set the premium levels for small-company exemptions at less than $300 million for an individual company and $600 million for a group. According to an analysis, the $300 million/$600 million premium threshold would have exempted less than 5 percent of the industry premium from PBR regulations. The PBRITF made the change in its Dec. 10 draft after analyzing data related to companies and premium thresholds. It is requesting comments on the small-company exemption until Jan. 15, 2015.

A provision to review the small-company exemption after five years was not included in the current PBRITF exposure. Some LATF members have supported a five-year review in order to clearly indicate an intent to continue to review the small-company exemption so that it could be modified later.

ACADEMY ACTIVITY

PBR Session at Academy Annual Meeting
The Academy held a session on PBR at its Annual Meeting in November. The session, The Other Side of PBR: Reviewing Results, provided insights into possible answers to the question: In a post-state implementation/enactment principle-based reserving (PBR) world, how will the review process work for regulators, auditors, and rating agencies?

Speakers at the PBR session included Mike Boerner, Texas Department of Insurance; Larry Bruning, National Association of Insurance Commissioners; Scott Robinson, Moody's Investors Service; Jeffrey Schlinsog, PricewaterhouseCoopers LLP; and Randall Stevenson, Consulting Actuary, INS Consulting Inc.

The panel reviewed expected PBR audit procedures and considerations, how rating agencies view PBR, and how the NAIC might aid state regulators during PBR reviews. The NAIC expects to hire five to seven staff actuaries by the beginning of 2017 to help state regulators evaluate PBR filings. They expect to utilize modeling software to assist with the review and analysis of different aspects of PBR. Additionally, regulators will be supported by the NAIC’s Valuation Analysis Working Group, which will respond to states on issues and questions that arise during PBR reviews, similar to the Financial Analysis Work Group (FAWG)  process currently in place at the NAIC.

Mortality Table Development
The American Academy of Actuaries and Society of Actuaries Joint Project Oversight Group made a presentation in November to the NAIC Life Actuarial (A) Task Force on the development of the 2014 VBT and CSO tables.

C-3 Phase I Spreadsheet
The C-3 Work Group submitted to the NAIC Life Risk-Based Capital (RBC) Working Group in November an updated spreadsheet and instructions for calculating the RBC requirement as part of the 2014 C-3 Phase 1 field test for large companies.

Post-NAIC Update/PBA Webinar
The Life Practice council on Dec. 12 presented a webinar that reviewed the highlights of the NAIC’s Fall 2014 National Meeting, including a recap of the LATF meeting, and recent developments relating to capital, captives, and other topics.

PBR LEGISLATIVE STATUS

Eighteen states representing about 28 percent of U.S. direct written premium have adopted a new Standard Valuation Law (SVL) needed to allow life insurers to institute PBR. However, PBR will be effective only after a supermajority of states and territories (42), representing 75 percent of written premium, adopt the revised law.

States adopting new SVL

% of U.S. life underwriting
Connecticut 1.78%
Arizon 1.73   
Florida 6.77   
Hawaii 0.59   
Indiana 1.81   
Iowa 1.01   
Louisiana 1.31   
Maine 0.40   
Mississippi 0.60   
Nebraska 0.59   
New Hampshire 0.45   
New Mexico 0.59   
Ohio 4.15   
Oklahoma 0.87   
Rhode Island 0.49   
Tennessee 1.79   
Virginia 2.54   
West Virginia 0.50   

REGULATORY ACTIVITY

AG 48
The PBR Implementation (EX) Task Force voted to adopt Actuarial Guideline XLVIII (AG 48) in November. This Actuarial Guideline lays out requirements for XXX/AXXX reinsurance arrangements. The Guideline will next be considered by the Joint Executive/Plenary Committee of the NAIC via conference call on Dec. 16 for a proposed effective date of Jan. 1, 2015.

Asset Adequacy Analysis
LATF adopted the American Council of Life Insurers’ (ACLI) proposal for using the Asset Adequacy Analysis for the Stochastic Exclusion Test. This proposal would change the Stochastic Exclusion Ratio Test (SERT) threshold from 4.5 percent to 6.0 percent and provides clarifying language to VM-20, that the use of a cash flow testing model meeting stated criteria would be acceptable for SERT calculations.

Asset/Liability Delinkage Proposal
The Emerging Actuarial Issues (E) Working Group voted to adopt a response to the question on the asset/liability delinkage proposal submitted by John MacBain (Actuarial Resources Corporation).

NAIC Fall Meeting Exposures

  • LATF exposed the Academy Deposit Fund Subgroup’s supplemental proposal and modified model regulation on Synthetic Guaranteed Investment Contract (GIC) Reserves. Comments are due by Jan. 16, 2015.
  • LATF exposed for comment the updated VM-20 Benchmark Spreads Tables. Comments were due December 2, 2014.
  • The PBR Implementation (EX) Task Force exposed for comment the proposed sections of the Standard Valuation Law to be used as substantially similar language in comparison to states’ Standard Valuation Laws needed to determine the Valuation Manual’s operative date.  The exposure is available for comment until Jan. 15, 2015.
  • The Stress Testing Subgroup of the Life Risk-Based Capital (E) Working Group exposed for comment the stress testing proposal as an outline for field testing. The document is exposed until January 30, 2015.
  • The Capital Adequacy (E) Task Force exposed for comment the referral from the Investment Risk-Based Capital (E) Working Group regarding derivatives as well as the Management’s Discussion and Analysis Instruction Proposal. Both documents are exposed until Jan. 2, 2015.