Principle-based reserving continues to draw the attention of regulators as they gear up for another round of discussions early next month.
The issue will turn up during discussions of two regulatory groups of the National Association of Insurance Commissioners, Kansas City, Mo. It also recently was discussed by actuaries during a Webcast sponsored by the American Academy of Actuaries, Washington.
A joint subgroup of the capital adequacy task force/life and health actuarial task force will focus on governance. The issue is a critical one because some regulators do not feel a principle-based system will offer sufficient protection to consumers without it. The concern is that a complete reliance on company determinations may leave policyholders vulnerable to inaccurate or aggressive assumptions.
A second session will be held to consider an interim solution being proposed by the American Council of Life Insurers, Washington.
The ACLI wants work on a new preferred mortality table to be postponed and existing mortality tables to be split into preferred and non-preferred tables. The reason is that it wants the principle-based approach to proceed apace and not be delayed by potential lack of consensus over new tables.
Work is currently under way to draft a guideline that would be used to provide actuarial guidance over split tables. The decision to create such a guideline was made July 10.
The effort to complete the project and get it firmly in place is due in part to an April 1, 2007, sunset provision on a temporary fix, Actuarial Guideline 38.
The Academy Webcast addressed the detail work that actuaries are forging to give a practical framework to a theoretical concept.
It was noted during the discussion that new tables and methods of mortality are expected to be ready by March 2007, prior to the sunset.
Some of the areas that actuaries are developing were touched upon. These include policyholder behavior assumptions such as premium patterns and premium persistency and lapses.
Among the points made on what could affect policyholder behavior is how the product was sold, inertia, the economic environment, the sophistication of policyholders and the development of secondary markets, according to slides used during the presentation.
Policyholder behavior will be even more important for pricing actuaries when a principle-based system is in effect, according to the Academy presentation. Pricing actuaries will have to work more closely with valuation actuaries, collaborating on the basis for assumptions and agreeing on the interplay between price levels, policyholder behavior, reserve levels and profitability, according to the Academy. And both will have to work more closely with underwriters, according to the presentation.
The presentation also noted that the pricing cycle could either be longer or more frequent as a result of changes from principle-based reserving.