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.

As part of this system, criteria used in preferred underwriting will be identified and then it will be determined how to score individual criterion, Gorski explained.

Corporate governance is another feature of the new system that regulators at the National Association of Insurance Commissioners insist is necessary and one that actuaries are working to develop.

Shirley Hwei-Chung Shao, chair of the Academy’s PBA Review and Governance Work Group, said a PBA review opinion will be submitted to all licensed states, and work papers will be available on request. Information will be kept confidential, according to Shao’s presentation.

The Academy’s work group is recommending that the PBA reviewer should be hired by the company’s board of directors, Shao said.

Independence will be a major focus of any appointment, she added. Among the checks she enumerated were requirements that an appointed actuary not be employed by the company in the prior 3 years; not have material financial interests in the company; and shall have 5-year rotation requirements.

Mike Boerner, managing actuary with the Texas Department of Insurance and chair of the Academy’s SVL 2 Valuation Law and Valuation Manual Team, explained how changes to the Standard Valuation Law and an accompanying manual will make the new PBA system possible.

A valuation manual will make the change more efficient by creating more uniformity, he explained. And the valuation manual may make it possible for states to comply with changed requirements without having to adopt a new regulation each year, Boerner added. However, states would still be able to alter requirements in the manual, according to Boerner’s presentation.

The effective date of the SVL draft would be the Jan. 1, following either the adoption by an as-yet undetermined number of states or the date when the NAIC adopts the draft, whichever is later.