N.Y. Issues Rule on Reserves for Universal Life Following Evidence of Under-Reserving

The New York State Insurance Department has issued a regulation requiring those who sell universal life insurance in the state to set aside adequate reserves in keeping with the spirit of an actuarial guideline that establishes the standard for the industry nationally.

“The insurance department found evidence that some insurers are designing certain life insurance products with the clear intent of circumventing the existing reserve standards,” Senior Deputy Superintendent Peter Molinaro stated, in discussing the need to adopt the amendment to Regulation 147, which sets forth New York’s life insurance reserve rules. “This enabled the insurers in question to sell policies to consumers that might threaten their organizations’ overall solvency.”

New York State is taking this step in part because the Insurance Department believes the National Association of Insurance Commissioners’ Actuarial Guideline 38, a model rule that offers a standard mathematical formula for calculating reserves and takes into account policy guarantees and the flexibility of premiums, needed clarification.

The practice of under reserving gives life insurers a competitive edge in the marketplace because it frees up capital that would otherwise be set aside to pay claims, according to officials.

“This action is being taken now so that no life insurer can increase its market share at the expense of the safety and soundness of policyholder funds,” Molinaro, who oversees the life bureau, said.

Universal life insurance products’ three basic cost components —investment earnings, the cost of protection in the event of a policyholder’s death, and the cost to cover the insurer’s expenses —are separately identified both in the policy and in the annual report to the policyholder.

In a related matter, the department is planning to send out a survey to all of New York State’s licensed life insurers and reinsurers, asking that they provide to the department an estimate of the amendment’s financial impact on their operations.