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Principle-Based Reserving Advances

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The National Association of Insurance Commissioners has authorized a new working group that will examine the issue of principle-based reserving.

The NAIC gave its endorsement to the new group at its summer meeting here June 11. The next day, the group held an organizational meeting.

The working group was formed even as a number of American Academy of Actuaries’ working groups advance toward completion of their work on principle-based reserving. The organization, based in Washington, promises to have necessary work done on mortality tables by year-end 2006.

As that work progresses, the American Council of Life Insurers, Washington, has proposed an interim solution, which the NAIC could adopt at its fall meeting in St. Louis. The purpose of an interim solution is to get the framework of a principle-based system ready by April 1, 2007, until the more long-term project is completed.

Principle-based reserving is a high priority for many life insurers because they maintain it will free up unnecessary reserves. Some regulators also support the project because they argue the current formula-based system requires them to make repeated changes when insurers issue new products or change existing products. Others are concerned that giving companies too much latitude will create greater solvency risks.

For those regulators, Mike Batte, chair of the Life and Health Actuarial Task Force and a New Mexico regulator, says that the development of corporate governance standards at the Academy will be an important base to build confidence.

The project is critical on a number of fronts, according to Batte. He said that principle-based reserving, which would give actuaries more room for judgment than the current formula-based system, accurately reflects global actuarial and accounting standards.

Regulators are just starting to look at principle-based reserving for long term care insurance, he noted. The project later may be expanded to other lines of business, including health and property-casualty, he added.