Regulatory Conversations

Perspectives from insurance regulators on the actuarial profession and the insurance industry

December 2020

Photo: iStock.com/porcorex

Comedian Jay Leno once said, “Regulations force people to do better.” The actuarial profession is greatly impacted by regulation—does this help us to do better, too? Whether related to product development, financial reporting or transactions with external parties, the underlying foundation and future development of much of the insurance industry and the financial markets will revolve around regulatory requirements and guidance.

We asked three individuals involved with U.S. regulatory bodies to provide their perspectives on the current state of insurance regulation, as well as how actuaries might get involved in influencing regulation going forward.

Patricia Allison, FSA, MAAA, is managing life actuary at the National Association of Insurance Commissioners (NAIC).
Alex Casas, CPA, is an assistant director of research and technical activities at the Financial Accounting Standards Board (FASB).
Dan Richards, FSA, CERA, works in Supervision, Regulation & Credit at the Federal Reserve Bank of Boston.

Here’s what they had to say.

What role does your organization play in the insurance industry? What role do life actuaries play?

Allison: The NAIC is the U.S. standard-setting and regulatory support organization created and governed by the chief insurance regulators from the 50 states, the District of Columbia and five U.S. territories. Through the NAIC, state insurance regulators establish standards and best practices, conduct peer reviews and coordinate their regulatory oversight. NAIC staff supports these efforts and represents the collective views of state regulators domestically and internationally. NAIC members, together with the central resources of the NAIC, form the national system of state-based insurance regulation in the United States.

Life actuaries at the NAIC are involved in a variety of projects that support state regulators, mainly related to principle-based reserving (PBR) for life insurance and annuities. For example, the life actuaries support the Valuation Analysis (E) Working Group by assisting in the review of PBR actuarial reports, and they often partner with members of the Life Actuarial (A) Task Force to help draft amendments to the Valuation Manual.

Casas: The FASB establishes the accounting and reporting standards by which insurers provide useful information to investors and other users of their financial reports. Actuaries provide us with valuable insights into the performance of insurance and pension products, which help us in our efforts to establish or improve accounting and financial reporting standards.

Richards: The Federal Reserve supervises and regulates certain insurance companies. The Dodd-Frank Act gave the Federal Reserve consolidated supervisory authority for two groups of insurance companies: insurers that own certain depository institutions (there currently are seven) and insurers designated by the Financial Stability Oversight Council for enhanced supervision (there currently are none).

Actuaries provide important insurance expertise for policy-making, research and supervision through the Federal Reserve System. Some also have translated their financial and risk management knowledge to roles in the System’s bank supervision and financial stability activities.

What is an upcoming initiative that your organization is significantly involved in that will impact actuaries or the insurance industry?

Allison: Next year, the NAIC will begin collecting life insurance mortality experience data according to the requirements of VM-50 and VM-51. The companies required to submit data were selected based on a goal of achieving a target level of approximately 85 percent of industry mortality experience. This will be a significant effort, and the NAIC has notified all impacted companies so they can prepare.

VM-50 Section 1.B discusses PBR and the need for experience data, and it lists some anticipated impacts. For example, the NAIC will be providing aggregated mortality experience data to the Society of Actuaries (SOA) for use in developing industry mortality tables. This provides a basis for assumptions when company data is not available or appropriate and provides a comparison basis that allows state insurance regulators to perform reasonableness checks on the appropriateness of assumptions as documented in the actuarial reports.

Casas: The initiative that comes to mind are the changes to the life insurance accounting model, or long-duration targeted improvements. That work began in 2008 and started as a complete overhaul of the insurance accounting model. Over the years, it evolved into the targeted improvements that were issued in 2018. Actuarial input was instrumental in shaping those targeted improvements, and the final changes reflect some of the recommendations we received from the actuarial community.

During the last 10 years, what changes have had the most impact on the regulatory landscape?

Richards: The continued integration of technology into financial services presents well-documented challenges to regulators. Additionally, there is a continuing trend of financial activities moving from public markets to private markets and from capital-regulated entities to those without capital requirements. Regulators face the challenge of anticipating how these changes in the financial ecosystem may affect regulated entities.

What advice would you give to actuaries who are aspiring to work in a regulatory function or get involved in regulatory matters?

Allison: Take advantage of opportunities to broaden your background. Learn about different types of products and, if possible, gain work experience in a variety of actuarial roles (e.g., statutory valuation, pricing, risk management, modeling, experience analysis). Also, try to get comfortable with public speaking.

There are many opportunities to get involved. For example:

Anyone interested in staying up to date on Valuation Manual amendments and developments can attend meetings of the Life Actuarial (A) Task Force as an interested party (contact RMazyck@naic.org to be added to the distribution list).
Proposed changes to the Valuation Manual can be submitted via an Amendment Proposal Form (APF).
When the Life Actuarial (A) Task Force exposes APFs for comments, you can submit a comment letter with your views on its pros and cons.

Casas: The biggest advice I have is to encourage that involvement. We welcome input from all types of stakeholders, not just accountants. Speaking for me personally, I especially enjoy receiving input from those who see the world differently. Everyone is shaped and fashioned by their own personal experiences, and we all benefit from receiving input from a broad spectrum of stakeholders.

What are the biggest benefits or challenges to working in a regulatory role?

Allison: It’s enjoyable working for an organization that supports state insurance regulators. There is tremendous opportunity for professional growth and contribution in this type of role because of the wide range of projects involving multiple product types. The overall nature of the work (i.e., reviewing PBR actuarial reports for many companies) also allows you to gain a big-picture view of the life insurance industry.

Casas: Two benefits come to mind. On a personal level, the work is intellectually stimulating, every day is different and you get to interact with lots of interesting people. On a broader level, the work we do is impactful, and we really do try to make financial reporting better. I think one of the bigger challenges is balancing different (and sometimes competing) perspectives and recommendations. In some cases, it may be difficult to please everyone, and we try to strike the right balance. Ultimately, the Board considers all of that diverse feedback in reaching its decisions—and that includes feedback from the actuarial community.

Richards: For me, the benefits and challenges are the same. As a consolidated supervisor, you need to think holistically about a company and the environment in which it operates. My role focuses on how management monitors and manages risks across a company. Thinking from this perspective has strengthened my understanding of how actuarial work touches other company activities. At the same time, it has required me to develop a broad body of knowledge to be effective in my role. I work on a multidisciplinary team and need to be able to engage people who bring expertise from other specialties, such as credit or operational risks. I also need to be able to communicate technical and complex ideas in a way that helps other people on the team understand context and materiality, so we can tailor and prioritize our supervisory work.

Is there anything else that actuaries should know about your organization or about interacting with your organization?

Casas: When it comes to interacting with the FASB, it’s helpful if you communicate clearly and effectively. This is not unique to actuaries—this also applies to investors and others who provide input to us, and to accountants as well. Each field or profession has its own vernacular, and it’s important to recognize that when you’re interacting with someone outside of that profession. They may speak a different language, so you need to put yourself in their shoes and use terminology or concepts that are familiar to them.