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NAIC Forms Principles-Based Reserving Working Group

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The National Association of Insurance Commissioners has formed a working group to focus on efforts to develop principles-based reserving life insurance rules.

The plenary, the body that includes all voting members of the NAIC, Kansas City Mo., approved the formation of the group, and officials say it should attract high-level participation by state insurance commissioners.

The working group held its first organizational meeting here at the NAIC’s summer meeting.

The actuaries and others working on principles-based reserving want to move the insurance industry away from dependence on static reserving formulas, toward use of general actuarial principles, modern statistical forecasting methods and reliance on actuaries’ judgment.

Many life insurers say a shift to principles-based reserving will reduce reserve requirements, allowing them to find new uses for some of the cash now locked away in reserves.

Some regulators support the project, saying it will ease efforts to issue and update products, but other regulators fear that giving companies too much latitude will increase solvency risks.

Efforts by the American Academy of Actuaries, Washington, to develop corporate governance standards could increase regulators’ confidence in the principles-based approach, according to Mike Batte, chair of the NAIC’s Life & Health Actuarial Task Force.

Batte, who supports the principles-based reserving approach, says the NAIC may apply the approach to health insurance and property-casualty insurance as well as to life insurance.

Regulators are just starting to look at the use of principles-based reserving in the area of long term care insurance, Batte said.

Moving to a principles-based approach is important in part because a principles-based approach will reflect global actuarial and accounting standards more accurately than the current formulaic system does, Batte said.