Principle Based Reserving Coming January 1, 2017

In recent years, life insurance companies have expressed concern that the current approach to product reserves does not take into account the increasingly complex, non-static, nature of current life insurance products. In response to these concerns, the National Association of Insurance Commissioners (NAIC) conducted “an extensive analysis of amended Standard Valuation Laws passed by 45 states, representing nearly 80 percent of the U.S. life insurance market.” The end result happened on June 10, 2016, when the National Association of Insurance Commissioners announced that it adopted the recommendation of the PBR Implementation Task Force to switch to principle based reserving (PBR) starting January 1, 2017.

Under PBR:

  • “Insurers set aside funds, or reserves, to pay insurance claims when due. Currently, formulas and assumptions are used to determine these reserves, as prescribed by state laws and regulations.”
  • “Companies will hold the higher of a) the reserve using prescribed factors and b) the reserve which considers a wide range of future economic conditions and is computed using justified company experience factors, such as mortality, policyholder behavior, and expenses.”
  • “The Valuation Manual is established by the Standard Valuation Law and would be used to detail the reserve calculation requirements.”
  • “The new Standard Valuation Law and Valuation Manual are built to encompass requirements for all life and health insurers and the business they write. Initially, reserving methods only change for life insurance. However, over time, PBR is expected to be developed for additional product lines.”

The PBR Implementation Committee will finalize several important components of PBR prior to January 2017. This includes “refining the PBR methodology, managing the pilot actuarial surveillance project, developing regulatory review and analysis procedures, developing additional training materials and working on experience data collection and review.”

One of the few states that has opposed to PBR is New York. Specifically, the New York Department of Financial Services (NYDFS) has opposed it for the following reasons:

  1. “Principles-based reserving in the banking sector proved disastrous”;
  2. “Under PBR, reserves will decrease, and the risk of insurer insolvency will increase”;
  3. “It is not clear that a PBR regime will benefit consumers”;
  4. “Regulators are ill-equipped at present to implement and oversee PBR”; and
  5. “Even if the rules-based approach has its shortcomings, it does not necessarily follow that PBR is the answer.”

Over 45 states have adopted PBR while one state, Massachusetts, is currently considering legislation in this area. Only three states have taken no action including New York.

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