More Flexible Reserving Gets Support

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Flexibility is important to life insurers who say the standard valuation law should use asset adequacy testing rather than formulas to determine necessary reserves.

Asset adequacy testing is a more flexible approach that allows an actuary to use professional judgment to determine whether reserving for assets is adequate.

The findings are part of a preliminary survey by the American Academy of Actuaries, Washington, which queried the top 200 life insurers by life reserves, on deficiency reserving. The response rate to the survey was about 30%, representing $180 billion in reserves out of a total of $600 billion.

The survey, an update of which is currently under way, was conducted by the Academys deficiency reserves working group.

The findings are being discussed by regulators who are considering possible changes to the Standard Valuation Law, a law that establishes reserving for life insurance products.

Companies were asked if the Standard Valuation Law, should be amended to eliminate the current formulaic approach to calculate deficiency reserves, which are all instances where the gross premium is less than the net premium. Responses indicated that 75% said yes and 15% responded no.

Another question asked was whether asset adequacy could be an appropriate approach to replace the current formulaic deficiency reserve approach. Some 80% favored such an approach, while 15% opposed.

Insurers also offered comments to explain their positions.

Reasons cited for changing the reserving methodology include reserves that are “too high or excessive” as well as calculations that are “very complex.”

Also, according to some comments, there is subjectivity in determining the formulas and calculations such as the X-factors that are added to calculations from the CSO Table to determine deficiency reserves. Consequently, according to a discussion of these comments, it would be better to just move to a system that allows an actuary to use professional judgment.