Morgan Stanley Report – AG 38

Actuarial Guideline 38 is the talk of the insurance world. At first glance you might cringe when you hear the words AG 38. We have all heard the joke that says the reason actuaries become actuaries is because “they don’t have the personality it takes to be accountants.” But this ruling is not a joke. At NAILBA, the National Association of Independent Life Brokerage Agencies, the carriers are all telling us their story of what the effect will be on their products now and long-term. Recently, Morgan Stanley published a report where they have done an assessment of which carriers will be at risk. Here is a quote from their assessment:

“Based on our review, Lincoln Financial, Manulife and Genworth are the companies that appear most at risk.”

What is AG 38?

Actuarial Guideline 38 was created in 2003 to clarify Valuation of Life Insurance Policies Regulation (#830), commonly referred to as Regulation XXX. The regulation sets forth reserve requirements for all universal life products that employ secondary guarantees, with or without shadow account funds. AG 38 was a regulatory response to other more complex contracts that opted for a shadow fund account design in order to compensate for the increased XXX reserve requirements. Without question the leading providers of these products has been Lincoln Financial and Genworth.

What are the changes?

The National Association of Insurance Commissions (NAIC) is in the process of updating the reserving requirements for various secondary guarantee universal life policies that fall under the Actuarial Guideline 38. In simplest terms, the current dispute focuses on whether some insurers selling the new designs are using too-high premium estimates for one part of the methodology, thereby producing lower reserves.(1) This change could result in an increase in the amount of required reserves. If carriers need to have more reserves, the premiums on the polices will go up. We have already seen over 15 carriers announce a pricing change for 2013.

What is the impact of recent AG38 revisions?

Reserve requirements on no lapse guarantee policies (NLG) that utilize a shadow account are significantly increased.

How will carriers respond?

Current expectations are that some carriers will need to increase reserve amounts. In order to meet the new reserving requirements on new business and re-gain their desired profit objectives on in force business, carriers will most likely be increasing rates on No Lapse Guarantee Policies (NLG) beginning early 2013.

How much would reserves increase?

The impact on required reserves would vary depending on the product design. Some carriers have implemented increases throughout the year in anticipation of this revision being adopted. Industry experts suspect the reserves could raise as much as two to seven times the current level. The newer version of universal life specifies a minimal annual premium to be paid to keep a policy in force, making it more competitive with term life.

So what does this mean to us? I have often said that any change in laws, tax codes or regulations is an opportunity. An opportunity for us to provide service. Service to our clients is always about communication. As professionals, we need to understand the regulation and clearly communicate to our clients all of their options. Call us @ ISN if you want help with that.

For further info – here is a link to a youtube presentation on AG 38 from American General:

About Jeffrey Berson

40 years in and around the industry has made Insurance a part of my DNA. I have had the pleasure of working with and for some of the greatest minds in our industry. My "Bersonal" View is an attempt to capture some of the best ideas, the best concepts and the best practices in a way that can lead to success for others. It will certainly be my point of view, so please...don't take it "Bersonal".
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