Principle-Based Reserving for Life Insurers Just Three States From Ratification
November 20, 2015 by Thomas Harman, Washington Bureau manager, BestWeek: Tom.Harman@ambest.com
NATIONAL HARBOR, Md. – Principle-based reserving for life insurers is close to becoming a reality, as adoption by only three states may be separating it from becoming a national standard, according to the latest count by the American Council of Life Insurers.
The data was presented to the National Association of Insurance Commissioners’ principle-based review working group during the NAIC Fall National Meeting on Nov. 18. In 2012, the NAIC Executive Committee approved principle-based reserving for state consideration in the hope of eliminating what supporters view as redundant reserving (Best’s News Service, Dec. 3, 2012).
Forty-two states whose combined life insurance premiums must exceed 75% of the nationwide total must approve the necessary change to valuation manuals containing principle-based reserving before it can become a national standard.
ACLI Vice President and Senior Actuary John Bruins said 39 states had adopted principle-based reserving. He said Massachusetts had legislation under consideration and lawmakers in eight more states — most of them with short winter sessions — are expected to consider legislation in early 2016. The timing is important because the thresholds must be met by July 1, 2016, in order to allow a Jan. 1, 2017, start date. Adoption by Massachusetts along with the 39 other jurisdictions would exceed the premium threshold at 75.05%. “Can we get three of those nine remaining states?” Bruins asked. “I think there is a very high probability that we’ll get three of those nine.”
But there remain some potential hurdles beyond the threshold limits. Bruins said there remain questions about whether some states that have adopted principle-based reserving have made alterations to their laws that would prevent them from being counted as “substantially similar” to the NAIC’s principle-based reserving standards. Michigan, for example, adopted a principle-based reserving law that is to be applied retroactively. Also bringing the substantially similar definition into question are provisions in several states’ principle-based reserving laws that include a small-business exemption for principle-based reserving that the ACLI helped write in the hopes of getting reluctant states to pass principle-based reserving. Such issues are being discussed by the Principles-based Reserving Implementation Task Force that is set to meet Nov. 21.
The working group is moving ahead with development of a principle-based reserving pilot program to test and evaluate principle-based reserving regulatory processes as defined in standard valuation laws and manuals. The areas to be tested on a trial basis include principle-based reserving calculations for term-life and universal life with secondary guarantees under the provisions approved by the NAIC in Valuation Manual 20, which was designed as a way to allow for captives to reinsure those policies until principles-based reserving takes effect.
As planned, the working group seeks participation from 10 insurance companies and their domiciles that are planning on valuing business under VM 20. Each company would determine the products to be tested with a valuation date of Dec. 31, 2015, according to a working group outline of the pilot. Valuation would consist of either a single year of new business or multiple years prior to 2015, with the latter preferred. State regulators and the NAIC’s Life Actuarial Task Force would refer the results to determine if any changes need to be made to VM 20. Completed lists of products and years for each company, as well as a confidentiality agreement between the NAIC, states and companies is expected by Jan. 31, 2016. Calculations on VM 20 and other data must be submitted to states and the NAIC by June 30, 2016. A final report will be due in December 2016, the outline said.
Working group chairman Mike Boerner of Texas said both companies and regulators will benefit from the results of the project, because companies can test their systems and processes before principle-based reserving takes effect while regulators will have a chance to determine if changes are needed to VM 20 or other actuarial reports and principle-based review procedures.
