United States: Update On Principle-Based Reserving

The Principle-Based Reserving ("PBR") Implementation (EX) Task Force1 held an open meeting on March 31, 2014 at the Spring National Meeting (the "Spring Meeting") of the National Association of Insurance Commissioners (the "NAIC"). The Task Force's "mission" is (1) to serve as the coordinating body with all NAIC technical groups (e.g., the Life Actuarial (A) Task Force) involved with projects related to the PBR initiative for life and health policies and (2) to further assess the solvency implications of life insurer-owned captive insurers and other special purpose vehicles.

This Stroock Special Bulletin looks at some of the highlights from that meeting, including the Legislative Status of PBR Implementation, the PBR Consultant's Supplemental Report, discussion regarding the proposed PBR statistical agent framework, Life Actuarial (A) Task Force developments, and PBR impact on small companies.

Legislative Status of PBR Implementation

Ms. Julie Mix McPeak (Co-Chair of the Task Force and Commissioner of the Tennessee Department of Insurance and Commerce) began the meeting by giving an overview of the adoption by NAIC-member jurisdictions of the revised Model Standard Valuation Law ("SVL"). The SVL refers to an updated NAIC Valuation Manual (the "VM"), which includes guidance for PBR to be used with respect to new business after the VM's operative date. Before the VM can become operative, a super-majority of NAIC-member jurisdictions (i.e., 42 jurisdictions representing at least 75% of total U.S. premiums written for life, annuities and health insurance) must have adopted the revised SVL.

As of April 7, 2014, 12 states representing 11.3% of relevant premium had adopted the revised SVL. One additional state had the legislation awaiting the governor's signature; once signed into law, 13 jurisdictions representing 13.8% of relevant premium will have enacted the revised SVL. In addition, 9 jurisdictions have either proposed legislation, or have legislation pending, to enact the revised SVL and 7 jurisdictions plan to consider such legislation in 2015. Assuming the revised SVL legislation is adopted as currently anticipated, 30 states representing 60.3% of relevant premium will have adopted that legislation by the end of 2015.

PBR Consultant's Supplemental Report

Rector and Associates' February 17, 2014 Report

In 2013, the NAIC engaged Neil Rector and Associates ("Rector and Associates") as its PBR consultant to assist the Task Force with its work on the following projects:

  • Analyzing life insurer-owned captive transactions representing a cross section of the industry in order to further evaluate the business purpose of captives from the various regulator and industry perspectives.
  • Evaluating the findings and recommendations set forth in the Captives/SPV Use White Paper and providing further recommendations regarding the potential regulatory treatment of captive transactions.

As described in more detail in our October 7, 2013 Stroock Special Bulletin2, Rector and Associates set out in its initial report, dated September 13, 2013 (the "Initial Consultant's Report"), a "regulatory framework" for consideration of captive transactions. This regulatory framework was formulated under the assumption that the Task Force accepted the "general logic" for captive transactions, but also concluded that changes to the existing regulatory framework are needed to promote consistency and to ensure that approved transactions are "appropriately conservative."

On February 17, 2014, Rector and Associates issued a follow-up to the Initial Consultant's Report (the "Supplemental Consultant's Report"), available at http://www.naic.org/documents/committees_ex_pbr_implementation_tf_140414_report_rector.pdf.

The Supplemental Consultant's Report contained the following 9-point executive summary of the framework:

  • The ceding insurance company should only get credit for reinsurance if it retains (on a funds withheld or trust basis) "Primary Assets"3 in an amount approximately equal to what the statutory reserve would be under PBR.
  • The remainder of the credit for reinsurance may be supported by any assets approved by regulators for both the ceding insurance company and the assuming insurer, subject to certain regulatory protections and oversight.
  • Full risk-based capital ("RBC") calculations using traditional NAIC methodology should be performed by at least one party to the financing transaction.
  • Key information about the use of financing transactions and assets supporting such transactions should be publicly disclosed.
  • Ceding insurance companies and their auditors should determine compliance with the requirements of the framework on an annual basis.
  • All reinsurance involving Triple X and AXXX reserves is within the initial scope of the framework; however, exemptions are provided for most traditional reinsurance arrangements (including for arrangements with reinsurers that follow NAIC accounting and RBC rules).
  • The concept of "financing" the reserves at the ceding insurance company level (without the use of reinsurance) is theoretically viable, but more work remains before recommendations can be made as to how to implement the concept.
  • The proposed effective dates for the new requirements are:

    • July 1, 2014 for the newly created financing structures;
    • December 31, 2014 for the new "Disclosure Requirements";.
    • January 1, 2015, 2015 for business ceded to existing financing structures; and.
    • December 31, 2015 for the new RBC rules.
  • A new "[Triple X] and AXXX Model Reinsurance Regulation"4 should be an accreditation standard to "codify" the requirements of the framework.

The Supplemental Consultant's Report also included the list of action items set forth below, which were designed to "codify" the framework and to provide additional detail regarding implementation.

  • Adopt the recommendations set forth in the Supplemental Consultant's Report in concept (e.g. general approach, definitions and proposed effective dates).
  • Refer items to other NAIC working groups and task forces:

    • Refer to the Life Actuarial (A) Task Force a charge to develop modifications to VM-20—Requirements for Principle-Based Reserves for Life Products so it can be used as the "Actuarial Method."
    • Refer to the RBC (E) Working Group charges (1) to develop a list of anticipated "Other Assets," (2) to determine RBC asset charges relative to "Other Assets," and (3) to require that full RBC calculations using traditional NAIC methodology be performed by at least one party to financing transactions.
    • Refer to the Blanks (E) Working Group a charge to finalize the "Disclosure Requirements" and to add them to the annual statement blanks.
    • Refer to the Statutory Accounting Principles (E) Working Group a charge to include a note to the annual audited financial statements to set forth relevant aspects of financing transactions.
    • Refer to the Financial Analysis (E) Working Group ("FAWG") a charge to add review of the "Disclosure Requirements" to the standard monitoring criteria for life insurance companies.
  • Make decisions as to which "Other Assets" should be referred to FAWG for review if used in financing transactions.
  • Identify insurance companies interested in exploring Alternative B (reduced retention of Triple X and AXXX reserves at the direct insurance company level) and further develop that alternative.
  • Finalize and adopt the proposed "[Triple X] and AXXX Model Reinsurance Regulation" and take action to make it an accreditation standard.
  • Rector and Associates recommended that these action items be completed at or before the NAIC's 2014 Fall National Meeting in November.

March 12, 2014 Conference Call

During a March 12, 2014 conference call, Mr. Neil Rector presented the Supplemental Consultant's Report to the Task Force. He emphasized that the framework pertains only to (1) business covered by the Valuation of Life Insurance Policies Model Regulation (commonly referred to as "Triple X") and Actuarial Guideline XXXVIII—The Application of the Valuation of Life Insurance Policies Model Regulation (commonly referred to as "AXXX" or "AG 38") and (2) the types of assets or securities allowed to support the reserves. He also noted that the framework does not modify the total statutory reserve value, and that the framework focuses on whether the direct ceding insurer has access to sufficient assets to pay policyholder claims. Mr. Rector stated that focusing on the regulation of captives would not solve regulatory concerns around captive transactions and would likely result in such transactions moving off-shore.

Mr. Rector said that the primary reason for recommending that a modified version of VM-20 be used as the "Actuarial Method" for determining the "Primary Asset Level" is that use of a modified version of VM-20 would eliminate the incentive for companies to engage in captive transactions. He noted that the framework includes some additional recommendations to help "shore up" VM-20, but said that even if the modified version of VM-20 is not perfect, it does a far better job of "leveling the playing field" compared to the current reserving methodology. Mr. Doug Stolte (Deputy Commissioner of Financial Regulation at the Virginia Bureau of Insurance) agreed that Rector and Associates' framework would level the playing field, which was Virginia's primary concern, but noted that there is still a substantial amount of work to be done.

At this point in the call, Mr. Robert Easton (Executive Deputy Superintendent of the Insurance Division at the New York Department of Financial Services) asked Mr. Rector about the elimination of permitted practices. Mr. Rector said that, in accordance with the new framework, all regulators would use the same reserving methodology and that methodology would not need to be a permitted practice. He explained that, by increasing transparency and establishing regulatory uniformity, "one-off" transactions could be eliminated.

Mr. Easton then inquired about the interim period before a revised reinsurance regulation is adopted and whether states would be incentivized to stop using the permitted practices. Mr. Rector responded that, even without adopting a revised regulation, the new disclosure requirements would be part of annual statement blanks and instructions and RBC would apply. He added that if an insurance company cedes Triple X or AXXX business without being exempted (e.g. cessions to a certified reinsurer) or without complying with the new requirements, such transaction would create a presumption that the insurance company is in a financially hazardous condition ("HFC") pursuant to the Model Regulation to Define Standards and Commissioner's Authority for Companies Deemed to be in Hazardous Financial Condition.

At the end of the discussion, Mr. Joseph Torti III (Co-Chair of the Task Force and Superintendent of Banking and Insurance at the Rhode Island Department of Business Regulation) reminded all conference call participants that the Supplemental Consultant's Report was exposed for comment until March 21, 2014.

Spring Meeting

During the NAIC Spring National Meeting, regulators discussed comment letters received on the Supplemental Consultant's Report (the comment letters are available at http://www.naic.org/documents/committees_ex_pbr_implementation_tf_140414_comment_rector.pdf). Mr. Nick Gerhart (Commissioner of the Iowa Insurance Division) stated that Iowa's comments are mostly focused on the proposed "[Triple X]and AXXX Model Reinsurance Regulation." He inquired as to whether amendments to current captive arrangements would be subject to the proposed regulation, but said that Iowa is most concerned about the HFC presumption. Mr. Gerhart said he understood why certified reinsurers would be exempt from the "Primary Asset" requirement, but did not understand why they should be exempt from "the whole thing." Superintendent Torti agreed that the HFC assumption "could be problematic." Mr. Dave Provost (Deputy Commissioner of the Captive Insurance Division of the Vermont Department of Financial Regulation) stated that he appreciated the intent of the proposed model regulation, but that it was unusual "to have a regulation to fix issues in another regulation" because a regulation typically is promulgated to implement a specific provision in a law. He indicated that Vermont would have a difficult time supporting the regulation with the HFC presumption.

Mr. Provost also noted that he believes the timeline set forth in the Supplemental Consultant's Report is "too aggressive" and that "a lot of states would have difficulty" meeting the specified effective dates. Superintendent Torti responded by saying he recognizes that there is a problem with the dates, but that the dates are saying, "let's get this uniform framework in place" because the alternative is a moratorium on captive and SPV transactions. Superintendent Torti does not think the proposed effective dates are unrealistic.

Mr. Dave Jones (Commissioner of the California Department of Insurance) stated that California submitted an extensive comment letter, but its "main concern" is the accelerated timeline. He noted that "a lot of pieces" need to come together to make the framework feasible, including an agreeable definition of "Primary Assets." Mr. Jones suggested that it would be simpler to use admitted assets (Vermont agreed), and voiced concern that jurisdictions devoting time to the "little pieces" may "take away from broader implementation of PBR." He also expressed hope that PBR will result in a decrease in the number of captive transactions, but added that he believes there will be "problems down the road" because he has yet to hear major industry associations commit to not using captives, even after PBR.

Superintendent Torti indicated a continued push to get insurance industry members to "say [captive transactions] will stop at PBR." He acknowledged that some companies have made such a commitment contingent upon coming to agreement on an appropriate economic reserve with a margin.

Mr. Mark Birdsall (Chief Actuary of the Kansas Insurance Department) made several comments about the "Actuarial Method." He said that, with respect to PBR accomplishing the "right-sizing" of reserves, VM-20 "utterly fails in that goal." In lieu of using VM-20's individual margin approach, which he stated is "impossible to measure," Mr. Birdsall suggested using a "two-stage process" similar to that set forth in VM-22—Requirements for Principle-Based Reserves for Non-Variable Annuity Products by using a best estimate assumption and then adding an aggregate margin. Mr. Mike Boerner (Director of the Texas Department of Insurance Actuarial Office) suggested looking into an aggregate margin approach, but said he thinks VM-20 "does have merit and will leave it at that."

Mr. Robert Easton (Executive Deputy Superintendent of the Insurance Division at the New York Department of Financial Services) stated that New York also submitted a comment letter in which it noted that it does "not have comfort with PBR reserves." He said that New York is concerned by hearing regulators such as Mr. Birdsall say that VM-20 is "not there" and seeing trade groups submit comment letters indicating that VM-20 is wrong because it is not liberal enough in giving companies the ability to set appropriate reserve levels. Mr. Easton later asked Mr. Paul Graham (Senior Vice President, Insurance Regulation & Chief Actuary of the American Council of Life Insurers (the "ACLI")) if he thinks VM-20 is not sufficiently flexible so that when PBR becomes effective there will not be a need for captive transactions. Mr. Graham did not provide a yes or no response, but said "if you get mortality right, you're in pretty good shape." Mr. Graham also stated that "[the insurance] industry has faith in VM-20 such that Triple X and AXXX captives will no longer be necessary." Mr. Easton said that the concerns New York is hearing from some regulators and industry participants "are significant and need to be weighed very carefully."

Mr. Steve Kinion (Director of the Delaware Bureau of Captive and Financial Insurance Products) spoke about Delaware's deference to increased regulatory uniformity and disclosure requirements, but said that Delaware did not recommend that the Task Force adopt the Supplemental Consultant's Report in its current form because it believes there are "too many unanswered questions and perhaps unintended consequences." He suggested that work be transferred to the Captives (EX) Working Group, which "has not yet been populated despite charges to look at these [captive] issues" and would create "one-stop shopping" by "focus[ing] like a laser beam on the captives in question."

Mr. Bill McCartney (Senior Vice President at USAA) then briefly stated that USAA aims to provide highly competitive financial services to the U.S. military community and that the current reserving system makes doing so very difficult. He said that USAA is mainly concerned with imposing a sunset date so that "at some point these actions go away whether there is a need for captives or not."

Ms. Nancy Bennett, (Senior Life Fellow at the American Academy of Actuaries (the "Academy")), noted that the Academy's comment letter specifically related to the current definition of the Actuarial Method for determining the primary asset amount. She indicated that VM-20 is a reasonable framework, but that VM-20 and the Valuation Manual itself are dynamic, changing methodologies. As such, Ms. Bennett indicated that the Academy does not believe the proposed modifications to VM-20 set forth in the Supplemental Consultant's Report are necessary; rather, the current version of VM-20 should be used.

Finally, Mr. Paul Graham (Senior Vice President, Insurance Regulation & Chief Actuary of the ACLI) discussed the ACLI's comment letter. He suggested that, because the Supplemental Consultant's Report raises so many technical and framework issues, the Task Force should consider scheduling an interim in-person meeting. He agreed with the concerns discussed above regarding the HFC presumption, indicating that there "could be a lot of unintended consequences based on the scope of application." Mr. Graham also voiced concern that because of the way the Supplemental Consultant's Report is currently written, it would "bring in" all Triple X and AXXX transactions (i.e., not just term and universal life with secondary guarantees), including traditional reinsurance cessions to offshore reinsurers. Finally, he stated that "being careful and making sure [the Task Force has] the scope right is going to be very important."

Because there was not enough time for all interested parties to present their comments, the Task Force scheduled a conference call for April 14, 2014 at 3:00 p.m. EST.

April 14, 2014 Conference Call

On the April 14, 2014 conference call, Superintendent Torti asked each interested party that had submitted a comment letter whether it wished to elaborate on its letter. The American Institute of Certified Public Accountants, Captives Insurance Companies Association, Center for Insurance Research, Northwestern Mutual, New York Life Insurance Company, and the Vermont Captive Insurance Association declined the Superintendent's offer, stating that they would rely on the comments set forth in their letters. A representative of Affordable Life Insurance Company stated that Affordable would like to press the points that: (1) when the request to develop PBR came about in 2005, the financing transactions at issue were not identified as problematic from a regulatory standpoint, but rather from a company standpoint; (2) requiring the "right reserve on the front end" would obviate the necessity for companies to have to engage in such transactions and such transactions would "die a natural death" because "the market would simply dry up"; and (3) Affordable agrees with Kansas' position that, in its current form, PBR does not achieve the end set forth in (2). The representative also indicated that, although reserve financing transactions are costly, they are actually necessary in the current environment; therefore, if the Task Force seeks to prohibit such transactions after PBR implementation, Affordable's concern is that consumers would be negatively impacted due to higher reserve amounts causing increased capital costs, which would be passed on to consumers. Affordable's representative concluded that the "request is to fix PBR."

A representative from the Arizona Department of Insurance then stated that the current deterministic reserving standard should continue to be used for reinsurance securitizations and that to ensure a "level playing field," PBR should not be utilized before it is adopted by state law.

Mr. Paul Graham (Senior Vice President, Insurance Regulation & Chief Actuary of the ACLI) then continued presenting the ACLI's comments from the Spring Meeting. He said that the ACLI is concerned with the use of the Model Regulation to Define Standards and Commissioner's Authority for Companies Deemed to be in Hazardous Financial Condition as the regulation for the framework set forth in the Supplemental Consultant's Report. Mr. Graham described ACLI's alternative proposal – to use NAIC's Actuarial Opinion and Memorandum Regulation (the "AOMR") as the "carrying rule." He explained that the ACLI believes there should be a provision requiring that on or after a specified date, an insurance company's appointed actuary must have concluded an examination to determine whether the company's primary assets meet the requirements of the actuarial method and, if they do, requiring the appointed actuary to provide an unqualified actuarial opinion regarding the insurance company. If the appointed actuary determines that the company's primary assets do not meet the requirements of the actuarial method, the actuary would be required to either (1) recommend rectifying the problem by adding primary assets or reducing credit for reinsurance or (2) submit a qualified opinion.

Mr. Mark Birdsall (Chief Actuary of the Kansas Insurance Department) said that he likes the idea of using the AOMR, but he thinks that the justification for doing so would be more legal than actuarial. Mr. Birdsall inquired as to what methodology would be used and Mr. Graham responded that the ACLI proposed taking whatever prescriptive requirement that regulators determined would create a level playing field and using that in conjunction with a "cash flow testing wrapper." Mr. Graham explained that such an approach could be used with any actuarial method, like the aggregate margin method that Mr. Birdsall proposed at the Spring Meeting. Mr. Birdsall agreed.

Mr. Rector then observed that the fundamental difference between the two approaches is that using the AOMR would require that affirmative action be taken after actuarial review to put a company into hazardous financial condition, whereas the proposed HFC presumption is automatic. He agreed that, regardless of which approach is used, there is a need for human intervention to determine whether failure to comply with the framework is a "substantive deviation" or "just a foot fault."

PBR Statistical Agent

During the Spring Meeting, Commissioner McPeak led a discussion on the proposed PBR statistical agent framework. The SVL requires each NAIC-member jurisdiction to collect life insurance experience data ("Experience Data") from insurance companies licensed in such jurisdiction, as prescribed in the Valuation Manual. Such Experience Data is necessary to develop industry experience data tables, which will be used by (1) insurance companies that do not have credible experience data themselves and (2) regulators, to determine industry experience benchmarks and validate insurance company model experience assumptions. The Valuation Manual contemplates designating a statistical agent(s) to collect the Experience Data on behalf of the states. As such, the Task Force was asked, among other things, to "[d]etermine the role of a statistical agent(s) and recommend procedures, funding and a process for data reporting."

Mr. Daniel Schelp (Managing Counsel, NAIC Legal Division) explained the memorandum he submitted with Larry Bruning (NAIC Life Actuary) to the members of the Task Force regarding a proposed statistical agent framework. The memo emphasized that "[i]t is essential that the states and the NAIC develop a consistent process to collect insurance company experience data due to confidentiality, uniformity, and efficiency considerations." The information in the memo is expected to be used as guidance by an as-of-yet unformed Working Group of the Task Force.

High Level Summary of Proposed Statistical Agent Framework

Set forth below is the high level summary of Mr. Schlep's and Mr. Bruning's proposed statistical agent framework, as described in their memo.

  • Because it is neither efficient nor practical for all 51 NAIC-member jurisdictions to separately collect company life insurance Experience Data, the jurisdictions would collectively (through the NAIC committee process) designate three to five jurisdictions (the "Designated Jurisdictions") to collect it on behalf of all jurisdictions. Such states would be selected based on several criteria, including (1) the widest range of admitted companies, (2) the strength of confidentiality laws and (3) specifics of state procurement rules. Although each jurisdiction would retain its authority to collect Experience Data on its own behalf, all jurisdictions would be encouraged to participate in the process to achieve uniformity and to reduce reporting costs for insurance companies.
  • The Designated Jurisdictions would contract with a single statistical agent to collect Experience Data for a particular data set (e.g., maturity, lapse) on a national basis. New York and Kansas currently have contracted with a statistical agent under a pilot program collecting similar information; the proposed statistical agent framework would leverage the experience of this pilot program.
  • At present, the New York/Kansas pilot program covers approximately 75% of Experience Data. The memo suggests expanding the scope of the pilot program to cover at least 80% of Experience Data and continuing the pilot program until the operative date of the Valuation Manual.
  • In order to assist the NAIC-member jurisdictions, the Task Force would designate a new working group (e.g., Life Statistical Agent (EX) Working Group) to provide guidance on the Experience Data collection process (e.g., audits of the statistical agent). The new working group would recommend a statistical agent to the Task Force based on pre-defined and pre-approved selection criteria; the recommendation would also include a list of representatives of the states selected to contract with the statistical agent.
  • The new working group would also recommend an allocation formula across the life insurance industry for the payment of the statistical agent expenses. Under the New York/Kansas pilot program, only those insurance companies submitting Experience Data to the statistical agent are paying for the expenses. However, representatives of the life insurance industry advised the NAIC that they would like to spread the costs of the statistical agent process to both submitting and non-submitting companies. The memo suggests that consideration also be given to implementing this cost allocation formula with respect to the New York/Kansas pilot program.
  • Working with the selected statistical agent(s), the NAIC would plan to warehouse Experience Data tables and formulate industry experience benchmarks, as directed by the new working group. Such information would be shared with the states to the extent necessary for regulatory purposes.
  • In addition to the collection of company experience data, the SVL and Valuation require each insurance company to file a PBR Actuarial Report directly with such company's lead domiciliary state regulator. This report (as authorized under SVL Section 14B(3)), would be shared with, and maintained by, the NAIC. The NAIC's professional financial and actuarial staff will provide assistance to the states in ensuring that companies are complying with the new PBR reserving requirements through the PBR Valuation Analysis Working Group. This process is currently recommended under the PBR Implementation Plan, and the Valuation Manual should be amended correspondingly.
  • Both the company experience data collected by the statistical agent(s) and the PBR
    Actuarial Report collected by the states are considered to be confidential information under the SVL that may be shared with the states and the NAIC. The NAIC and the state regulators will need access to Experience Data to validate insurance company model experience assumptions and to perform other regulatory functions. The new working group will determine requirements around state access to confidential company experience data in consultation with the NAIC Legal Division.
  • In order to ensure the confidentiality of the information provided to the NAIC by states or the statistical agent, and to ensure state access to appropriate information, it will be necessary for the NAIC to implement a confidentiality framework by entering into information sharing and confidentiality agreements with the contracting states and the selected statistical agent(s). The contracting states agreements with the statistical agent will need to allow for NAIC warehousing and state and NAIC data access under that confidentiality framework.

Key Decision Points for the Task Force to Address

Set forth below are the "Key Decision Points in the Proposed Framework" that Mr. Schlep and Mr. Bruning described in their memo.

  • Should the New York/Kansas pilot program be kept in place and expanded until the operative date of the Valuation Manual and should an industry allocation formula be developed for the pilot program?
  • The states will collectively (through the NAIC committee process) designate three to five states to collect data on behalf of all of the states. Is this a viable approach?
  • The designated states will contract with a single statistical agent to collect industry experience data for a specific data set on a national basis. The NAIC would create the new working group to make a recommendation on the statistical agent(s) to be used based on pre-defined criteria.
  • The new working group will also make a recommendation on an allocation formula across the insurance industry for the payment of the statistical agent expenses. This payment will need to be included in the regulation or bulletin issued by all states to require submission of company experience data. Are there concerns with the ability to require this payment?
  • The NAIC will warehouse confidential information collected by the states and the statistical agent, and share it with the states. It will be necessary for the NAIC to implement a confidentiality framework to protect this information.
  • In order to document these key decisions, it will be necessary to amend the Valuation Manual to reflect the statistical agent process.

At the end of the discussion, the Task Force members voted unanimously to publish Mr. Schelp's and Mr. Bruning's statistical agent framework memo for written comments, which are due by May 15, 2014.

Life Actuarial (A) Task Force Developments

The Life Actuarial (A) Task Force ("LATF") met on March 27 and March 28, 2014. During the meetings, LATF members adopted the American Academy of Actuaries' Appendix II spread tables under VM-20—Requirements for Principle-Based Reserves for Life Products, as of September 30, 2013. New spread tables, as of December 31, 2014, are expected to be exposed during the month of April. The spread tables are intended to be used in connection with Section 8D of Actuarial Guideline XXXVIII—The Application of the Valuation of Life Insurance Policies Model Regulation. Section 8D applies to policies and certificates (1) issued on and after July 1, 2005, (2) issued prior to January 1, 2013 and (3) in force on December 31, 2012 or on any valuation date thereafter. LATF is working to develop an annual updating process for such tables without amending VM-20.

LATF also adopted a VM-20 amendment proposal permitting a "direct iteration method" as an alternative approach to calculate the deterministic reserve. Finally, LATF adopted a VM-20 amendment proposal to exempt industrial life from PBR.

PBR Impact on Small Companies

During the PBR Implementation Task Force's February 6, 2014 conference call, Mr. John Bruins of the American Council of Life Insurers ("ACLI") stated that the current product group exclusion tests in the Valuation Manual may need "a fair amount of work." In particular, he said that an issue has emerged from the political process (for NAIC-member jurisdictions to adopt PBR-related legislation) regarding the impact of such adoption on small companies. The ACLI has proposed a company-focused PBR "exclusion" where, in situations of "limited risk," the insurance company should "be able to get out of doing a lot of work – without doing a lot of work." The ACLI has a near-complete proposal that would make about 9% to 10% of business written excluded from PBR based on the size of the company/group and a few risk profile items (e.g., capitalization and book of business).

For any company meeting the required criteria (to be documented in the Valuation Manual), the ACLI recommends that the company should certify that such criteria are met and then use the formulaic approach for calculating reserves. Although this would eliminate the deterministic test, stochastic calculations and various documentation requirements, companies would still have to perform deficiency reserve calculations and submit experience data if the company is a significant player in a product line. Mr. Bruins asked the PBR Implementation Task Force to direct the LATF that a small company exclusion is "a reasonable thing to do" and then allow LATF to work out the details of such exclusion.

At this point in the call, Superintendent Torti stated that he supports a small company exclusion, with appropriate consideration of risk. Commissioner McPeak said that she would like to see a complete proposal from the regulatory actuaries, but is not "philosophically opposed" to a small company exclusion. She concluded the discussion by noting the Task Force's openness to the concept of a small company exclusion and asked LATF to evaluate the issue and to make a recommendation to the PBR Implementation Task Force.


1 Members of the Principle-Based Reserve Implementation (EX) Task Force are: Joseph Torti III, Co-Chair (RI); Julie Mix McPeak, Co-Chair (TN); Jim L. Ridling (AL); Dave Jones (CA); Thomas B. Leonardi (CT); Kevin M. McCarty (FL); Nick Gerhart (IA); Sandy Praeger (KS); John M. Huff (MO); Benjamin M. Lawsky (NY); Mary Taylor (OH); Julia Rathgeber (TX); Todd E. Kiser (UT); Susan L. Donegan (VT); and Jacqueline K. Cunningham (VA).

2 Available at: http://www.stroock.com/SiteFiles/Pub1400.pdf.

3 The Supplemental Consultant's Report recommends that the Task Force select the following as "Primary Assets": (1) cash and (2) securities listed by the Securities Valuation Office (the "SVO"), including those deemed exempt from filing as defined by the SVO's Purposes and Procedures Manual and qualifying as admitted assets. It also suggests that the Task Force allow clean, irrevocable, unconditional and "evergreen" letters of credit that meet the requirements of Section 10.A.(3) of the Model Credit for Reinsurance Regulation to be used as a "Primary Asset." However, such letters of credit should be used only for years subsequent to the year of inception of the financing transaction and only so long as such letters of credit in the aggregate comprise no more than 10% of the insurer's total Primary Asset Level.

4 See Exhibit D of the Supplemental Consultant's Report.

For More Information

William D. Latza

Bernhardt Nadell

Vincent Laurenzano

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions