By Randy Myers
Insurance companies may have years of experience with stable value, but an ever-changing regulatory environment means the business itself has never become routine.
Unlike many other industries subject to government oversight, the insurance industry is regulated primarily at the state level rather than the federal level. Each state insurance department brings a slightly different approach to the task, and that can sometimes slow the process of bringing new insurance products to market.
“Fifty states means 50 different regulatory agencies,” observed Bill Sample, director and actuary for Metropolitan Life Insurance Co., speaking as part of a panel discussion about the insurance market at the 2013 SVIA Spring Seminar. “Sometimes they work together, sometimes they don’t.”
There may be some relief in sight. Forty-one states have adopted the “Interstate Insurance Product Regulation Compact,” which is designed to speed up the approval process for life, annuity, disability and long-term-care insurance products by establishing a single point of filing for review. Three more states are expected to adopt it by the end of this year, according to Helen Napoli, director of contract and product development for stable value investments at New York Life Investment Management LLC, who organized the panel. Unfortunately, neither New York nor California—two of the more challenging states from a regulatory perspective—are among the current or anticipated adopters. What’s more, Napoli cautioned, the compact will not provide complete regulatory relief for insurers, since it will only address contract basics. “It won’t change reserve requirements or other basic requirements a state may have,” she said. She also noted that the compact has yet to write standards for the group annuity business, which would cover stable value contracts. “Still,” she said, “it’s something to look forward to.”
In the meantime, insurers participating in the stable value market must gain approval not only from any state where they are licensed and plan to issue their contracts, but also, in some cases, from their home state—even if they do not plan on issuing contracts there.
The required filings can be voluminous, including a plan of operations, a contract form, a memorandum of variability, and an actuarial memorandum. Among the dozens of factors regulators examine, said Michael Rant, vice president and corporate counsel for Prudential Financial, are the core terms of the contract and the commitments made by the insurance company in that contract. The dual aim of the review, he said, is to protect consumers and the solvency of the insurance company.
In the case of stable value products, regulators also review which types of investments are eligible to be held in a stable value product, and how the crediting rate will be calculated. They make sure there are provisions for the insurer to terminate the contract if doing so should become prudent. To protect themselves, state insurance departments also make sure nothing is in a contract that could be construed as a waiver of remedies in the event of an insurer’s insolvency. They also confirm that contracts are being issued to groups eligible to participate in stable value products under each state’s insurance code.
Rant noted that the contract form contains “brackets” that delineate variable text, or language that may vary from contract to contract. The memorandum of variability requires an insurer to spell out alternative or replacement language that could have a material effect on the risks being assumed by the insurer.
The actuarial form documents that the contract adheres to capital reserve requirements for the state, Sample said. It also provides space for an insurer’s actuaries to sign off on the soundness of the product being reviewed, including, in the case of separate account stable value products, confirmation that risk charges being paid to the general account are adequate.
Insurers domiciled in New York, Sample said, also are required to file a self-support memorandum in which its actuaries attest that the contract is self-supporting under reasonable assumptions about interest rates, mortality and expenses. That memo also delves into multiple facets of the contract: product risks, risk mitigation provisions, pricing assumptions, anticipated investment returns, risk charges, expenses and profits. California has special requirements, too, he said, including a statement indicating why the product in question is not hazardous to the public.
“Once a contract is issued, regulators become increasingly focused on the reserves and the asset-liability match,” Sample said. That’s because they care about the financial stability, or solvency, of the insurance company. “They want to show policyholders—in this case, investors in a stable value fund—that they will receive their full benefit,” he explained.
While insurance companies understand the focus on reserves, they also want to make sure reserve requirements are calculated appropriately. In New York, Sample said, reserve requirements for stable value products are calculated under New York Regulation 128. As a first step, it requires that insurers calculate the present value of their liability, project the guaranteed payout at the contract’s minimum rate, and then discount that payout at 104.5 percent of Treasury spot rates. Then, in a second step, the company must apply the appropriate “shaves,” or discounts, to the value of the assets held in the stable value fund’s underlying portfolio. If the result in step 1 exceeds the result in step 2, the company must hold the difference as additional reserves.
Actuaries at the Life Insurance Council of New York, an insurance industry trade group, have proposed to New York regulators an alternate method for calculating reserves. The council suggests that its method would be more appropriate, especially during periods of market stress like those that existed during the 2008 credit crisis, when many separate account issuers were required to dramatically boost their reserves. The American Academy of Actuaries has made similar proposals to the National Association of Insurance Commissioners, Sample said. Its proposals would base the discount rate calculation on a blend of prevailing yields on Treasury bonds and investment-grade corporate bonds.