Updates to Reserving Requirements for UL with Secondary Guarantees Possible in 2013

The introduction of Universal Life products with secondary guarantees has dramatically altered the landscape for non-traditional, "unbundled" product structures. Aided in no small part by the continued low interest rate environment, ULSG products are thriving compared to their "value-builder" predecessors, and remain popular because of their ability to provide purchasers permanent, flexible insurance coverage at a minimal cost. The debate over how to appropriately reserve for these products, however, remains unsettled, particularly as it relates to products with multiple secondary guarantees.

At issue: some insurers have created ULSG designs which maintain multiple "shadow" accounts related to secondary guarantees, with varying risk-charge, interest and expense charge rates -- and which are at higher or lower levels depending on whether the shadow account balance is positive or negative. Furthermore, the shadow accounts exist only to support the secondary guarantees, and do not represent values accessible to the policyholder. While the existence of these different levels of accounting is believed to fit within a reasonable interpretation of the cited regulations, in the eyes of some regulators and industry professionals, these constructs do not allow for -- by design, critics suggest -- the development of an adequate reserve liability.

As it currently stands, the Joint Working Group established by the NAIC in 2011 to look into these issues is pursuing enhancements to Actuarial Guideline 38, which applies to the reserving of this product type -- including imposing separate requirements for inforce business and prospective business, issued on or after January 1, 2013 (the expected effective date of the changes). It is believed that these requirements will impact all ULSG designs, not just those with multiple secondary guarantees, at least as far as regulatory compliance is concerned. At this writing, the Joint Working Group is reviewing comments in response to exposure drafts of these proposed updates.

GBC will continue to monitor developments in this area, and advise clients as changes to the regulations/guidelines (and their impact) comes into focus.

Below are links to articles which expand on these issues, and served as a resource for the above synopsis:

http://www.naic.org/cipr_topics/topic_actuarial_guideline_xxxviii_ag_38.htm http://www.naic.org/cipr_newsletter_archive/vol2_ag38.htm

Posted: August 27, 2012