85 lines.

Regulators start drafting principles-based model act

Regulators are starting work to turn the concept of a principles-based reserving system into specifics that will be used in the day-to-day running of insurance companies.

The draft of a new model act is a focal point for discussion of an idea that is gaining adherents among many regulators and insurers. The model is part of an effort to modify the Standard Valuation Law to reflect a principles-based approach.

Greater emphasis would be placed on principles than on formulas in determining solvency reserves. Company actuaries would have more judgment in establishing assumptions that serve as a foundation for reserving.

Reasons cited for the need for a new approach include more efficient use of capital and the need for insurers to have more flexibility to create more innovative products in a competitive financial services market. Concerns that have been voiced include the impact on protections designed to ensure companies’ solvency.

The discussion took place during a meeting of the Life & Health Actuarial Task Force of the National Association of Insurance Commissioners, Kansas City, Mo. Work on the draft is being spearheaded by Mike Boerner, a Texas regulator.

The concept is gaining enough traction to prompt a request for $500,000 in funding in the 2006 NAIC annual budget to help with actuarial experience studies. The request to Diane Koken, NAIC president, was made by Thomas Rhodes, actuarial director of the Medical Information Bureau, Westwood, Mass.

The draft act, dubbed the principles-based law, would apply to life, annuity and health insurance products as well as individual, group and fixed and variable products. It would apply to insurers and reinsurers.

The draft defines a principles-based approach as including valuation and nonforfeiture values which would include mortality, interest, lapse and other assumptions.

The draft also reinforces state insurance commissioners’ authority to determine valuation requirements.

In written comments New York regulator Denis Lauzon broaches 3 objectives to be considered in the act’s development: providing for reserve and RBC principle-based valuations; providing for oversight; and, tracking the conceptual thinking of the Financial Accounting Standards Board, Norwalk, Conn., and the International Accounting Standards Board, London.

Among the governance points covered in the initial New York proposal are: the establishment of a risk management system that would provide timely information and have a process to validate assumptions, models and the results of principle-based valuations.

During a discussion on the issue Lauzon noted that any guideline would need to cover items such as company governance, peer review, process method and assumption.

Several regulators and Paul Graham, a life actuary with the American Council of Life Insurers, Washington, said it would make sense to separate the valuation and nonforfeiture pieces of work on the project. Graham noted that possible tax issues related to the Standard Nonforeiture Law could slow the project down considerably.

xxxxxxxx