NAIC mulls lower reserves for variable annuities

The group has just completed its initial review of a proposal put forth by the American Council of Life Insurers. The trade association proposed nine initiatives, attempting to provide some reserve relief for their members before yearend.

The National Association of Insurance Commissioners today said it will consider a proposal that could lower reserves for lifetime benefits on variable annuities.
But insurers will need to find other ways to ensure that they can survive during market turmoil, regulators said.
The Kansas City, Mo.-based regulatory group has just completed its initial review of a proposal put forth by the American Council of Life Insurers in Washington.
The life insurers’ trade association proposed nine initiatives, attempting to provide some reserve relief for their members before yearend.
The ACLI had also requested that the regulators eliminate a stand-alone asset adequacy analysis that reflects only the benefits, expenses and charges associated with lifetime guarantees for variable annuities.
This analysis, if performed at the end of the year, will call for higher reserve levels because of this fall’s market turmoil.
Many of these benefits are now “in the money” — meaning the guarantee’s value exceeds the account’s value.
Instead, the lobbying group wanted an asset adequacy analysis that would reflect the benefits, expenses and charges for the variable annuity contract, which would allow the base contract’s future mortality and expense charges to support claims on living benefits.
The NAIC said it could accept the ACLI’s proposal, provided it meets certain conditions.
Insurers could perform an analysis using the benefits, expenses and charges for the variable annuity contract as long as they meet the following five conditions:
Insurers must test all blocks of variable annuity business with guarantees that were issued after Jan. 1, 1981; they must test for investment volatility, considering volatility assumptions for stocks, bonds and derivatives, plus other assets; and they must also consider their policyholder behavior assumptions so that they reflect recent history and potential future exercise of variable annuity contract options.
Insurers must also expand their annual actuarial opinion to include a detailed analysis of the assumptions and conclusions of the effects of living benefits on reserve adequacy and possible losses under adversity — including investment volatility and policy behavior.
Finally, to the extent that this new analysis changes the valuation basis for the company, carriers must follow their accounting practices and procedures manual, and their annual statement instructions, to reflect that change.