NAIC Set to Implement Principle-Based Reserving Methodology for Life Insurers in January 2017
June 11, 2016 by Thomas Harman
WASHINGTON – Principle-based reserving for life insurers will be activated on Jan. 1, 2017, after the National Association of Insurance Commissioners’ Executive Committee adopted a recommendation to do so from a reserving task force.
The vote brings to a close a decade of debate over the use of the methodology, designed to help life insurers right-size their reserves that supporters of the method believed were too large. In 2012, the NAIC voted its initial approval of principle-based reserving, which took the matter to jurisdictions for a vote (Best’s News Service, Dec. 3, 2012). The NAIC needed 42 states and jurisdictions containing 75% of life insurance premiums nationwide and this week announced that 45 jurisdictions containing nearly 80% of premiums had done so.
An NAIC panel also had been examining states’ new standard valuation laws including principle-based reserving to see if they had been substantially similar to NAIC’s principle-based reserving model before giving final approval.
Life insurance companies now have an option to do a three-year phase-in of this reserving method beginning Jan. 1, 2017.
The methodology requires life insurance companies to compare reserve calculations based on a set formula against a reserve calculation that includes factors such as mortality, and policyholder behavior. Companies get to keep the calculation producing the greatest reserve number.
“This is an historic accomplishment for the state-based system of insurance regulation that marks the beginning of a new policy valuation system that can adapt to new and innovative life insurance products benefiting consumers and life insurers,” said NAIC President John Huff in a statement.
The American Council of Life Insurers issued a statement in strong support of the principle-based reserving method. “The [NAIC] has played a leadership role in updating the reserving methodology, which dates to the nation’s Civil War,” said ACLI President and Chief Executive Officer Dirk Kempthorne in a statement.
He said principle-based reserving would “enhance the current system for calculating policy reserves resulting in reserve levels that more accurately reflect risks assumed by life insurers for the policies they underwrite.”
Kempthorne said principle-based reserving would strengthen regulators’ solvency oversight authority “to help ensure companies will be able to fulfill their promises to policyholders.” He said the modernized reserve methodology will help companies develop innovative life insurance products and services that help consumers address ever-changing financial needs.
The principle-based reserving implementation task force is finalizing important work before implementation, such as refining principle-based reserving methodology, managing a pilot actuarial surveillance project, developing regulatory review and analysis procedures, developing additional training materials and working on experience data collection and review, the NAIC said in a statement.
The Affordable Life Insurance Alliance also welcomed the NAIC’s vote. Scott Harrison, the ALIA’s executive director said the vote was an important day for life insurers, and especially consumers, who will now get access to properly priced, innovative products. He said the advance of principle-based reserving demonstrates that states working through the NAIC have the ability to modernize an important part of their regulatory scheme and even over significant opposition from various stakeholders. “It show how right those commissioners were and the vision they had,” Harrison said.
(By Thomas Harman, Washington Bureau manager, BestWeek: Tom.Harman@ambest.com)
