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Life Health > Life Insurance

Principle-Based Reserving Discussion To Continue

By Jim Connolly

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Minneapolis roadshow to draw diverse participation

By Jim Connolly

Regulators, company CEOs, life insurance associations and actuaries will meet in Minneapolis Aug. 22-23 to discuss the best way to create efficient, streamlined reserving for life insurance products.

Principle-based reserving, which relies more on actuarial judgment and individual company circumstances than on the current formulaic approach for reserving, will be the focus of the interim meeting of the National Association of Insurance Commissioners, Kansas City, Mo. It will be discussed and compared with the current way reserving is done.

The discussion will take place even as the NAIC prepares to consider and possibly adopt an interim reserving approach for universal life products with secondary guarantees, Actuarial Guideline 38. AG 38 stands a good chance of being fully adopted by the NAIC at its fall meeting Sept. 10-13, says Jim Poolman, North Dakota insurance commissioner and chair of the NAIC’s Life & Annuities “A” Committee, which is examining the issue of principle-based reserving.

Poolman says the issue has implications for consumers, the life insurance market and solvency oversight. Consequently, he continues, regulators will balance the need for strong regulation and speed. The discussions will be informational, but there will also be a general discussion of charges for the “A” Committee and the Life & Health Actuarial Task Force, which reports to the “A” Committee, he says.

The interim decision sunsets in 2007, and Poolman says it will be at the top of the NAIC’s agenda for life insurance regulation during that time.

Among the issues that regulators will have to weigh is how to proceed with changes that are uniform, he adds.

Life insurance CEOs that are expected to speak at the interim meeting are Bob Davis of USAA, San Antonio, Texas; Dennis Glass, president and CEO with Jefferson-Pilot Financial, Greensboro, N.C.; and John D. Johns, chairman, president and CEO of Protective Life Corp., Birmingham, Ala. Both Glass and Johns are founding co-chairs of the Affordable Life Insurance Alliance, Washington.

The American Council of Life Insurers, Washington, is also expected to testify at the meeting. At press time, specifics of those comments were not available.

The American Academy of Actuaries will start its presentation by explaining how the concept of a principle-based approach evolved over the last decade, according to Dave Sandberg, a life actuary with Allianz Life Ins. Co. of America, Minneapolis, and an Academy representative. That overview will include current projects on reserving for universal life products and work on an NAIC initiative of reserving through the C-3 Phase II project.

Governance issues for regulators will also be broached and potential changes of regulatory structure such as whether there should be a centralized NAIC function to address reserving, a mechanism such as the Interstate Compact or some other way of creating uniformity, he adds.

Other points that will be discussed, Sandberg says, includes peer review, coordination of auditors’ and actuaries’ responsibilities in attesting to the soundness of company attestations, and whether there needs to be additional certifications for items such as the validity of an actuarial model. There will also be a discussion of flexibility and appropriate “sticks and carrots,” he says.

Scott Harrison, ALIA executive director, Washington, says that ALIA will try to answer the question of why there needs to be reform of the current valuation methods. The discussion will go beyond the “narrow interpretation of AG 38″ as it applies to one product and look at how such a system could broadly cover products, he says.

Under the current system, he maintains, companies hold excessive reserves and with current risk management techniques, there is a better way to create a reserving system, Harrison says. By doing so, premiums will be lower and the flexibility of products greater, he adds.

Among the points that ALIA will make are that a change is doable and that a plan of action should be adopted by the NAIC, he says. “We would like to see the NAIC create a life reserve modernization action plan” with principle-based solutions as its foundation, Harrison adds.

“The issue has implications for consumers, the life insurance market and solvency oversight.”

Jim Poolman

North Dakota Insurance Commissioner

“We would like to see the NAIC create a life reserve modernization plan.”–Scott Harrison

Governance, peer review and coordination of actuarial and accounting work are some of the issues that need to be developed.–Dave Sandberg

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