New York-licensed insurers that write life and annuity products should consider possible balance-sheet implications for in-force variable business — including the ability to establish certain reserves over five years — arising from newly proposed regulatory amendments on principle-based reserving (PBR), available here. The proposal, published on Dec. 30, 2020, would amend the Department of Financial Services' (DFS) existing regulation on PBR (11 NYCRR 103, Insurance Reg. 213) and remains open for public comment until March 1.
The proposed amendments incorporate the current valuation manual (VM) published by the National Association of Insurance Commissioners (NAIC) as well as recent NAIC Actuarial Guidelines relating to PBR. While the DFS proposal does address reserves for newly written products, some of the most notable effects of the amendments could apply to legacy business. Under the proposal, for the following types of products that were issued prior to Jan. 1, 2020, reserving requirements would be as described below. These requirements would be imposed on all valuations on or after Dec. 31, 2020 (amended from the current Jan. 1, 2020 threshold date).
- Variable deferred annuities
- Variable immediate annuities
- Individual and group annuities with guarantees similar to guaranteed minimum death benefits (GMDBs) and variable annuity guaranteed living benefits (VAGLBs)
- A newly added category of “hybrid” annuities (an annuity contract with an investment option where the rate of return is based on an index, such as the S&P 500, and for which the return may be less than zero)
- All other insurance policies or annuity contracts that contain guarantees similar in nature to GMDBs or VAGLBs, even if the insurer does not offer the mutual funds or variable funds to which these guarantees relate
Under the amended regulation, as in the current version, the minimum reserve is the greater of that determined using existing DFS methodology (set forth in Regulation 213) and the reserve determined in accordance with the VM. Under the proposed amendment to Regulation 213, any excess of such minimum over the minimum reserves determined in accordance with the 2017 version of Actuarial Guideline XLIII may be phased in over five years, with one-fifth of the excess amount required to be posted by Dec. 31, 2020, another one-fifth by Dec. 31, 2021, and so on until Dec. 31, 2024, by which time the entire excess reserve must be established. (Under the current regulation, the excess over the greater of such AG XLIII amount and the VM amount could be phased in over three years.)
For those insurers that do not elect to apply the optional phase-in reserving, and for all valuations after the phase-in period if elected, the minimum aggregate reserve is the greater of (i) the sum of DFS methodologies for in-force (issued pre-Jan. 1, 2020) and new products and (ii) the minimum reserve calculated in accordance with the VM prior to reflecting any reinsurance ceded.
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