United States

Assessing the impact of principles based reserving on your organization


On Dec. 2, 2012, the NAIC Executive/Plenary Committee (the Committee) approved a new Valuation Manual that supports a principles-based reserving (PBR) approach to establishing insurance companies' reserves.

As insurers consider the impact of PBR, they should note that:

  • Given the controversy around this topic, it will likely take several years to implement
  • It will only apply to future policies
  • It is not too soon to begin exploring the implications of PBR for your organization, as the effects will vary among insurers based on a variety of factors.

The Committee also voted to create an executive-level NAIC Joint Working Group of the Life Insurance and Annuities and Financial Condition Committees (the working group). This executive-level committee will invite consumer participation as it works to design the transition to the principles-based reserving process. The newly established working group will focus on:

  • Guidelines to ensure there are adequate resources for states to implement PBR
  • Transitioning reserving practices
  • Data compilation
  • Engaging consumers

The newly approved Valuation Manual defines the methods regulators and insurers will use to calculate life insurance company reserves. PBR incorporates factors beyond interest rates and mortality to better capture product risks and ensure corporate solvency. Regulators expect they will have access to more information about companies' risks. In addition, appropriate reserving standards will be available for new product designs from inception.

The new Valuation Manual and approved revisions to the Standard Valuation Law and the Standard Nonforfeiture Law for Life Insurance are ready to be presented to states as a package for consideration in time for 2013 legislative sessions.

Kevin M. McCarty, NAIC President and Florida Insurance Commissioner, said, "As state regulators, we take insurance company solvency very seriously. It is vital that consumers get the benefit of the promises made by their insurers. The adoption of this manual is a win-win for life insurance consumers, as we expect it will lead to more choices in the marketplace. Additionally, PBR was a key initiative identified by our members this year and its passage signifies our commitment to modernizing our regulatory system to meet the needs of the market. We are committed to providing all the resources necessary to a successful transition."

RSM encourages its clients to begin determining how the new valuation model will impact their organization and related pricing in the future. The new rules could result in an increase or decrease in required capital.

For more information, or to visit with one of our actuaries, please contact Jim Greisch at jim.greisch@rsmus.com.


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