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New York Life raises flag on potential reserve shortfall under PBR

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New York Life raises flag on potential reserve shortfall under PBR

A majorinsurer has stepped forward to express concerns with reserving methods containedwithin a new life insurance reserving framework expected to be implemented at thebeginning of 2017.

New YorkLife wants to consider establishing a minimum reserve level, especially for certainproducts, for fear that some companies might be underfunded when claims come due.

The NAIC-establishedregulatory reserving method, referred to as principle-based reserving, has beenin the works for at least a decade and provisionally met its minimum to become operational Jan.1, 2017, pending a review by the NAIC into whether the laws enacted in 43 statesso far pass muster. Currently, the NAIC is looking at an outcomes-based approachto evaluate whether a minimum of 42 state laws can be deemed substantially similarto the NAIC's revised model StandardValuation Law.

PBR changesthe system for calculating policy reserves, especially for complex life insuranceproducts, so they can be better tailored by insurers to the risks assumed, lifeinsurers say.

However,New York Life Insurance Co.is calling now for revisions to a reserve calculation for term life products, amongother things.

The currentterm net premium reserve formula under PBR has shortcomings that allow certain profitsinto the calculation that could reduce statutory reserves when they are most needed,to fund death claims for term life, the company said.

"Asthe model based calculations within PBR increase judgment in setting reserves, companiesmay in some cases be tempted to adjust modeling assumptions to reduce reserves,despite potential long-run risks to solvency. The temptation will be greatest forthose products where consumer demand is highly sensitive to price. Term life providesa good example," New York Life said in a March 28 paper on PBR implementation.

The paperevaluates data to show perceived shortcomings in the net premium reserve formulaand to suggest corrections in the perceived distortions.

New YorkLife executives wrote in an April 25 letterto NAIC Life Actuarial Task Force Chair Mike Boerner that they are "acutelyconcerned about the use of post-level term profits to reduce reserves during thelevel premium period."

Theyexplain that when these profits are permitted, reserve patterns show a lack of pre-fundingfor death claims when expected claims are highest and pre-funding is most needed.Insurers, they stated, should not be permitted to reduce their statutory reservesbased on an assumption of profits after the level premium period because such profitswill become increasingly unlikely over time. Consumers will instead become moreefficient in their decisions about the costs and benefits of term products as technologyadvances and they gain insight into their health situation and the status of theirterm policies, according to New York Life.

New YorkLife, which has previouslyvoiced concern to regulators about reserve levels in the life insurance industrythrough practices of ceding reserves through captive reinsurance transactions, warned that some companiesmight see higher reserves as a lost opportunity. Reserves cannot be used as readycapital to deploy in the capital markets where many stock life insurers participate.

"Thesecompanies may seek to set reserves no higher than the required formula-based minimum,"the paper stated.

New YorkLife wants regulators to design guardrails, especially for the early years of PBR,that will "serve as a strong check against the risks of unusual or unreliablemodeling results, or overly aggressive approaches to the model-based calculations,until companies and regulators have gained experience and have increased confidencein the modeling."

"Ifdesigned correctly, it will ensure that there is a reasonable minimum reserve inall circumstances," the March paper stated.

On arecent regulatory call, an American Council of Life Insurers actuary said he thinksthere is not enough time to properly analyze the New York Life proposal for theinitial implementation of the valuation manual for PBR, and that any proposed changesshould be considered for implementation only in year two.

New YorkLife wrote that it recognizes some insurers fear that too much emphasis on the netpremium reserve might push insurers back to the old system of formulaic reservesthat they felt were too conservative, sparking the desire for PBR in the first place.Reliance on the net premium reserve "could take the 'P' and the 'B' out ofPBR," the mutual insurer acknowledged.

But,it countered, "by the same token, there is also a risk of a net premium reservethat is too low to provide a meaningful guardrail. … Put another way, an appropriatenet premium reserve can ensure that a company cannot take the 'R' out of PBR."

Insurersdeclined to speak publicly about New York Life's proposal but fretted about themutual throwing sand in the gears of PBR at the eleventh hour or just shrugged offthe concerns.

The Florida Office of Insurance Regulation, whoseactuary sits on the Life Actuarial Task Force, said it is supportive of continuedevaluation of the net premium reserve methodology in order to create "a robustformulaic floor."

"New York Life has proposed one possible alternativeto the current methodology which deserves due consideration. … LATF will considerthe New York Life proposal along with other methodologies and is working diligentlyto contemplate and implement appropriate changes to the Valuation Manual prior to[Jan. 1, 2017]," spokeswoman Amy Bogner stated.

Regulatorsare weighing the proposal and will be discussing it on future conference calls."I think any term NPR adjustments can be in place for 2018, but we will needto discuss whether they can apply to 2017 issues for the 2018 valuation," Boernersaid in an email.

AlthoughNew York Life believes changes to the formula should be made as soon as possible,it allowed in its letter to Boerner that it is "sensitive to the concerns thathave been raised by some regulators and interested parties," and willing tosupport deferring the effective date of any net premium reserve modifications untilJan. 1, 2018. But, it said, work on the issue should be underway without delay.

New YorkLife also outlined the need for other changes that life insurers and regulatorsshould tackle as they ramp up to PBR implementation, including various other modelingassumptions. However, it stated that ensuring that a reasonable net premium reserveis in place is an essential first step.

"Inthe meantime, they can sleep soundly knowing that there is a reasonable minimumreserve that will be required in all circumstances," New York Life said.