Actuaries and regulators are continuing their quest for a more flexible reserving system for life insurance products.[@@]

Dave Neve, chairman of the universal life working group at the American Academy of Actuaries, Washington, says the academy is studying a “principle-based” approach to reserving for term products, variable universal life products, and UL products that offer secondary guarantees.

Eventually, the reserving project could create a framework for all life insurance products, Neve says.

In recent months, advocates of traditional, relatively simple formulas for calculating minimum reserves have squared off against advocates of “stochastic-based modeling,” who say actuaries should come up with reserve requirements for a particular product by using sophisticated mathematical models to determine how that product might behave under a wide variety of market conditions.

Neve is quick to state that principle-based reserving is not synonymous with stochastic-based modeling.

Principle-based reserving strategies could use traditional formulas as well as stochastic models, but stochastic models might be especially useful in the analysis of products that are difficult to evaluate with traditional formulas, Neve says.

One key to modernizing the reserving system is setting up a governance system for actuaries, Neve says. Neve says the governance system probably would include a peer-review system.

Here is a sampling of actuaries’ reactions to Neve’s comments:

- Frank Dino, a Florida regulator and life actuary, says it is hard to make assumptions about policyholder behavior and how policyholder behavior influences reserves. Consequently, actuaries would still have to use some pure judgment when coming up with the assumptions used to calculate reserves, Dino says.

- Bill Carmello, a New York regulator and life actuary, says a new reserving system should include some kind of floor or minimum. But insurers would not necessarily have to use the “Standard Scenario,” a strategy that New York has proposed as a vehicle for calculating reserve levels for variable annuities, Carmello says.

- William Koenig, chief actuary at Northwestern Mutual Life Insurance Company, Milwaukee, has sent the National Association of Insurance Commissioners, Kansas City, Mo., a letter talking about the need for compromise. Although Northwestern is supportive of a principle-based reserving approach, the company has reservations about issues such as taxes and the creation of a minimum floor, Koenig writes in the letter. Koenig also writes that a new reserving system should allow for more — but not complete — reliance on actuarial judgment.