State insurance regulators are starting long-planned efforts to write a model act that could create a principles-based reserving system.[@@]

Mike Boerner, a Texas regulator, is leading the team that is writing the draft, and members of the draft team updated other regulators on the team’s progress at a recent meeting of the Life & Health Actuarial Task Force of the National Association of Insurance Commissioners, Kansas City, Mo.

Drafting is far enough along that Thomas Rhodes, actuarial director of MIB Group Inc., Westwood, Mass., has asked the NAIC for $500,000 in 2006 funding to cover the cost of the actuarial experience studies needed to support work on the model.

Advocates of a principles-based approach to calculating life insurance company reserves say it would put more emphasis on reserving principles, rather than on static formulas, in efforts to calculate solvency reserve requirements.

Company actuaries would have to exercise more judgment when coming up with the assumptions used in reserving calculations.

Critics of the principles-based reserving effort wonder whether a shift could lead to problems with insurer solvency, but supporters say a shift would increase life insurers’ flexibility and help life insurers use capital more efficiently.

The current model draft, dubbed the principles-based law, would apply to annuity issuers, health insurers and life reinsurers as well as to direct writers of life insurance.

The draft emphasizes that state insurance commissioners would continue to have the authority to determine valuation requirements.

Dennis Lauzon, a New York regulator, submitted written comments listing 3 goals for the team drafting the model:

== Providing for principles-based valuations of reserve levels and risk-based capital ratios.

== Providing for oversight.

== Keeping up with the conceptual work of the Financial Accounting Standards Board, Norwalk, Conn., and the International Accounting Standards Board, London.

New York regulators also are calling for the establishment of a risk-management system that would let regulators know about potential problems early.

Any principles-based reserving guideline should also address matters such as a peer review system, Lauzon said during a discussion of the New York proposal.

Several regulators and Paul Graham, a life actuary with the American Council of Life Insurers, Washington, said it would make sense to separate work on valuation issues and nonforfeiture issues.

Tackling tax issues related to the Standard Nonforeiture Law could slow the process of drafting a new reserving model down considerably, Graham said.