LATF Update – August 2012

[DonnaClaire]

LATF Update – August 2012 Meeting
By Donna R. Claire/Sheldon Summers

The Summer 2012 NAIC LATF meeting was held in Atlanta. I admit I wasn’t there – instead I was taking an Arctic (North Atlantic) cruise with Special Expeditions/National Geographic, looking at icebergs, whales, polar bears, walruses, puffins and other interesting seabirds. (Great trip!) However, Sheldon Summers was there, and he gave me a summary of the meeting.

Below are the highlights:

Valuation Manual: The Principle-Based Valuation Manual was adopted by LATF on a conference call August 2, 2012. The parent committee of LATF, called the A Committee, subsequently adopted it on a conference call on August 17, 2012. The goal is for states to adopt during 2013 and 2014 legislative agendas, and be effective 1/1/2015. The Valuation Manual is meant to be a living document, and work will continue on the manual.

PBR Implementation and Review: There were a number of discussions regarding Principle-Based items. Cande Olsen gave a presentation on behalf of the Life Practice Council of the Academy detailing the reasons we need PBR, e.g., it addresses shortcoming in current formula based reserve methodology; what PBR is, e.g., that it is based on stochastic modeling which uses insurer experience; why the current proposal is not a “pure” PBR, e.g., that prescriptive elements added due to regulatory concerns with transitioning to PBR; pointing out the problems with prescriptive elements, e.g., causes unnecessary complexity and conservatism and stating that the Academy’s LPC supports the adoption of PBR, but believes it would be prudent to have a process to facilitate the review, assessment, and improvement of the new methodology. The Academy also stated that it will continue to do work to support methodology, not only by working with LATF but also with legislatures, etc. – and will make strong push for ongoing review and improvement.

PBR Reviews: How the reviews of PBR will be done is one of the major issues. It is a challenge at State Insurance Departments to develop expertise to analyze stochastic models and may need additional personnel. One suggestion is a Centralized Review Facility, or some other methodology to provide support to the states for review.

Other Valuation Issues: As mentioned above, there are still issues under discussion. These issues include whether an aggregate margin could be used in place of the current Valuation Manual requirement of margins on all major assumptions; whether the collar on starting assets used in modeling (currently stated as between 98% and 102% of ultimate reserves) can be expanded. Work will continue on these items.

Payout annuities: There is a new table proposed called the 2012 Individual Annuity Reserving table. It is a generational table that changes each year based on improvement factors with the Projection Schedule called G2. Until now, the individual annuity valuation table was a static table, so this would require programming changes for companies. The discussion of a transition period and effective date will take place on a conference call in September.

2013 GRET Tables: Tom Rhodes presented the GRET report for the SOA, giving the proposed 2013 GRET factors. One consideration on the new factors is that there is a 10% cap on changes to the factors from year to year. The proposed new factors are being exposed for 30 days, with LATF to vote on implementation after this time.

Nonforfeiture Improvement: A status report from the Academy work group on nonforefiture improvement was given by John McBain. LATF mentioned that there are some items that it may need to provide input on, such as the requirement for nonforfeiture benefits and the requirement for cash values, but no action was taken at this meeting.

Actuarial Guideline XXXIII: Tomasz Serbinowski provided an update regarding the work with respect to fixed annuities with guarantee living benefits. They are looking at the impact of having variable annuity requirements different from results for fixed annuities, which are based on applying Actuarial Guidleine 33 to those products. Dave Neve, representing AVIVA, commented that AG33 reserves are excessive for fixed annuities with guaranteed living and death benefits and requested an interim solution until PBR is effective for annuities – believes AG43 is an appropriate short term solution – differences include that the fees collected and lapses are recognized in AG43, but not AG33. There will be further LATF calls on this matter.

ARWG: Jim Lamson provided an update on the Academy group working on fixed income annuities for eventual inclusion in the Valuation Manual as Section 22. They are wrestling with issues such as aggregate versus individual margins, and are exploring how to reflect economic risks – is it time to consider scenario testing of other assumptions? This group has developed a stochastic exclusion test based on cash flow testing. They are using the life section of the Valuation Manual, VM20, as a formatting guide.

Experience Reporting: Fred Andersen gave an update on New York’s data collection for experience reporting. NY has just completed a very successful first cycle for data call and is now in the middle of the second data call – collecting data for ordinary life mortality; they are exploring whether to request policyholder behavior in a third data call, such as lapses for ULSG policies. The long term plan by NY for collecting data is to incrementally expand the information requested, such as expanding to other lines of business. Fred heard that the NAIC is anxious to get a statistical agent, and Fred’s subgroup will have a conference call regarding process to get things going. The options regarding the existing NY Pilot program is for the NAIC to take it over or for another state to do what NY is doing since would result in national coverage. The end product is a report on A/E which is used by NY in reviewing cash flow testing and will be useful to PBR reviews. The ACLI was requested to do a survey of its members as to what types of studies are being done internally regarding policyholder behavior.

Compact (IIPRC): Alice Fontaine provided an update on the work of the Interstate Insurance Product Regulation Commission. They are currently working on standards development for group term life for employer groups. Work is planned for group annuity standards.

International Update: Larry Bruning gave an update on what is happening in the international arena. There a project, called Com-Frame, to develop common framework for supervision of Internationally Active Insurance Groups; a draft by IAIS of Com-Frame document was exposed 7/2/2012. The definition of an Internationally Active Insurance Group is one that writes in 3 or more jurisdictions and more than 10% of business is outside domestic jurisdiction; over $50 billion with over $10 billion outside of the domestic jurisdiction.

Summary: PRR is much closer to being a reality, so life insurers should be planning for it. The next NAIC meeting is the end of November in Maryland, and I intend on reporting on it.

[working girl]

Donna, any updates since August?

[rekrap]

Originally Posted by working girl

Donna, any updates since August?

Originally Posted by DonnaClaire

Summary: ... The next NAIC meeting is the end of November in Maryland, and I intend on reporting on it.

NAIC Fall 2012 National Meeting
November 29-December 2
Washington, DC