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August 24, 2006 at 05:56 AM
Corporate governance, changes to the standard valuation law and the collection of data are just a few of the issues that life actuaries say they are fine-tuning to advance principles-based reserving.
A principles-based approach to reserving is a system many in the industry say could make reserving more efficient for life insurers than formulaic reserve accounting methods. However, during an Aug. 22 Webcast by the American Academy of Actuaries, Washington, some regulators said they were concerned that principle-based accounting could be open to abuses if not executed properly.
If a company is good at risk management, then a PBA approach to reserving will reward that company with lower reserves, said Donna Claire, chair of the Academy’s Risk Management and Financial Soundness Committee. For some companies, reserves could be higher, she added.
More accurate assessment of reserving needs is becoming more important as products become more complex, according to Claire.
Asked whether PBA would impose a heavy burden on small companies and whether small companies should be allowed to continue using formulaic accounting, Claire said that the size of the company is not the biggest consideration. Rather, it’s the risks a company takes.
For small, low-risk carriers or companies with low-risk lines of business, there would be simplified methods that would be a middle step between formulaic and principles-based reserving, she explained.
Larry Bruning, chief actuary of the Kansas Insurance Department and chair of the Academy’s central actuarial examiner team, said he thought a PBA approach will become more important because of increased product complexity, competition in both consumer asset accumulation and risk management, and existing law inhibiting product design.
Another reason detailed by Dave Sandberg, vice president of the Academy’s Life Practice Council, is the international movement to a principles-based approach. It’s likely there will be consistency between the U.S. and international standards, he said.
Another feature of PBA will be the completion of preferred mortality tables that will be suitable for statutory valuation as well as a tool to help actuaries decide what table is appropriate in given situations, said Larry Gorski, chair of the joint Society of Actuaries-Academy project oversight group on preferred mortality.
