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.
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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.