Members of the American Academy of Actuaries have drafted a statement of principles that actuaries, insurers and regulators can use to set and assess life insurance and annuity reserve levels.[@@]

Regulators at the National Association of Insurance Commissioners, Kansas City, Mo., have given the AAA, Washington, comments on the 10-principle draft, and academy members are preparing a revised version based on the comments. The principles team hopes to present the revision in August, at an interim NAIC meeting in Minneapolis.

Some actuaries, insurers and regulators have been promoting adoption of a reserving system based on principles and actuarial judgment, rather than specific formulas and ratios, since the mid-1990s.

Recent clashes over reserving requirements for universal life products with secondary guarantees have revived interest in the principles-based reserving concept.

The reserving principles included in the first AAA draft cover topics such as governance, evaluation of controllable risks, and the need to let reserving assumptions change as economic conditions change.

Actuaries and regulators are talking about ways to make sure that insurers use the same assumptions when valuing assets and liabilities, to avoid situations in which assets are priced at book value while liabilities are priced at market value.

The American Council of Life Insurers, Washington, is emphasizing the importance of considering the effects of changes in federal reserving requirements on federal income taxes.

Opponents of principles-based reserving used tax issues to keep the new reserving concept from advancing in the mid-1990s, according Mike Batte, a New Mexico regulator.

But John Bruin, an ACLI actuary, says the ACLI is supports the concept and will ask federal tax authorities to make the changes necessary to put a new reserving system in place.

Frank Dino, a Florida regulator, says he is concerned that a principles-based system will put regulators at a disadvantage by giving insurers too much latitude in making assumptions. If, for example, a regulator believed that an insurance company should be in receivership, the company could argue that it and the regulator were simply relying on the judgment of actuaries who were using different but equally reasonable assumptions, Dino says.

Dan Keating, a Florida regulator, is recommending that a principles-based reserving approach be adopted in phases.

John Rink, a Nebraska regulator, is agreeing with the idea of phasing in the new approach, but he also is opposing any efforts to delay implementation.