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ROLL CALL Iowa, Chair Nebraska California New Jersey Connecticut New York Michigan Ohio Missouri
AGENDA
1. Finalize Report to the Financial Condition (E ) Committee—Commissioner Nick Gerhart (IA)
• Exposed report Pages 3-5 • Report as revised with non-substantive changes Page 7-11 • Comment Letters
o Connecticut non-substantive changes Page 13-17 o Connecticut Page 19 o Northwestern Mutual Page 21 o ACLI Page 23-29 o New York Life Page 31-33 o New York DFS Page 35-36 o AAA Page 37-42
2. Discuss Any Other Matters Brought Before the Working Group— Commissioner Nick Gerhart (IA) 3. Adjournment
Report to the Financial Condition (E) Committee Variable Annuities Issues (E) Working Group—At the 2015 Spring National Meeting, the Variable Annuities Issues (E) Working Group was formed and given the following charge:
• Oversee the NAIC’s efforts to study and address, as appropriate, regulatory issues resulting in variable annuity captive reinsurance transactions.—Essential
Simultaneous with the formation and charge given to this Working Group, the NAIC Executive Committee and Internal Administration (EX1) Subcommittee established resources to allow the NAIC to engage a consultant to assist the Working Group in meeting this charge. Oliver Wyman was engaged by the NAIC to fulfill this role, and in September, delivered a report of observations and recommendations which was discussed during an interim meeting of the Variable Annuities Issues (E) Working Group on Sept. 10. During that meeting, the Working Group and members of the industry provided feedback on the recommendations which was used to develop this report. The report has since been discussed and adopted. The Financial Condition (E) Committee is asked to adopt this report, including adoption of the Variable Annuities-Framework for Change, in concept (Exhibit 1) and the charges for NAIC groups (Exhibit 2). Variable Annuities-Framework for Change • The Variable Annuities Framework for Change (Framework) is intended to address concerns that have led to
the industry’s development and utilization of captive reinsurance transactions with regard to variable annuity business. In general, the general conclusion is that the utilization of these transactions has been driven by the existing statutory requirements which are generally considered to be non-economic, or structured in a manner that does not promote strong risk management.
• Unlike the NAICs XXX/AXXX Reinsurance Framework, which was adopted to apply prospectively, this framework for changes is intended to make changes that apply retrospectively. This is because XXX/AXXX products are both subject to life insurance non-forfeiture and valuation laws whose valuation and non-forfeiture interest rates change on a calendar issue year by calendar issue year basis and are locked in at policy issue and remain locked in for the life of the contract. In contrast, variable annuities with and without guaranteed benefits are exempt from the annuity non-forfeiture law. In addition, the reserve valuations for variable annuities with and without guarantees are defined by AG43 which is based on a stochastic methodology and are not based on a calendar year valuation interest rates that are locked in at issue, rather these rates are generated and are unlocked at each valuation. The AG43 valuation methodology is currently applied retroactively back to January 1, 1981.
• The Working Group was supportive of the numerous changes you see listed in the Framework for two reasons:
1) to encourage strong risk management within the insurance company; 2) to remove the need to reinsure variable annuity business to captive reinsurers. With respect to the later, the Working Group would recommend that once these changes, or the majority of these changes are effective (anticipated effective date of 1/1/17), domestic regulators of insurers ceding variable annuity to captive reinsurers should request their company to recapture the business and for the group to dissolve the captive reinsurer.
• Unlike XXX/AXXX, this Framework impacts all insurers writing the specified line of business, and is not
implemented through specific requirements on the reinsurance contract, but rather on the requirements of the direct writer of the contract. In summary, those changes are to the following areas:
o Actuarial Guideline 43; o Risk-Based Capital Requirements (C3 Phase II); o Allowing hedge accounting treatment under SSAP No. 86 for certain limited derivative contracts
that otherwise do not meet hedge effectiveness requirements; o Allowing states a consistent mechanism to utilize hedges without any size limitations that may
Exhibit 1— Variable Annuities-Framework for Change 1. The Framework will result in changes to AG 43 that will be designed to result in a less non-economic reserve
requirement for variable annuities. The changes are expected to include the following: a. Development of calibration criteria for the Interest Rate (USD and possibly international) scenario
generation with a market-sensitive mean reversion asymptote – this will align the interest scenarios with broader efforts underway at the NAIC level. Potential to integrate the Interest Rate calibration criteria with Equity Return calibration criteria and to add a volatility calibration prescription;
b. In the Standard Scenario calculation: Introduce more granular benefit-specific prescriptions of policyholder behavior assumptions. Separately, the prescribed set of assumptions is to be calibrated to adverse, yet plausible levels informed by credible industry experience;
c. Additionally, the Standard Scenario calculation will be conducted on a portfolio as opposed to seriatim basis with the existing seriatim Standard Scenario calculation made available as a disclosure item;
d. Hedging reflection in the Adjusted CTE 70 calculation to allow for the reduction of gross market risk positions for hedge instruments prior to expiration of existing hedges rather than a simple hold-to-maturity treatment;
e. Increased regulator only disclosure designed to ensure regulators understand the potential impact under different assumptions;
f. The addition of a feedback loop that continuously reviews granular industry data as a means to modify the AG in the future to ensure the framework continues to operate as redesigned. This will require additional granular data to be submitted to the NAIC and analyzed and presented to a group of regulators.
2. The Framework will result in changes to the Life Risk Based Capital formula that includes material expected
changes to C3 Phase II. Similar to changes to AG 43, these will be designed to result in less non-economic capital requirements on variable annuities. The changes that are expected include the following:
a. Complete elimination of the standard scenario; b. Alignment of the total asset requirement (TAR) and the AG 43 reserve requirements through use of the
AG43 stochastic CTE calculation as the basis for a difference calculation for the direct determination of the C3 charge and the indirect determination to Total Assets Required as the sum of reserves plus the newly defined C3 charge. The C3 charge will be the difference between two AG43 CTE calculations at different confidence levels. The individual CTE calculations will apply an effectiveness factor for the reflection of a CDHS that is calibrated to be consistent with the error factors of the C3 Phase 2 framework. The confidence levels will be determined in the calibration phase during a forthcoming Quantitative Impact Study. The resulting difference will be appropriately tax effected and scaled to arrive at the C3 charge. This use of the AG43 calculation will eliminate the need for a separate C3 Phase 2 calculation;
c. The addition of a feedback loop that continuously reviews granular industry data as a means to modify the C3 Phase II in the future to ensure the framework continues to operate as redesigned. This will require additional granular data to be submitted to the NAIC and analyzed and presented to a group of regulators.
3. The Framework will result in changes to SSAP No. 86 that are designed to reduce the accounting mismatch that
exists between the value of the hedge and the value of the hedged item (the variable annuity liability) so that as market conditions change, gains or losses that are not consistent with the economic value of the hedges are not created within the financial statements. In addition, requirements for increased public disclosure on variable annuity risks will be added to the SSAPs, and data captured in the notes to the financial statements.
4. The Framework will result in the development of narrowly defined statutory language that states may use in removing the limitations that may exist within their investment statutes that may otherwise limit the extent of hedges an insurer may use in their risk management.
C-3 Phase II/AG 43 (E/A) Subgroup of the Life Risk Based Capital Working Group • The joint C-3 Phase II/AG 43 (E/A) Subgroup of the Life Risk-Based Capital (E) Working Group and Life
Actuarial (A) Task Force will develop and recommend changes to C3 Phase 2 and AG 43 for 2017 adoption that implement the Variable Annuities Framework. —Essential
Statutory Accounting Principles (E) Working Group • Develop and adopt changes to SSAP No. 86-Derivatives, with an effective date of January 1, 2017 or earlier,
which allow hedge accounting treatment under SSAP No. 86 for certain limited derivative contracts (e.g. interest rate hedges with counterintuitive effects) that otherwise do not meet hedge effectiveness requirements. In adopting such an allowance, consider if the requirement to meet hedge effectiveness can be replaced by some other information that demonstrates strong risk management is in place over the identified hedges. —Essential
• Finalize public disclosure on variable annuity risks as developed by the Variable Annuity Issues (E) Working Group. —Essential
Blanks (E) Working Group • Based upon the disclosure developed by the Variable Annuities Issues (E) Working Group on variable
annuities, finalize a data captured note with an effective date of December 31, 2017 or earlier —Essential Variable Annuities Issues (E) Working Group • Develop a model guideline in 2016 that represents narrowly defined statutory language that states may use in
removing the limitations that may exist within their investment statutes that may otherwise limit the extent of hedges an insurer may use in their risk management. —Essential
• Redesign the annual statement disclosures on variable annuities to add more meaningful information about the valuation of the guaranteed liabilities with an effective date of December 31, 2017 or earlier. The objective of the improved disclosure should be to provide all stakeholders (e.g., regulators, consumers, and investors) with more transparency and additional insights into how the contractual obligations could change over time as well as the insurance company’s ability to both manage those obligations. The disclosure information must be provided in a prescribed, easy-to-understand, format including key risk driver assumptions (e.g., interest rates, lapse rates, and benefit utilization) and the impact of “shocks” to the key risk driver assumptions (e.g., benefit utilization becomes more efficient, interest rates drop by 1%, etc.). Upon development, refer to the Statutory Accounting Principles (E) Working Group and Blanks (E) Working Group for finalization and incorporation into NAIC publications. —Essential
***********
G:\FRS\DATA\Staff\DJD\Variable Annuities\Calls & Meetings\2015\Oct 2\Variable Annuities-Framework for Changes.docx
Report to the Financial Condition (E) Committee Variable Annuities Issues (E) Working Group—At the 2015 Spring National Meeting, the Variable Annuities Issues (E) Working Group was formed and given the following charge:
• Oversee the NAIC’s efforts to study and address, as appropriate, regulatory issues resulting in variable annuity captive reinsurance transactions.—Essential
Simultaneous with the formation and charge given to this Working Group, the NAIC Executive Committee and Internal Administration (EX1) Subcommittee established resources to allow the NAIC to engage a consultant to assist the Working Group in meeting this charge. Oliver Wyman was engaged by the NAIC to fulfill this role, and in September, delivered a report of observations and recommendations which was discussed during an interim meeting of the Variable Annuities Issues (E) Working Group on Sept. 10. During that meeting, the Working Group and members of the industry provided feedback on the recommendations which was used to develop this report. The report has since been discussed and adopted. The Financial Condition (E) Committee is asked to adopt this report, including adoption of the Variable Annuities-Framework for Change, in concept (Exhibit 1) and the charges for NAIC groups (Exhibit 2). Variable Annuities-Framework for Change • The Variable Annuities Framework for Change (Framework) is intended to address concerns that have led to
the industry’s development and utilization of captive reinsurance transactions with regard to variable annuity business. In general, Tthe general conclusion is that the utilization of these transactions has been driven by aspects of the existing statutory requirements which areare generally considered to be be introduce substantial non-economic balance sheet volatility and/or , orare structured in a manner that does not promote strong risk management, and which introduce volatile and incongruous changes in reserves and RBC requirements. The Framework is intended to demonstrate the NAIC commitment to make changes in the areas identified. The Framework uses the phrase “will result in change” in a number of areas to demonstrate the commitment to change. The commitment is necessary as the NAIC EX1 Subcommittee is expected to receive a request for funding to retain a consultant to help implement the types of changes that are being commitment to.
• Unlike the NAICs XXX/AXXX Reinsurance Framework, which was adopted to apply prospectively, this framework Framework for changes Change is intended to make changes that apply retrospectively consistent with the fact that the AG43 valuation methodology is currently applied retroactively to January 1, 1981. This is because XXX term and /AXXX UL products are both subject to life insurance non-forfeiture and valuation laws whose valuation and non-forfeiture interest rates change on a calendar issue year by calendar issue year basis and are locked in at policy issue and remain locked in for the life of the contract. In contrast, variable annuities with and without guaranteed benefits are exempt from the annuity non-forfeiture law. In addition, the reserve valuations for variable annuities with and without guarantees are defined by AG43 which is partly based on a stochastic methodology and are is not based on a calendar year valuation interest rates that are locked in at issue,. Rrather, these rates are generated and are unlocked at each valuation. The AG43 valuation methodology is currently applied retroactively back to January 1, 1981.
• The Working Group was supportive of the numerous changes you see listed in the Framework for two reasons:
1) to encourage strong risk management within the insurance companiesy; 2) to remove the need to reinsure variable annuity business to captive reinsurers. With respect to the later, the Working Group would recommend that once these changes, or the majority of these changes are effective (anticipated effective date of 1/1/17), domestic regulators of insurers ceding variable annuity to captive reinsurers should request their company to recapture the business and for the group to dissolve the captive reinsurer.
• The determination of the exact changes to the actuarial statutory requirements will be based in large part upon a
quantitative impact study performed by the NAICs consultant, and the decisions reached by the regulators based upon the aggregate (non-company specific data) from this study. Therefore the actuarial listing of items that may be included in the change are NOT definitive, but they are intended to be used as a guide in the likely
direction of the changes to the statutory requirements and they will be used in the design of the of the changes that will be tested in this quantitative impact study. It’s possible that other solutions may be identified during and after the quantitative impact study that could ultimately be incorporated into the final changes to the statutory requirements. Results from the quantitative impact study will need to be reported and consolidated for regulatory review. Design of the study by the consultant will need careful attention with input from individual members of the industry and individual identified regulators so that the work can progress in a timely and efficient manner. The design may include things not initially identified, such as the evaluation of elements related to revenue sharing provisions or potential statutory tax implications.
• Unlike XXX/AXXX, this Framework impacts all insurers writing the specified line of business, and is not
implemented through specific requirements on the reinsurance contract, but rather focuses on the requirements of impacting the direct writer of the contract. In summary, those changes are will be proposed to the following areas:
o Actuarial Guideline 43; o Risk-Based Capital Requirements (C3 Phase II); o Allowing Hhedge accounting treatment under SSAP No. 86 for certain limited derivative contracts
that otherwise do not meet hedge effectiveness requirements; o Allowing states a consistent mechanism to utilize hedges without any size limitations that may
otherwise apply in investment statutes.Narrowly defined statutory language that states may use to remove limitations that may exist within their investment statutes that may otherwise limit the extent to which an insurer may use hedges in its risk management.
Exhibit 1— Variable Annuities-Framework for Change 1. The Framework will result in changes to AG 43 that will be designedhave the potential to result in a less
reduced and less volatile non-economic reserve requirement for variable annuities that is better aligned with the business economics while providing sufficient amounts to cover moderately adverse circumstances. These changes identified and to be tested in the quantitative impact study (QIS) are expected to may include, but are not limited to, the following:
a. Development of calibration criteria for the Interest Rate (USD and possibly international) scenario generation with a market-sensitive mean reversion asymptote – this will align the interest scenarios with broader efforts underway at the NAIC level. Potential to integrate the Interest Rate calibration criteria with Equity Return calibration criteria and to add a volatility calibration prescription;
b. In the Standard Scenario calculation: Introduce more granular benefit-specific prescriptions of policyholder behavior assumptions in the Standard Scenario calculation. Separately, the prescribed set of assumptions is to be calibrated to moderately adverse, yet plausible, levels informed by credible industry experience;
c. Additionally, Calculate the Standard Scenario calculation will be conducted on a portfolio as opposed to seriatim basis with the existing seriatim Standard Scenario calculation made available as a disclosure item;
d. Reflect hHedging reflection in the Adjusted CTE 70 calculation to allow for the reduction of gross market risk positions for hedge instruments prior to expiration of existing hedges rather than a simple hold-to-maturity treatment;
e. Increased regulator only disclosure designed to ensure regulators understand the potential impact under different assumptions;
f. The establishment The addition ofAdd ofEstablish a feedback loop that continuously reviews granular industry data as a basis means to modify the reserve requirements AG in the future to ensure the framework continues to operate as redesigned. This will require additional granular data to be submitted to the NAIC and analyzed and presented to a group of regulators.
2. The Framework will result in changes to the Life Risk Based Capital formula that includes material expected
changes to C3 Phase II. Similar to changes to AG 43, these will be designed to result in less reduced and less volatile non-economic capital requirements on variable annuities that are better aligned with the business economics and statutory reserve calculations while remaining consistent with Risk-Based capital standards. These changes identified and to be tested in a QISthat are expected may include, but are not limited to, the following:
a. Complete Eeliminatione of the standard scenario; b. Alignment of the total asset requirement (TAR) and the AG 43 reserve requirements. This will involve
through use of the AG43 stochastic CTE calculation as the basis for a difference calculation for both (i) the direct determination of the C3 charge and (ii) the indirect determination to Total Assets Required as the sum of reserves plus the newly defined C3 charge. The C3 charge will be the difference between two AG43 CTE calculations at different confidence levels, with the lower CTE calculation anticipated to be subject to a floor equal to the AG43 standard scenario (itself subject to revision). The individual CTE calculations will apply an effectiveness factor for the reflection of a CDHS that is calibrated to be consistent with the error factors of the C3 Phase 2 framework. The confidence levels will be determined in the calibration phase during athe forthcoming Quantitative Impact Study. The resulting difference will be appropriately tax effected and scaled to arrive at the C3 charge. This use of the AG43 calculation will eliminate the need for a separate C3 Phase 2 calculation;
c. The eEstablishment The Aaddition of a feedback loop that continuously reviews granular industry data as a means to modify the C3 Phase II requirements in the future to ensure the framework continues to operate as redesigned. This will require additional granular data to be submitted to the NAIC and analyzed and presented to a group of regulators.
3. The Framework will result in changes to SSAP No. 86 that are would be designed to reduce the accounting
mismatch that exists between the value of the hedge and the value of the hedged item (the variable annuity liability). so thatIt is anticipated that the changes will be constructed such that as market conditions change,
gains or losses that are not inconsistent with the changes in the economic value of the hedges are not created within the financial statements. In addition, requirements for increased public disclosure on variable annuity risks will be considered for added to the SSAPs, and data captured in the notes to the financial statements.
4. The Framework will result in the development of narrowly defined statutory language that states may use in to removing removethe limitations that may exist within their investment statutes that may otherwise limit the extent of to which hedges an insurer may use hedges in their its risk management.
***********
Exhibit 2
Proposed Charges to NAIC Groups
C-3 Phase II/AG 43 (E/A) Subgroup of the Life Risk Based Capital Working Group • The joint C-3 Phase II/AG 43 (E/A) Subgroup of the Life Risk-Based Capital (E) Working Group and Life
Actuarial (A) Task Force will develop and recommend changes to C3 Phase 2 and AG 43 for 2017 adoption that implement the Variable Annuities Framework. —Essential
Variable Annuities Issues (E) Working Group • Develop guidance in 2016 that represents narrowly defined statutory language that states may use in removing
the limitations that may exist within their investment statutes that may otherwise limit the extent to which an insurer may use hedges in its risk management. —Essential
• Redesign the annual statement disclosures applicable to variable annuities to add more meaningful information about the valuation of the guaranteed liabilities with an effective date of December 31, 2017 or earlier. The objective of the improved disclosure should be to provide all stakeholders (e.g., regulators, consumers, and investors) with more transparency and additional insights into how the contractual obligations could change over time as well as the insurance company’s ability to manage those obligations. The disclosure information must be provided in a prescribed, easy-to-understand, format including key risk driver assumptions (e.g., interest rates, lapse rates, and benefit utilization) and the impact of “shocks” to the key risk driver assumptions (e.g., benefit utilization becomes more efficient, interest rates drop by 1%, etc.). Upon development, refer to the Statutory Accounting Principles (E) Working Group and Blanks (E) Working Group for finalization and incorporation into NAIC publications. —Essential
• Evaluate the results of the Variable Annuities Framework Quantitative Impact Study and develop recommendations that will reduce the level and volatility of the non-economic aspect of current reserve and RBC requirements.
Statutory Accounting Principles (E) Working Group • Develop and adopt changes to SSAP No. 86-Derivatives, with an effective date of January 1, 2017 or earlier,
which allow hedge accounting treatment under SSAP No. 86 for certain limited derivative contracts (e.g. interest rate hedges with counterintuitive effects) that otherwise do not meet hedge effectiveness requirements. In adopting such an allowance, consider if the requirement to meet hedge effectiveness can be replaced by some other information that demonstrates strong risk management is in place over the identified hedges. —Essential
• Finalize public disclosure on variable annuity risks as developed by the Variable Annuity Issues (E) Working Group. —Essential
• Consider whether current or future changes to reserves resulting from implementation of the Variable Annuities Framework will be reported in the Annual Statement as a “Change in basis.” —Essential
Report to the Financial Condition (E) Committee Variable Annuities Issues (E) Working Group—At the 2015 Spring National Meeting, the Variable Annuities Issues (E) Working Group was formed and given the following charge:
• Oversee the NAIC’s efforts to study and address, as appropriate, regulatory issues resulting in variable annuity captive reinsurance transactions.—Essential
Simultaneous with the formation and charge given to this Working Group, the NAIC Executive Committee and Internal Administration (EX1) Subcommittee established resources to allow the NAIC to engage a consultant to assist the Working Group in meeting this charge. Oliver Wyman was engaged by the NAIC to fulfill this role, and in September, delivered a report of observations and recommendations which was discussed during an interim meeting of the Variable Annuities Issues (E) Working Group on Sept. 10. During that meeting, the Working Group and members of the industry provided feedback on the recommendations which was used to develop this report. The report has since been discussed and adopted. The Financial Condition (E) Committee is asked to adopt this report, including adoption of the Variable Annuities-Framework for Change, in concept (Exhibit 1) and the charges for NAIC groups (Exhibit 2). Variable Annuities-Framework for Change • The Variable Annuities Framework for Change (Framework) is intended to address concerns that have led to
the industry’s development and utilization of captive reinsurance transactions with regard to variable annuity business. In general, Tthe general conclusion is that the utilization of these transactions has been driven by aspects of the existing statutory requirements which areare generally considered to be introduce substantial non-economic balance sheet volatility and/or , orare structured in a manner that does not promote strong risk management.
• Unlike the NAICs XXX/AXXX Reinsurance Framework, which was adopted to apply prospectively, this framework Framework for changes Change is intended to make changes that apply retrospectively consistent with the fact that the AG43 valuation methodology is currently applied retroactively to January 1, 1981. This is because XXX term and /AXXX UL products are both subject to life insurance non-forfeiture and valuation laws whose valuation and non-forfeiture interest rates change on a calendar issue year by calendar issue year basis and are locked in at policy issue and remain locked in for the life of the contract. In contrast, variable annuities with and without guaranteed benefits are exempt from the annuity non-forfeiture law. In addition, the reserve valuations for variable annuities with and without guarantees are defined by AG43 which is partly based on a stochastic methodology and are is not based on a calendar year valuation interest rates that are locked in at issue,. Rrather, these rates are generated and are unlocked at each valuation. The AG43 valuation methodology is currently applied retroactively back to January 1, 1981.
• The Working Group was supportive of the numerous changes you see listed in the Framework for two reasons:
1) to encourage strong risk management within the insurance companiesy; 2) to remove the need to reinsure variable annuity business to captive reinsurers. With respect to the later, the Working Group would recommend that once these changes, or the majority of these changes are effective (anticipated effective date of 1/1/17), domestic regulators of insurers ceding variable annuity to captive reinsurers should request their company to recapture the business and for the group to dissolve the captive reinsurer.
• Unlike XXX/AXXX, this Framework impacts all insurers writing the specified line of business, and is not
implemented through specific requirements on the reinsurance contract, but rather focuses on the requirements of impacting the direct writer of the contract. In summary, those changes are will be proposed to the following areas:
o Actuarial Guideline 43; o Risk-Based Capital Requirements (C3 Phase II); o Allowing Hhedge accounting treatment under SSAP No. 86 for certain limited derivative contracts
that otherwise do not meet hedge effectiveness requirements;
o Allowing states a consistent mechanism to utilize hedges without any size limitations that may otherwise apply in investment statutes.Narrowly defined statutory language that states may use to remove limitations that may exist within their investment statutes that may otherwise limit the extent to which an insurer may use hedges in its risk management.
Exhibit 1— Variable Annuities-Framework for Change 1. The Framework will result in consider changes to AG 43 that will be designedhave the potential to result in a
less reduced and less volatile non-economic reserve requirement for variable annuities. These changes are expected to may include, but are not limited to, the following:
a. Development of calibration criteria for the Interest Rate (USD and possibly international) scenario generation with a market-sensitive mean reversion asymptote – this will align the interest scenarios with broader efforts underway at the NAIC level. Potential to integrate the Interest Rate calibration criteria with Equity Return calibration criteria and to add a volatility calibration prescription;
b. In the Standard Scenario calculation: Introduce more granular benefit-specific prescriptions of policyholder behavior assumptions in the Standard Scenario calculation. Separately, the prescribed set of assumptions is to be calibrated to adverse, yet plausible, levels informed by credible industry experience;
c. Additionally, Calculate the Standard Scenario calculation will be conducted on a portfolio as opposed to seriatim basis with the existing seriatim Standard Scenario calculation made available as a disclosure item;
d. Reflect hHedging reflection in the Adjusted CTE 70 calculation to allow for the reduction of gross market risk positions for hedge instruments prior to expiration of existing hedges rather than a simple hold-to-maturity treatment;
e. Increased regulator only disclosure designed to ensure regulators understand the potential impact under different assumptions;
f. The addition ofAdd a feedback loop that continuously reviews granular industry data as a means to modify the AG in the future to ensure the framework continues to operate as redesigned. This will require additional granular data to be submitted to the NAIC and analyzed and presented to a group of regulators.
2. The Framework will result in consider changes to the Life Risk Based Capital formula that includes material
expected changes to C3 Phase II. Similar to changes to AG 43, these will be designed to result in less reduced and less volatile non-economic capital requirements on variable annuities. These changes that are expected may include, but are not limited to the following:
a. Complete Eeliminatione of the standard scenario; b. Alignment of the total asset requirement (TAR) and the AG 43 reserve requirements through use of the
AG43 stochastic CTE calculation as the basis for a difference calculation for the direct determination of the C3 charge and the indirect determination to Total Assets Required as the sum of reserves plus the newly defined C3 charge. The C3 charge will be the difference between two AG43 CTE calculations at different confidence levels. The individual CTE calculations will apply an effectiveness factor for the reflection of a CDHS that is calibrated to be consistent with the error factors of the C3 Phase 2 framework. The confidence levels will be determined in the calibration phase during a forthcoming Quantitative Impact Study. The resulting difference will be appropriately tax effected and scaled to arrive at the C3 charge. This use of the AG43 calculation will eliminate the need for a separate C3 Phase 2 calculation;
c. The Aaddition of a feedback loop that continuously reviews granular industry data as a means to modify the C3 Phase II in the future to ensure the framework continues to operate as redesigned. This will require additional granular data to be submitted to the NAIC and analyzed and presented to a group of regulators.
3. The Framework will result in consider changes to SSAP No. 86 that are designed to reduce the accounting
mismatch that exists between the value of the hedge and the value of the hedged item (the variable annuity liability). so thatIt is anticipated that the changes will be constructed such that as market conditions change, gains or losses that are not inconsistent with the changes in the economic value of the hedges are not created within the financial statements. In addition, requirements for increased public disclosure on variable annuity risks will be added to the SSAPs, and data captured in the notes to the financial statements.
4. The Framework will result in consider the development of narrowly defined statutory language that states may use in to removing removethe limitations that may exist within their investment statutes that may otherwise limit the extent of to which hedges an insurer may use hedges in their its risk management.
***********
Exhibit 2
Proposed Charges to NAIC Groups
C-3 Phase II/AG 43 (E/A) Subgroup of the Life Risk Based Capital Working Group • The joint C-3 Phase II/AG 43 (E/A) Subgroup of the Life Risk-Based Capital (E) Working Group and Life
Actuarial (A) Task Force will develop and recommend changes to C3 Phase 2 and AG 43 for 2017 adoption that implement the Variable Annuities Framework. —Essential
Variable Annuities Issues (E) Working Group • Develop guidance in 2016 that represents narrowly defined statutory language that states may use in removing
the limitations that may exist within their investment statutes that may otherwise limit the extent to which an insurer may use hedges in its risk management. —Essential
• Redesign the annual statement disclosures applicable to variable annuities to add more meaningful information about the valuation of the guaranteed liabilities with an effective date of December 31, 2017 or earlier. The objective of the improved disclosure should be to provide all stakeholders (e.g., regulators, consumers, and investors) with more transparency and additional insights into how the contractual obligations could change over time as well as the insurance company’s ability to manage those obligations. The disclosure information must be provided in a prescribed, easy-to-understand, format including key risk driver assumptions (e.g., interest rates, lapse rates, and benefit utilization) and the impact of “shocks” to the key risk driver assumptions (e.g., benefit utilization becomes more efficient, interest rates drop by 1%, etc.). Upon development, refer to the Statutory Accounting Principles (E) Working Group and Blanks (E) Working Group for finalization and incorporation into NAIC publications. —Essential
• Evaluate the results of the Oliver Wyman Impact Study and develop recommendations that will reduce the level and volatility of the non-economic aspect of current reserve and RBC requirements.
Statutory Accounting Principles (E) Working Group • Develop and adopt changes to SSAP No. 86-Derivatives, with an effective date of January 1, 2017 or earlier,
which allow hedge accounting treatment under SSAP No. 86 for certain limited derivative contracts (e.g. interest rate hedges with counterintuitive effects) that otherwise do not meet hedge effectiveness requirements. In adopting such an allowance, consider if the requirement to meet hedge effectiveness can be replaced by some other information that demonstrates strong risk management is in place over the identified hedges. —Essential
• Finalize public disclosure on variable annuity risks as developed by the Variable Annuity Issues (E) Working Group. —Essential
Blanks (E) Working Group • Based upon the disclosure developed by the Variable Annuities Issues (E) Working Group on variable
annuities, finalize a data captured note with an effective date of December 31, 2017 or earlier —Essential
Variable Annuities Issues (E) Working Group • Develop a model guideline in 2016 that represents narrowly defined statutory language that states may use in
removing the limitations that may exist within their investment statutes that may otherwise limit the extent of hedges an insurer may use in their risk management. —Essential
• Redesign the annual statement disclosures on variable annuities to add more meaningful information about the valuation of the guaranteed liabilities with an effective date of December 31, 2017 or earlier. The objective of the improved disclosure should be to provide all stakeholders (e.g., regulators, consumers, and investors) with more transparency and additional insights into how the contractual obligations could change over time as well as the insurance company’s ability to both manage those obligations. The disclosure information must be provided in a prescribed, easy-to-understand, format including key risk driver assumptions (e.g., interest rates, lapse rates, and benefit utilization) and the impact of “shocks” to the key risk driver assumptions (e.g., benefit utilization becomes more efficient, interest rates drop by 1%, etc.). Upon development, refer to the Statutory Accounting Principles (E) Working Group and Blanks (E) Working Group for finalization and incorporation into NAIC publications. —Essential
***********
G:\FRS\DATA\Staff\DJD\Variable Annuities\Calls & Meetings\2015\Oct 2\Variable Annuities-Framework for Changes.docx
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From: Rarus, Andrew [mailto:[email protected]] Sent: Friday, October 16, 2015 11:12 AM To: Daveline, Dan Cc: Zadzilko, Debra; Belfi, Kathryn; Wade, Katharine; Jakielo, James Subject: Variable Annuities Framework for Change - Bullet 3, Page 1 Dan, As we previously discussed, Connecticut formally recommends a revision to bullet 3 on page 1 of the “Variable Annuities-Framework for Change” document (attached). Bullet 3, page 1 currently reads as follows:
The Working Group was supportive of the numerous changes you see listed in the Framework for two reasons: 1) to encourage strong risk management within the insurance company; 2) to remove the need to reinsure variable annuity business to captive reinsurers. With respect to the later, the Working Group would recommend that once these changes, or the majority of these changes are effective (anticipated effective date of 1/1/17), domestic regulators of insurers ceding variable annuity to captive reinsurers should request their company to recapture the business and for the group to dissolve the captive reinsurer
Connecticut suggests the following edits to this bullet:
The Working Group was supportive of the numerous changes you see listed in the Framework for two reasons: 1) to encourage strong risk management within the insurance companies; 2) to remove the need to reinsure variable annuity business to captive reinsurers. With respect to the later, the Working Group would recommend anticipates that once these changes, or the majority of these changes are effective (anticipated effective date of 1/1/17), domestic regulators of insurers ceding variable annuity liabilities to captive reinsurers should request their company to will recapture the business and for the group to dissolve the captive reinsurer.
Please let me know if you have any questions. Thanks, Andy
Andrew J. Rarus Chief Actuary - Life & Health | State of Connecticut Insurance Department P.O. Box 816 | Hartford, CT 06142-0816 | 860.297.3943 | Fax: 860.297.3978 | [email protected]
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October 16, 2015
Commissioner Nick Gerhart
Chair, NAIC Variable Annuities Issues (E) Working Group
supports uniformity and transparency for critical regulatory issues, such as reserving and capital
requirements. We feel this proposal will bring us closer to those objectives.
The Framework is intended to make changes that apply retrospectively, and further indicates:
“…the Working Group would recommend that once these changes, or the majority of
these changes are effective (anticipated effective date of 1/1/17), domestic regulators of
insurers ceding variable annuity to captive reinsurers should request their company to
recapture the business and for the group to dissolve the captive reinsurer.”
We strongly support retrospective application and the unwinding of existing VA captive
transactions. Robust mechanisms should be developed to enforce unwinding and to prevent new
captive arrangements. We would caution against an approach that could be seen to condone the
continuing use of VA captives if it is perceived that the feedback loops outlined in the
Framework are untimely or ineffective, i.e. an implication that VA captives are acceptable until
the NAIC fixes each and every perceived imperfection in the reserving and capital rules.
If you would like to discuss this letter with us, please let us know.
Sincerely,
David R. Remstad
Senior Vice President & Chief Actuary
David R. Remstad, FSA Senior Vice President & Chief Actuary 720 East Wisconsin Avenue 720 East Wisconsin Avenue Milwaukee, WI 53202-4797 414 665 2568 office [email protected]
John Bruins Vice President & Senior Actuary 202.624.2169 October 16, 2015 The Honorable Nick Gerhart Chair – Variable Annuities Issues (E) Working Group National Association of Insurance Commissioners Re Exposed Variable Annuities - Framework for Change Dear Commissioner Gerhart; The ACLI1 submits the following comments regarding the Variable Annuities - Framework for Change (Framework) on behalf of our member companies. ACLI members appreciate the direction set by the Working Group, and generally agree with the preliminary findings and recommendations that Oliver Wyman presented. Those findings focus on the misalignment of the regulatory requirements both internally and with the economic realities resulting in volatile and incongruous changes to reserves and capital requirements, and inconsistent risk management incentives. ACLI members generally support the concepts outlined in the Framework to address these issues, and offer the following comments to help refine it. As drafted, the Framework implies that the proposed changes will be implemented. We suggest that the Framework identify the concerns to be addressed, and offer preliminary solutions subject to confirmation. A number of the issues still need to be tested, hence the need for a Quantitative Impact Study (QIS). The Framework should explicitly recognize the plans to conduct a QIS and include a charge to accomplish it. The Framework should also recognize that not all possible solutions may have been identified, and therefore include a statement that other items, e.g., revenue sharing or potential statutory tax implications, may be explored in the QIS as well. We have provided suggested wording in the draft Framework to address these issues, including a new item 5 in Exhibit 1 to identify the QIS as a core part of the Framework and a suggested charge for the VAIWG to oversee the QIS (see Attachment). The Framework identifies calibration of interest rates as an enhancement to the requirements. We agree that the calibration of scenarios should be reviewed, but are concerned that the time required for this element could preclude it from being part of a QIS. Given the importance of this element to the end result, testing of any calibration changes is vitally important. The Framework recognizes the significant role of hedge programs and other risk mitigation techniques by multiple references throughout the Framework document. Treatment of these hedges in the reserve calculation, in the RBC calculation, and in the accounting need to be considered holistically and consistently, and the impacts evaluated in the QIS.
1 The American Council of Life Insurers (ACLI) is a Washington, D.C.-based trade association with 284 member companies operating in the United States and abroad. ACLI advocates in federal, state, and international forums for public policy that supports the industry marketplace and the 75 million American families that rely on life insurers’ products for financial and retirement security. ACLI members offer life insurance, annuities, retirement plans, long-term care and disability income insurance, and reinsurance, representing more than 90 percent of industry assets and premiums. Learn more at www.acli.com.
We support the elimination of the standard scenario in the RBC calculations. Conceptually, we support the change to C3P2 for RBC to be an add-on to reported reserves rather than the difference between the reserve and another calculation, so long as the revisions account for any excess of standard scenario reserves over the stochastic CTE 70 amounts. Companies agree that more granular prescribed assumptions for lapse and utilization in the reserve standard scenario might be useful and appropriate, so long as they are not overly granular and thus create unnecessary complexity. New assumptions should be based on observed experience. Additional granularity makes sense when the differentiation is meaningful. Introducing aggregation in the standard scenario for reserves should also be a substantial improvement. Combined, these two changes should help the standard scenario to produce reasonable results more of the time. If the standard scenario is computed on an aggregate basis, reserves will still need to be established at a policy level by allocation of aggregate values. This will be needed both for allocation purposes in the event of a receivership situation and to coordinate with the need to have policy level values for tax. Industry expects to provide recommendations for implementation in order to facilitate coordination with tax requirements as proposed changes approach finalization. We support disclosure that is relevant, meaningful, and informative so that regulator can effectively oversee business. Disclosure requirements should provide useful information to regulators, be flexible so that adjustments can be made to reflect different company circumstances, and balance the benefit with the cost. In addition, proprietary company information should not be subject to public disclosure requirements. We support the idea of a feedback loop as that will help to keep assumptions grounded in experience. We recommend that an efficient process for potential future changes be developed as part of the Framework implementation. The Framework anticipates that changes will apply retroactively to inforce business. We request that a charge be given to Statutory Accounting Principles Working Group to consider how the impact of these changes should be accounted for at the time of implementation, both the direct changes from this Framework and future potential updates to assumptions. In addition, we note that the rationale for the retroactive application contains two incorrect statements, namely:
• The Framework implies that variable annuities are exempt from nonforfeiture. VA’s are subject to Nonforfeiture requirements, which are defined in the Variable Annuities Model Regulation (Model # 250).
• The Framework says that AG-43 does not rely on statutory valuation interest rates that are locked in at issue. AG-43 has a dual calculation with the standard scenario amount determined using the statutory valuation interest rates defined at issue plus a stochastic calculation based on current rates.
We look forward to working with you to resolve these issues, thus allowing better management and accounting measurement of the variable annuities. Attached is a copy of the Framework with suggested changes consistent with the above comments.
cc Dan Daveline, NAIC
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Attachment Page 3
Report to the Financial Condition (E) Committee Variable Annuities Issues (E) Working Group—At the 2015 Spring National Meeting, the Variable Annuities Issues (E) Working Group was formed and given the following charge:
• Oversee the NAIC’s efforts to study and address, as appropriate, regulatory issues resulting in variable annuity captive reinsurance transactions.—Essential
Simultaneous with the formation and charge given to this Working Group, the NAIC Executive Committee and Internal Administration (EX1) Subcommittee established resources to allow the NAIC to engage a consultant to assist the Working Group in meeting this charge. Oliver Wyman was engaged by the NAIC to fulfill this role, and in September, delivered a report of observations and recommendations which was discussed during an interim meeting of the Variable Annuities Issues (E) Working Group on Sept. 10. During that meeting, the Working Group and members of the industry provided feedback on the recommendations which was used to develop this report. The report has since been discussed and adopted. The Financial Condition (E) Committee is asked to adopt this report, including adoption of the Variable Annuities-Framework for Change, in concept (Exhibit 1) and the charges for NAIC groups (Exhibit 2). Variable Annuities-Framework for Change • The Variable Annuities Framework for Change (Framework) is intended to address concerns
that have led to the industry’s development and utilization of captive reinsurance transactions with regard to variable annuity business. In general, tThe general conclusion is that the utilization of these transactions has been driven by the existing statutory requirements which are generally considered to be non-economic, or structured in a manner that does not promote strong risk management, and which create volatile and incongruous changes in reserves and RBC requirements..
• Unlike the NAICs XXX/AXXX Reinsurance Framework, which was adopted to apply prospectively, this framework for changes is intended to make changes that apply retrospectively. This is because XXX/AXXX products are both subject to life insurance non-forfeiture and valuation laws whose valuation and non-forfeiture interest rates change on a calendar issue year by calendar issue year basis and are locked in at policy issue and remain locked in for the life of the contract. In contrast, variable annuities with and without guaranteed benefits are subject to nonforfeiture requirements that do not lock in interest rates at issue due to the nature of the benefit which are provided based on the values of the underlying assets.exempt from the annuity non-forfeiture law. In addition, the reserve valuations for variable annuities with and without guarantees are defined by AG43 useswhich incorporates a dual calculation of a standard scenario that utilizes statutory interest rates which are locked in at issue plus a which is based on a stochastic methodology and are not based on a calendar year valuation interest rates that are locked in at issue, rather theseusing rates which are generated and are unlocked at each valuation. The AG43 valuation methodology is currently applied retroactively back to to contracts issued since January 1, 1981.
• The Working Group was supportive of the numerous changes you see listed in the
Framework for two reasons: 1) to encourage strong risk management within the insurance company; 2) to remove the need to reinsure variable annuity business to captive reinsurers.
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With respect to the latter, the Working Group would recommend that once these changes, or the majority of these changes are effective (anticipated effective date of 1/1/17), domestic regulators of insurers ceding variable annuity to captive reinsurers should request their company to recapture the business and for the group to dissolve the captive reinsurer.
• Unlike XXX/AXXX, this Framework is expected to impacts all insurers writing the specified line
of business, and is not implemented through specific requirements on the reinsurance contract, but rather on the requirements of the direct writer of the contract. In summary, those changes are expected to the following areas:
o Actuarial Guideline 43; o Risk-Based Capital Requirements (C3 Phase II); o Allowing hedge accounting treatment under SSAP No. 86 for certain limited
derivative contracts that otherwise do not meet hedge effectiveness requirements;
o Allowing states a consistent mechanism to utilize hedges without any size limitations that may otherwise apply in investment statutes.
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Exhibit 1
Exhibit 1— Variable Annuities-Framework for Change 1. The Framework is intended towill result in changes to AG 43 that will be designed to result in
a less non-economic reserve requirement for variable annuities that areis better aligned with the business economics while providing sufficient amounts to cover moderately adverse circumstances. moderately . The changes identified and to be tested in a Quantitative Impact Study (QIS) are expected to include the following:
a. Development of calibration criteria for the Interest Rate (USD and possibly international) scenario generation with a market-sensitive mean reversion asymptote – this will align the interest scenarios with broader efforts underway at the NAIC level. Potential to integrate the Interest Rate calibration criteria with Equity Return calibration criteria and to add a volatility calibration prescription;
b. In the Standard Scenario calculation: Introduce more granular benefit-specific prescriptions of policyholder behavior assumptions. Separately, the prescribed set of assumptions is to be calibrated to moderately adverse, yet plausible levels informed by credible industry experience;
c. Additionally, the Standard Scenario calculation will be conducted on a portfolio as opposed to seriatim basis with the existing seriatim Standard Scenario calculation made available as a disclosure item;
d. Hedging reflection in the Adjusted CTE 70 calculation to allow for the reduction of gross market risk positions for hedge instruments prior to expiration of existing hedges rather than a simple hold-to-maturity treatment;
e. Increased regulator only disclosure designed to ensure regulators understand the potential impact under different assumptions;
f. The additionestablishment of a feedback loop that continuously reviews granular industry data as a meansbasis to modify the AG AG 43reserve requirements in the future to ensure the framework continues to operate as redesigned. This will require additional granular data to be submitted to the NAIC and analyzed and presented to a group of regulators.
2. The Framework is intended towill result in changes to the Life Risk Based Capital formula
that includess material expected changes to C3 Phase II. Similar to changes to AG 43, these will be designed to result in less non-economic capital requirements on variable annuities that are better aligned with the business economics and statutory reserve calculations while remaining consistent with Risk Based Capital standards.moderately conservative. The changes identified and to be tested in a Quantitative Impact Study that are expected include the following:
a. Complete elimination of the standard scenario; b. Alignment of the total asset requirement (TAR) and the AG 43 reserve requirements
through use of the AG43 stochastic CTE calculation as the basis for a difference calculation for the direct determination of the C3 charge and the indirect determination to Total Assets Required as the sum of reserves plus the newly defined C3 charge. The C3 charge will be the difference between two AG43 CTE calculations at different confidence levels. The individual CTE calculations will apply an effectiveness factor for the reflection of a CDHS that is calibrated to be consistent with the error factors of the C3 Phase 2 framework. The confidence levels will be determined in the calibration phase during athe forthcoming Quantitative Impact Study. The resulting difference will be appropriately tax effected and scaled to arrive at the C3 charge. This use of the AG43 calculation will eliminate the need for a separate C3 Phase 2 calculation;
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c. The additionestablishment of a feedback loop that continuously reviews granular industry data as a means to modify the C3 Phase II requirements in the future to ensure the framework continues to operate as redesigned. This will require additional granular data to be submitted to the NAIC and analyzed and presented to a group of regulators.
3. The Framework will considerresult in changes to SSAP No. 86 that arewould be designed to
reduce the accounting mismatch that exists between the value of the hedge and the value of the hedged item (the variable annuity liability) so that as market conditions change, gains or losses that are not consistent with the economic value of the hedges are not created within the financial statements. In addition, requirements for increased public disclosure on variable annuity risks will be addedconsidered for to the SSAPs, and data captured in the notes to the financial statements.
4. The Framework willis intended to result in the development of narrowly defined statutory language that states maycould use in removing the limitations that may exist within their investment statutes that may otherwise limit the extent of hedges an insurer may use in their risk management.
4.5. It is planned that all of the potential changes outlined in 1. through 4. above will be tested in a Quantitative Impact Study. Individual companies will need to test the proposed changes in a coordinated manner with the results reported and consolidated for regulatory review. Design of the study will need careful attention, with input from regulators, consultants and industry in order to create a well designed analysis that will provide the necessary information in a timely and efficient manner.
***********
Exhibit 2
Proposed Charges to NAIC Groups
C-3 Phase II/AG 43 (E/A) Subgroup of the Life Risk Based Capital Working Group • The joint C-3 Phase II/AG 43 (E/A) Subgroup of the Life Risk-Based Capital (E) Working Group
and Life Actuarial (A) Task Force will develop and recommend changes to C3 Phase 2 and AG 43 for 2017 adoption that implement the Variable Annuities Framework. —Essential
Statutory Accounting Principles (E) Working Group • Develop and adopt changes to SSAP No. 86-Derivatives, with an effective date of January 1,
2017 or earlier, which allow hedge accounting treatment under SSAP No. 86 for certain limited derivative contracts (e.g. interest rate hedges with counterintuitive effects) that otherwise do not meet hedge effectiveness requirements. In adopting such an allowance, consider if the requirement to meet hedge effectiveness can be replaced by some other information that demonstrates strong risk management is in place over the identified hedges. —Essential
• Finalize public disclosure on variable annuity risks as developed by the Variable Annuity Issues (E) Working Group. —Essential
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• Consider whether current or future changes to reserves resulting from implementation of this Framework will be reported in the Annual Statement as a ‘Change in Basis’. - Essential
Blanks (E) Working Group • Based upon the disclosure developed by the Variable Annuities Issues (E) Working Group on
variable annuities, finalize a data captured note with an effective date of December 31, 2017 or earlier —Essential
Variable Annuities Issues (E) Working Group • Develop a model guideline in 2016 that represents narrowly defined statutory language that
states may use in removing the limitations that may exist within their investment statutes that may otherwise limit the extent of hedges an insurer may use in their risk management. —Essential
• Oversee a Quantitative Impact Study designed to evaluate the financial impacts of the proposed changes, including their interactions. This study may include evaluation of additional elements such as Revenue Sharing provisions or potential statutory tax implications. - Essential
• Redesign the annual statement disclosures on variable annuities to add more meaningful
information about the valuation of the guaranteed liabilities with an effective date of December 31, 2017 or earlier. The objective of the improved disclosure should be to provide all stakeholders (e.g., regulators, consumers, and investors) with more transparency and additional insights into how the contractual obligations could change over time as well as the insurance company’s ability to both manage those obligations. The disclosure information must be provided in a prescribed, easy-to-understand, format including key risk driver assumptions (e.g., interest rates, lapse rates, and benefit utilization) and the impact of “shocks” to the key risk driver assumptions (e.g., benefit utilization becomes more efficient, interest rates drop by 1%, etc.). Upon development, refer to the Statutory Accounting Principles (E) Working Group and Blanks (E) Working Group for finalization and incorporation into NAIC publications. —Essential
***********
G:\FRS\DATA\Staff\DJD\Variable Annuities\Calls & Meetings\2015\Oct 2\Variable Annuities-Framework for Changes.docx
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1
BY E-MAIL
October 16, 2015
Commissioner Nick Gerhart
Chair, NAIC Variable Annuities Issues (E) Working Group
Re: Exposure – Variable Annuities Framework for Change and Proposed Charges to
NAIC Groups
Dear Commissioner Gerhart,
New York Life offers the following comments on the Variable Annuities Framework for Change
and the related proposed charges to NAIC groups (the Framework).
We appreciate the efforts of the Variable Annuities Issues (E) Working Group (the Working
Group), with the assistance of Oliver Wyman, to evaluate and consider changes to the statutory
accounting, reserving, and capital standards surrounding variable annuities. We support the
direction laid out by the Framework and we look forward to working with regulators and other
stakeholders as the technical details of the Framework are explored further in the coming
months.
While we support the Framework and the objectives of the Working Group in general, a critical
end goal of this effort must be the elimination of non-uniform variable annuity accounting,
reserving and capital standards enabled today through the use of captive reinsurance
transactions. We encourage the Working Group to make this end goal explicit. As Oliver
Wyman noted in their September 10, 2015 preliminary report, through the use of variable
annuity captives, “resulting accounting standards differ widely,” and “a multitude of reserving
standards are applied that represent modifications of GAAP FAS/SOP, IFRS, or AG43.”1 This
lack of uniformity threatens the viability of the state-based system of insurance regulation and
must cease once the work outlined in the Framework is complete. The development and
implementation of the Framework is inadequate unless this goal is achieved.
As such, we suggest the following three changes to the Framework documents.
First, we suggest revising the following bullet point in the Report to the Financial Condition (E)
Committee that appears in the first page of the document (suggested additions double-
underscored):
The Working Group was supportive of the numerous changes you see listed in the
Framework for two reasons: 1) to encourage strong risk management within the
1 Oliver Wyman. “NAIC VA Captive Study Preliminary Findings and Conclusions”. September 10, 2015. Slide 8.
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insurance company; 2) to remove the need to reinsure variable annuity business to
captive reinsurers. With respect to the later, the Working Group would recommend that
once these changes, or the majority of these changes are effective (anticipated effective
date of 1/1/17), (a) domestic regulators of insurers ceding variable annuity to captive
reinsurers should request their company to recapture the business and for the group to
dissolve the captive reinsurer, and (b) the Reinsurance (E) Task Force should revise the
Credit for Reinsurance Model Law and Regulation to ensure compliance with the
variable annuity statutory reserving and risk-based capital standards in a manner similar
to the compliance mechanism under the NAIC’s XXX/AXXX Captive Reinsurance
Framework. We recommend revising the credit for reinsurance models now, while they
are currently open and under discussion in the context of the XXX/AXXX Captive
Reinsurance Framework, rather than re-opening them at a later date.
Second, we suggest that a fifth item be added to Exhibit 1 of the document:
5. The Framework will result in revisions to the Credit for Reinsurance Model Law and
Regulation, similar to those made under the NAIC’s XXX/AXXX Captive
Reinsurance Framework, to ensure compliance with statutory reserving and risk-
based capital standards for any variable annuity policies ceded to a captive reinsurer
that are not recaptured once these changes, or the majority of these changes, are
effective.
Third, we suggest that the following charge be added to Exhibit 2 of the document:
Reinsurance (E) Task Force
Revise the Credit for Reinsurance Model Regulation in a manner similar to the
NAIC’s XXX/AXXX Captive Reinsurance Framework such that, in order for a
ceding company to receive reserve credit for variable annuity policies ceded to a
captive reinsurer, (1) the policies must be supported by assets of appropriate quality
at the level of statutory reserves, (2) risk-based capital must be calculated in
accordance with NAIC standards, and (3) the captive must produce robust public
disclosure including, but not limited to, statutory reserves, the level and nature of
assets supporting the statutory reserves, and risk-based capital.
The NAIC’s XXX/AXXX Captive Reinsurance Framework provides a valuable model that
regulators should leverage to bring greater uniformity to variable annuity accounting, reserving
and capital standards. Although variable annuity captives are used for purposes that differ from
XXX and AXXX life insurer captives, the structure of the XXX/AXXX Framework can be
adapted readily to suit this different context. Among other things, a framework of this kind
would not necessarily bar the use of variable annuity captives once the underlying accounting,
reserving and capital standards have been modified. Instead, if deemed appropriate by
regulators, captive use could conceivably continue for purposes other than avoidance of the
underlying standards, including, for example, for the purpose of achieving benefits of scale that
come from consolidating hedging operations in a single entity. With a framework of this kind in
place, any captives that survive reform of the underlying standards would be regulated in a
robust, nationally consistent manner.
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In addition, we strongly suggest that the NAIC utilize a similar process as it used to develop and
adopt the XXX/AXXX Captive Reinsurance Framework. In particular, we highly recommend
that the NAIC retain a consulting firm like Rector & Associates to shepherd all proposed
changes through the NAIC process.
We are grateful for your time and attention to our comments. If you would like to discuss this
letter with us, please let us know.
Sincerely,
George Nichols, III
Senior Vice President in Charge of the Office of Governmental Affairs
New York Life Insurance Company
Joel M. Steinberg
Senior Vice President
Chief Actuary & Chief Risk Officer
New York Life Insurance Company
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From: Fenwick, Amanda (DFS) [mailto:[email protected]] Sent: Friday, October 16, 2015 10:45 AM To: Daveline, Dan Cc: Carmello, William; Cebula, Michael; Hazzard, Dwight J (DFS); Leifer, Daniel; Lochner, David J (DFS) Subject: NAIC VAIWG-Please submit comments by COB Friday, October 16th Below are NY’s comments on the VAIWGs report to the Financial Condition (E) Committee regarding a framework to remove the incentive to use captives. Overall we are not comfortable with the direction the working group is heading. The report focuses on the use of captives but not the appropriateness of the reserves/capital. To revise the requirements without due consideration of level of reserves and capital would be inappropriate and lead to inadequate levels. Alternatively, the use of captives could be eliminated by no longer allowing captive transactions as we have done in NY. The primary objective in establishing reserves and capital should be to ensure companies can make good on their promises to policyholders. New York submitted amendment proposal forms several years ago to address the level of reserves and capital which have not yet been discussed. We feel that these proposals should be discussed and vetted prior to moving forward with this report. That being said we have the following specific comments on the report and the attached Exhibit. 1. The report seems to suggest that the Working Group reached a consensus for the suggested changes.
Please note New York is not in agreement with these changes. As stated above the proposal does not appear to consider the resulting level of reserves and capital.
2. Throughout the Exhibit, it states that the Framework “will result” in changes. We feel that language like this
should be revised to state that the Framework “should consider”. The current suggestions to address the use of captives have not been thoroughly tested or reviewed to the extent that they should be considered final.
3. The report states that the “Standard Scenario calculation will be conducted on a portfolio as opposed to seriatim basis with the existing seriatim Standard Scenario calculation made available as a disclosure item”. We do not support an aggregate calculation for the Standard Scenario. AG43/VACRVM was meant to be in the spirit of CARVM. Since CARVM is a policy-level calculation, the Standard Scenario floor should be aligned with this principle.
4. We disagree with the idea of eilimating the standard scenario for C3 Phase II. We feel that there is too
much pressure on companies to lower capital and having an objective floor for both reserves and capital is vital .
5. We feel that the change to determine the C3 Phase II charge to be the stated difference calcultion may
introduce unintended conseqences into the formula. For instance, certain assumptions could be made that purposefully move the two CTE amounts closer and effectively eliminate the charge. The group may want to consider the difference between the maximum of the high CTE and the Standard Scenario less the lower CTE amount.
6. The Exhibit states that the Framework will result in changes to SSAP No. 86 . However it is not clear what
form of hedges (e.g. equity or interest) would be accounted for on an amortized cost basis. Clarification on this item would be helfpul.
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Amanda Fenwick, FSA Assistant Chief Life Actuary NYS Department of Financial Services Insurance Division Life Bureau (518) 474-7929
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1850 M Street NW Suite 300 Washington, DC 20036 Telephone 202 223 8196 Facsimile 202 872 1948 www.actuary.org
1
October 16, 2015
The Honorable Nick Gerhart
Chair, Variable Annuities Issues (E) Working Group
National Association of Insurance Commissioners
Dear Commissioner Gerhart:
The American Academy of Actuaries’1 AG 43/C-3 Phase II Work Group appreciates the
opportunity to provide comments on the October 2, 2015, Variable Annuities Framework for
Change (Framework) exposed by the NAIC Variable Annuities Issues (E) Working Group
(VAIWG).
We have been monitoring the work of the NAIC C-3 Phase II/AG 43 (E/A) Subgroup and
providing material and important input since early 2012. We have issued several reports
discussing many of the issues covered in the Framework; we ask that the VAIWG review those
materials as part of its work. Other Academy work groups have been actively involved in reserve
and risk-based capital requirements for variable annuities since 2001; these work groups have
been instrumental in the development of Actuarial Guideline XLIII (AG 43) and C-3 Phase II
(C3P2). We hope the VAIWG will continue to view the Academy as central to the development
and implementation of the Framework.
The Framework, as exposed, has the tone of a completed effort, with the Quantitative Impact
Study (QIS) serving only to validate the Framework. While we support enhancements to the
reserve and capital requirements for variable annuities, we believe an industry impact study
(which we strongly support) of the exposed framework is premature at this time. We believe that
more work is needed to determine whether the exposed framework will achieve the objectives
stated by the VAIWG.
We also believe the January 1, 2017, effective date is too aggressive. This effective date will
make it very difficult to test any proposed changes or conduct a suitable QIS. While a target date
is useful, we believe January 1, 2018 is more realistic. Because AG 43 and C3P2 apply to inforce
contracts, the potential impact of proposed changes could be in the billions of dollars. Therefore,
it is critical that viable alternatives to the ideas in the current Framework are tested in advance. It
would be difficult to have vetted solutions in place by January 2017.
1 The American Academy of Actuaries is an 18,500+ member professional association whose mission is to serve the
public and the U.S. actuarial profession. The Academy assists public policymakers on all levels by providing
leadership, objective expertise, and actuarial advice on risk and financial security issues. The Academy also sets
qualification, practice, and professionalism standards for actuaries in the United States.
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1850 M Street NW Suite 300 Washington, DC 20036 Telephone 202 223 8196 Facsimile 202 872 1948 www.actuary.org
2
We do think it may make sense to consider identifying a phased approach, where a subset of the
proposed changes that could be made by January 2017 are identified. These changes would move
toward a final solution with a defined timetable for completely implementing the changes. As
noted above, any such changes should undergo an impact study before they are implemented.
In addition, we suggest that the ideas being discussed be first tested on simple products. This
testing should be performed before a full industry impact study is started. If the testing does not
produce the intended results for simple products, the Framework will likely not achieve the
desired objectives when applied to more complex real-world products.
We have offered specific comments to the NAIC’s C-3 Phase II/AG 43 (E/A) Subgroup
suggesting revisions to some of the features in AG 43 and C3P2 that have created unintuitive
results. Our December 10, 2012, letter2 discusses several of these suggestions. While many of
our suggestions have been addressed in the exposed Framework, we believe there should be
opportunity to discuss other ideas and refine existing proposals.
We offer specific comments on the exposed Framework in the attached appendix and also offer
these suggestions:
1. Use the same scenarios and assumptions for statutory reserves and risk-based capital
(RBC). The only difference should be tax treatment and confidence level.
2. Modify the treatment of hedging in the requirements to address counterintuitive
results. Doing so should include eliminating the Clearly Defined Hedging Strategy
(CDHS) concept in the reserve and RBC calculations, requiring hedging strategies to be
modeled, and supporting the modeling of hedging strategies with a combination of actuarial
judgment, disclosure, margins, and guidance that provides checks and balances.
3. Evaluate the calibration criteria for equity scenarios to determine whether updates
are needed. This evaluation should include consideration of a more dynamic (i.e., state-
dependent) approach.
4. Consider adding calibration criteria for interest rate scenario generators. This effort
should include a review of the interest rate calibration criteria recommended by the
Academy’s Economic Scenario Work Group (ESG WG) in 2008.3
5. Align the common requirements included in C3P2 and AG 43.
6. Remove the standard scenario from both AG 43 and C3P2 as a required minimum. We do understand, however, that a standard scenario can be a useful tool to facilitate the
regulatory comparison of reserves. As such, certain improvements could be devised to
improve how the reserve standard scenario functions.
7. Evaluate the tax risk surrounding the creation of captives and determining whether
accounting adjustments are needed. While the impact varies by company, the