American Academy of Actuaries Annual Meeting and Public ... · Static Laws vs. Evolving Environment New products and features emerged that caused controversy or required special interpretations

American Academy of Actuaries Annual Meeting and Public Policy Forum

November 13–14, 2014

Copyright © 2014 by the American Academy of Actuaries. All Rights Reserved.


Is Nonforfeiture Ready for a Change? Issues and Concerns


Speakers

• Moderator: • John MacBain, MAAA, FSA

• Immediate Past Chairperson, Nonforfeiture Modernization Work Group

• Panelists: • John Bruins, MAAA, FSA

• ACLI • Brenda Cude, PhD

• University of Georgia • Tomasz Serbinowski, MAAA, FSA

• Utah State Insurance Department


An Academy Perspective

John MacBain, MAAA, FSA

Immediate Past Chairperson, Academy Nonforfeiture Modernization Work Group


HISTORY OF NONFORFEITURE MANDATES

Original concept of nonforfeiture values credited to Elizur Wright (MA)- 1860’s Concept of equity between terminating/persisting policyholders introduced in NAIC’s

1941 Guertin Committee Report (Comm. to Study NF & Related Matters) Minimum NF values should be established on such a basis that:

Continuing p/h’s not unduly penalized by providing excessive values to those who terminate, and

Withdrawing p/h’s should be given largest value consistent with (a) Guertin essentially concluded that an asset share minimum NF value was most

appropriate For practical reasons, the group ultimately proposed an adjusted premium formulaic

approach that approximated the asset share values for non-par WL insurance issued by stock companies

Prescribed minimum values are formulaic and “product silo” driven

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HISTORY OF NONFORFEITURE MANDATES (Cont’d)

Approach became the basis for the 1942 Standard Nonforfeiture Law for Life Insurance (SNFL)

1942 Law has remained in effect with little change (except for mortality table and a number of Actuarial Guideline interpretations) to today

Standard Nonforfeiture Law for Individual Deferred Annuities adopted in 1977

SOA 1975 Unruh Committee next weighed in Essentially recommended that the life SNFL remain the minimum NF value

basis but should be improved 1996 Report of the SOA Task Force on Life Nonforfeiture set out certain

principles for NF mandate reform and solicited SOA and AAA actuarial input

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HISTORY OF NONFORFEITURE

MANDATES (Cont’d)

August 2011 Report of the Academy Nonforfeiture Improvement WG includes many of the principles of the 1996 SOA Report in its proposed approach for reform

Basic concepts contained in Academy NFMWG proposal for NF reform: a) NF mandates should provide for “in kind” NF benefits; cash surrender

benefits need not be mandated (a public policy issue) b) Mandated NF benefits should be based on the pre-funded portion of the

risks assumed by the company as of the time funding of the risk ceases c) NF benefit mandates should not be “product silo” based but risk based d) NF mandates should provide specific guidance as to the methodology and

general guidance as to the establishment of assumptions e) The NF mandate methodology should be the same for life insurance and

annuities f) Improved p/h disclosure and substantive regulatory feedback loop making

more use of today’s information technology capabilities

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J O H N B R U I N S , M A A A , F S A V P A N D S E N I O R A C T U A R Y

A C L I

Nonforfeiture Modernization: A View from Industry

Disclaimer

• ACLI Policy ACLI supports the NAIC Model Standard Nonforfeiture Law as amended in 2012, and is not actively seeking changes at this time

• Comments today are my own, are not intended to represent ACLI nor any of ACLI’s member companies.

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Considerations of Timing

• While some concerns have been raised about the current situation, neither the concerns nor the solutions, are uniformly agreed to.

• Industry is currently undergoing several major projects utilizing significant resources, and leaving limited resources to consider additional Issues for change o PBR o New CSO tables o ORSA o SIFI o Global capital standards

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Considerations for Change

• NF affects competitive position – gaining agreement on change will be a difficult process

• External influences: external competition, tax, other regulatory changes.

• Will change be evolutionary, or revolutionary?

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Planning for Change

• In order to gain agreement on details of change, discussion needs to begin with policy issues.

• Key conceptual issues include Balance between terminating and continuing

policyholders – what value is provided to each? What impact does either have on the other?

How can consumer choice be improved? What is the role of disclosure?

• Consideration of tax impacts Impact of taxation on consumers Impact of taxation on companies

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B R E N DA J . C UDE, PHD, PRO F ES S O R

UN I V ERS I T Y O F G EO RG I A DEPA RT M EN T O F F I N A N C I A L P LA N N I N G ,

HO US I N G A N D CO N S UM ER ECO N O M I C S N A I C CO N S UM ER R EP R ES EN TAT I V E

A Consumer Perspective

Who should care about this issue?

Consumers? Financial advisors, especially Certified Financial

Planners and those who follow a fiduciary standard?

Consumer advocates? Academics in insurance, insurance law, financial

planning? Regulators?

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Why would consumers care?

Will the price of insurance products be higher or lower? Will the price be lower? For all products?

Will the value of insurance products be higher? Even if that's true, how do we communicate that to

consumers?

Better and more timely consumer information

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The challenges…

Consumers’ insurance literacy is generally very low. Insurance products continue to increase in

complexity making it difficult for even insurance literate consumers (and their advisors) to keep up.

Explanations about the benefits of nonforfeiture modernization tends to be framed as the need for a risk-based approach to nonforfeiture or by referring to lapse-supported products.

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The challenges…

Consumers tend to pay more attention to product costs than product benefits.

Consumers care more for their present self than their future self.

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TOMASZ SERBINOWSKI, MAAA, FSA ACTUARY

UTAH STATE INSURANCE DEPARTMENT

A Regulator’s Perspective

Regulator’s Role

• Regulators are charged with the review of compliance of life and annuity products with the existing NF laws that

• Were written in a different era for simpler products o Fixed premiums o Mostly guaranteed benefits

• Assumed little or no underwriting

o Provided benefits in case of non-payment of required premiums

• Application of these laws today presents a challenge

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Static Laws vs. Evolving Environment

New products and features emerged that caused controversy or required special interpretations Life insurance with current and guaranteed premiums Life insurance with initial period of level premiums ROP term Universal life Secondary guarantees Annuities with fixed maturity dates Index annuities Annuities with GLWB CDAs

Annuity NF law was written for front loaded products and became problematic even before it was formally adopted (hence the need for AG III)

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Formulaic Laws Not Grounded In Principles

Lack of clear and coherent underlying principles results in an ad hoc regulatory approaches Sometimes developed at State level Sometimes in form of desk drawer rules Sometimes applied in a haphazard fashion Interpretations may depend on the reviewer

IIPRC and development of the uniform standards resulted in some limited success in providing uniform interpretation of the NF law ROP term Bonus annuities

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Availability of Resources

Lack of clarity and diverse interpretation make it difficult for regulators to rely on “self-certification”

Review of compliance with NF requirements can be challenging

and time consuming (e.g., smoothness test for UL)

Some departments do not have actuaries on staff Some States don’t have the ability to charge insurers for the

cost of the product reviews Without uniform interpretation of the law, use of

consultants does not guarantee consistency

In recent years, IIPRC took some workload away from the participating States

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Are We There Yet?

Despite all of the problems with the current law, the work on the NF law reform has continued for decades. Why?

Any change would have significant implications for the industry affecting different stakeholders differently

Better the devil you know than the devil you don’t know Significant changes mean business disruptions and

uncertainty Unclear future of cash values and associated tax implications

NF reform that disadvantages a segment of the industry will face resistance (think back to AG XYZ)

Bottom line: We need a crisis for the NF reform to happen

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Impact of NF Reform on the States

Resources are probably NOT driving decisions regarding whether to undertake reforms Work on the reform is at such preliminary stage that no

assessment of cost or impact on the insurance departments has been made or is even possible

If the new NF approach becomes more “principled” and uniformly interpreted, it may be feasible to rely on self-certifications

Review of NF compliance could become part of the triennial financial examinations (cost would be borne by the industry)

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Innovation

Product design is sometimes driven by tax, reserve, and nonforfeiture requirements rather than genuine consumer needs Example: Prior to the 2003 amendments to the annuity NF law,

almost all deferred annuities issued were flexible premium designs (even if the applicant indicated desire to pay single premium on the application). After the 2003 amendments, single premium annuities reemerged.

New products that strain the rules highlight the need for reform Question: Is it ever possible to write a law (or set of rules) that over time will not become obsolete? If not, do we need a NF manual?

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Documents

American Academy of Actuaries Annual Meeting and Public ... · Static Laws vs. Evolving Environment New products and features emerged that caused controversy or required special interpretations