As reported in our earlier Client Alert dated September 10, 2012, New York Department of Financial Services Investigates Life Insurance Industry’s Use of Captive Reinsurers, the National Association of Insurance Commissioners (NAIC) was considering amendments to Actuarial Guideline 38 (AG 38) in an effort to address reserving deficiencies in universal life products that employ secondary guarantees (ULSG policies). Effective September 12, 2012, the NAIC has so revised AG 38.

The revisions outline different standards for ULSG policies issued on or after July 1, 2005, and prior to January 1, 2013, that are still in force on December 31, 2012 (pre-2013 policies) and ULSG policies issued after January 1, 2013 (post-2013 policies).

  • For pre-2013 policies, a primary reserving methodology and an alternative reserving methodology are provided.

  • For post-2013 policies, there are methodologies tailored to specific ULSG policy designs and another methodology for policy designs that do not fall into one of the enumerated design categories.

Documentation and Reporting Requirements

For pre-2013 policies, certain documentation and reporting requirements apply, including the preparation of a stand-alone Actuarial Memorandum detailing the reserve analysis performed on the business. The information contained in this memorandum must be sufficient to permit another actuary in the same field to evaluate the assumptions as well as to facilitate regulatory review. Where any pre-2013 policy business has been ceded to a reinsurer, the memorandum must provide a list of the assuming companies with face amount, reserve credit taken and form of reinsurance.

The Actuarial Memorandum will be reviewed by the domiciliary regulator along with the NAIC Financial Analysis Working Group (FAWG) to ensure compliance with the new standards. If the memorandum is adequate and FAWG agrees with the domiciliary state, FAWG will issue a confidential report to non-domiciliary regulators indicating that the insurer’s reserving methodology is appropriate. If FAWG does not agree with the domiciliary state’s decision, FAWG will issue a confidential report to non-domiciliary states indicating that the company’s reserving methodology is not appropriate.

Additionally, where the primary methodology is used, a separate confidential report must be submitted to the insurer’s domiciliary state outlining the gross reserve before reinsurance subject to certain specified standards.

NY Department of Financial Services Reverses Filing Position

On October 12, 2012, the New York Department of Financial Services posted on its website an Important Notice Regarding Universal Life Insurance with Secondary Guarantees, announcing that ULSG policies can be filed on a certified basis as long as the NAIC certification demonstrating compliance with the revised AG 38 guidelines is used. This position represents a reversal of the Department’s earlier position announced in December 2011 that such filings had to be submitted to the Department in advance for pre-approval before the certified filing method could be used.