NAIC MEETING COVERAGE
PBR Reinsurance Proposal
Wouid End Regulations' Strictures
Risk transfer would be captured in modeiing
BY JiiVI CONNOLLY
WASHINGTON
C
EDING COMPANIES AND reinsur-
ers could be freed from the stric-
tures of current regulations if a new
principles-based reserving system is put in
place, according to a presentation made
by actuaries to state insurance regulators.
Risk transfer would still continue to be
captured, but would be reflected in finan-
cial statements and models that assess the
risks in those statements, explained Shel-
don Summers, representing the Ameri-
can Academy of Actuaries, Washington,
during the fall meeting of the National
Association of Insurance Commissioners,
Kansas City, Mo. Summers is also a life
actuary with the California insurance
department.
Currently, reserving for life reinsurance
requires that companies follow the strictures
of regulations such as Statement of Statu-
tory Accounting Principles 61 and Appendix
A791, Summers explains. Both are part of
the NAIC's Accounting Practices and Proce-
dures Manual.
However, according to a paper presented
by the Academy to the Life & Health Actu-
arial Task Force, with the new PBR approach,
"the only questions should be 'What is in-
demnified?' and 'What's that worth?' given
statutory stochastic assumptions."
LHATF adopted a motion to expose the
document for comment.
The report says current regulations use
a limited number of factors set by law, in-
cluding mortality and interest rates. And, it
explains that a reinsurance reserve credit is
taken for the reinsured business even though
cash flows under the agreement may behave
differently than the reserve assumptions.
Under current rules. Summers said, ced-
ing companies are penalized if they do not
meet regulatory requirements. A big part
of those requirements, the paper states, is
focused on risk transfer. Ceding companies
meeting requirements receive 100% credit,
while for those companies that do not meet
requirements, no aedit is allowed.
www.lifeandhealthinsurancenews.com
The use of models to determine rein-
surance reserves, the paper states, would
include assumptions regarding cash flows
expected to be paid from or to reinsurers
under reinsurance agreements.
During a discussion among regulators on
the issue Amanda Fenwick, a New York regu-
lator, said that regardless of the cash flow
represented in any modeling, it will still be
Annuhy Guideiine Exposed For Adoption
BY JiM CONNOLLY
WASHINGTON
A
FTER NEARLY A DECADE of re-writes, a
F
model guideline, AG VACARVM, which
establishes reserving requirements for
e
variable annuities with guarantee provisions,
has been exposed for possible adoption.
•Rie vote was taken here during a meeting
of the Life & Health Actuarial Task Force during
the fall meeting of the NAIC.
The exposure comes after regulators were
urged by Tom Campbell, the long-time chair of
the Washington-based American
Academy of Actuaries VA
CARVM wori< group and a life A temporai7
actuary with Hartford Life, as
well as the American Council of
guideline is due
Life Insurers, that the model be to sunset on
exposed and ultimately adopted
so that what they believe is Jan. 1,2008
more effective regulation wouid
be in place when a sunset provision of Actuarial
Guideiine 39 is triggered on Jan. 1,2008.
AG 39, a temporary guideline for reserving
of annuities with guarantees, was adopted in
2002 for a 2-year period and then renewed for
more than 2 years.
A number of regulators argued during the
Life & Heaith Actuarial Task Force that since
AG VACARViVI is a principles-based proposal
it might be better to include it In the deveiop-
ment of a valuation manual that will be a guide
to principles-based reserving, should that
reserving approach be adopted.
But Hartford Life's Campbell countered
that it wouid be best to adopt a better
October 8,2007 I Nationai Underwriter Life & Health I 4 1
necessar)' to make sure there is risk transfer.
But Tom Campbell, a member of the
Academy's reinsurance work group and a life
actuary with Hartford Life, Simsbury, Conn.,
explained that the new approach would
actually discourage not accurately reflecting
risk transfer because there would be no ben-
efit reflected on a ceding company's balance
sheet. The cash flow obligation of the cedent
to pay the reinsurer will be reflected in
the reserve calculation rather than through
rules, he added.
Fenwick also noted that it is unclear
whether the new approach would properly
capture the bifurcation of risks involved in
reinsurance transactions. CD)
proposal.
"AG 39 doesn't work," said John Bruins,
an ACU life actuary. Although, he said that
VA CARVM is a principles-based approach to
reserving. Bruins added that immediate action
is needed.
Fred Anderson, a NewYori< regulator, sug-
gested waiting until after the law changes
because there is not yet a structure in place.
NewYork proposes, he said, to use the
Academy document and temporarily strengthen
a standard scenario which creates a minimum
reserving floor until regulators
see fit to relax it in the future.
ACU's Bruins suggested
that ifAG VACARVM could
not be made effective in
early 2008, then the follow-
ing changes should be made
to AG 39, so that regulation
reflecting the current mari<et
wiii be in place. Such changes wouid include a
quarterly release of 2.5% of the accumulated
reserve for reporting quarters beginning Jan. 1,
2008. Accumulated charges net of this release
trigger wouid be subject to asset adequacy
analysis.
IfAG VACARVM is not adopted in early
2008, ACU plans to recommend modifying AG
39 to allow credit for more forms of reinsur-
ance and credit for hedging programs.
Nebraska regulator John Rink asked "when
is someone going to come to the plate and get
this finished?" He offered a motion to have a
finai extension to Jan. 1,2009, but it was not
seconded. EH