Affordable Life Insurance Alliance to NAIC: AG 38 Framework Shows Positive Signs

The Affordable Life Insurance Alliance has reiterated its support for parts of a National Association of Insurance Commissioners proposal on how certain life insurance products would be evaluated under Actuarial Guideline 38.

In a letter to Texas Insurance Commissioner Eleanor Kitzman, ALIA Executive Director Scott Harrison said the proposed framework is a "very positive step in the process of bringing closure to the issues involving Actuarial Guideline 38."

The NAIC's draft framework comes after the organization's Executive Committee opted to create a joint working group made up of members of the Life Insurance and Annuities Committee and the Financial Condition Committee, which is chaired by Kitzman. The joint committee was formed in November in an effort to scale back the debate on the issue that was set off last year after some state regulators questioned the legality of how companies were setting up reserves for certain universal life insurance products (Best's News Service, Nov. 5, 2011).

The debate centers on how AG 38 should apply to universal life insurance policies with secondary guarantees and term universal life products. According to the NAIC's proposed interpretation framework, closed blocks of business policies would be evaluated by actuaries on a stand-alone basis. The evaluations would consist of asset adequacy analyses incorporating "moderately adverse scenarios." If it is determined the reserves are adequate on that basis, the company would not need to make an adjustment to its in-force reserves (Best's News Service, Jan. 16, 2012).

Harrison wrote in the letter that ALIA approves of the "bifurcated" approach outlined in the framework that would set up different evaluation standards for "closed blocks of business" policies that were written before a specified date and for policies deemed to be new business, or those that were written after the decided upon date.

The letter also praises the joint working group for bringing in an outside actuary to aid in their fact-finding mission. "Among other reasons, we believe that an actuarial consultant would be extremely valuable to advise the joint working group on any items where a consensus among the stakeholders cannot be reached," Harrison wrote.

Attempts to reach Harrison for additional comment were unsuccessful.

The letter also touches on ALIA's push for comprehensive principles-based reserving. ALIA has pushed the NAIC to move more quickly toward PBR, arguing it would make the debate over AG 38 largely irrelevant because the PBR system would sidestep many of the questions that the existing framework has (Best's News Service, Jan 16, 2012).

"We support the idea of companies being permitted to apply PBR to business written after the effective date of the resolution. We believe that giving companies this option will make reaching an agreement on a formulaic approach for new business easier to reach," Harrison said. "We would simply note, however, that there may be federal tax implications with this concept."

(By Jeff Jeffrey, Washington Correspondent: jeff.jeffrey@ambest.com)