New York regulator balks at life insurers’ new powers to assume improved policyholder mortality

Aug. 18, 2021 –A new amendment that allows life insurance in an industry beleaguered by low returns has sparked concern from New York State insurance regulators. 

During the final meeting of its summer conference on Aug. 17, the National Association of Insurance Commissioners adopted an amendment that allows insurers to use in their calculations a “prudent” level of mortality improvement for their contracts beyond the valuation or contract-setting date. This move would allow life insurers to cast a bet that mortality improves over time when calculating the reserves they put aside to back policies.

“Insurers should not be allowed to assume that experience improves from where things are today when setting their reserves,” New York Department of Financial Services’ top insurance regulator Mi Chi To cautioned fellow commissioners at the meeting of the executive/plenary committee in a hybrid live/video-streamed meeting.

In her argument, she cited the unknowns of the long-term effects of Covid-19 on mortality as well as the pressures life insurers were under in today’s challenging persistent low interest rate environment. 

The sustained low interest rates impact industry reserve margins and capital adequacy, according to Fitch Ratings, as it outlined in a December 2020 wire report. These now chronic low interest rates impact all major product lines of life insurers , particularly guaranteed universal life insurance, payout and other fixed annuities, and long-term care insurance, Fitch said. In general, better mortality assumptions decrease the need for heftier reserves. 

New York’s To said that the newly-adopted NAIC measure flies in the face of not only fundamental principles of statutory accounting, but also of ultimately of consumer protection.

Despite the votes not being in her favor among fellow regulators, she advised that insurers should not be allowed to assume that experience improves “from where things are today” when setting their reserves.

It is not clear whether her concerns would lead to any action or separate regulatory guidelines at some point from the New York DFS for insurers doing business in the state. 

“At minimum, we respectfully believe that it is really an awkward time to be considering the possibility of changing mortality assumptions in the middle of during a pandemic at a time when unfortunately no one knows the lasting effects of Covid on future mortality,” To said.

The American Academy of Actuaries and the Society of Actuaries noted in a joint presentation last December to the NAIC’s Life Actuarial Task Force that Covid-19 could have potential longer-term impacts that could come from survivors with impaired health as well as from their delays in healthcare and testing during the pandemic. 

The amendment, known as 2020-10, was adopted by the task force Aug. 12 at its meeting. 

Another SOA slide deck presentation to the NAIC in August citing Centers for Disease Control and Prevention statistics showed mortality rates for 2020 increased 4.4% over 2019, excluding Covid. With Covid, they were 16.1% higher. Heart issues as a cause of death had its largest increase in 20 years in 2020, according to the statistics while lower cancer steadily continued as a trend.

Before Covid, in 2019, life expectancy at birth was 78.8 years for the total U.S. population, an increase of 0.1 year from  2018, according to the CDC. 

But setting sufficient reserves come first, according to New York’s executive superintendent for insurance. 

“We, of course, understand the immense pressure life insurers are under in terms of setting their reserves given how long interest rates have remained at extremely low levels. We know this is a critical issue for the industry,” she said.

She said solvency regulators “are all laser-focused” on the reserve challenges of life insurers. “We are certainly open to discussing whether there are any regulatory changes that would be appropriate to provide relief to address this issue, but we really do not believe this amendment is the solution,” To said.

Insurance commissioners from New Mexico and Louisiana joined New York in opposition to the measure, saying they shared her concerns about the new allowance to assume mortality improvement past the valuation date of life insurance policies.