Discussion of principles-based reserving threaded through several sessions during the fall meeting of the National Association of Insurance Commissioners here.

At a joint executive committee/plenary session, the NAIC, Kansas City, Mo., adopted an interim step in implementing a principles-based reserving system.

And during a session of the Life & Health Actuarial Task Force, Donna Claire, chair of the risk management and financial soundness committee of the American Academy of Actuaries, Washington, said that its work on the system could be ready by year-end.

The executive/plenary vote, in which California was the sole abstaining state, affirmed a regulatory package that includes adoption of Actuarial Guideline 38, which establishes reserves for variable annuities with guarantees, as well as the Model Regulation Permitting the Recognition of Preferred Mortality Tables For Use in Determining Minimum Reserve Liabilities.

The preferred mortality tables split the existing 2001 CSO Table into 3 non-smoking and 2 smoking preferred mortality risk tables. The Academy is currently developing a new preferred mortality risk table with updated data. However, the American Council of Life Insurers, Washington, has argued that advancement of a principles-based solution was critical for the insurance industry. Thus, they argued, it would be better to split existing tables than to risk having the project delayed while new tables were developed.

In describing the proposal to commissioners, North Dakota Insurance Commissioner Jim Poolman, who is encouraging a quick advancement of a principles-based system, and who is chair of the Life Insurance and Annuities “A” committee, said that the model also includes an asset adequacy test and a sunset for AG 38 of December 31, 2010. It is anticipated that a principles-based reserving system could be in place at that time.

But, Poolman called on the life insurers to reach consensus and strengthen support for the new reserving system. During a Principles-Based Reserving Working Group session, Poolman said that an idea that is being considered which would create a central body to offer guidance and interpretations on reserving could meet with resistance from state legislators who may be reluctant to cede authority. Consequently, it is important that insurers support the effort, he explained.

Sue Nolan, executive director of the National Conference of Insurance Legislators, Troy, N.Y., said that NCOIL is considering this issue and will discuss it during its fall meeting in November in Napa Valley, Calif.

A centralized body would need to be accompanied with public accountability and an open process, Birny Birnbaum, executive director of the Center for Economic Justice and an NAIC funded consumer representative said.

If a valuation manual is created as part of that effort to create centralized guidance, it is important that the manual be effective in states on a common date, according to Paul Graham, a life actuary for the ACLI.

The ACLI also addressed the issue of taxes at the working group meeting and at the LHATF meeting.

During the LHATF meeting, Gregory Jenner, executive vice president, taxes and retirement security, with the American Council of Life Insurers, Washington, expounded on that theme. Jenner told regulators and attendees at the LHATF meeting that the ACLI hopes to educate the Treasury Department on the principles-based issue and that it hopes that it can work within the scope of the current law. The reason, he explains, is that going to Congress and seeking a change in the law could conceivably open up a “Pandora’s Box.”

Jenner explained that while ACLI will try to explain the issue to officials at the Treasury, there are other matters, such as President Bush’s budget, that will occupy the Department and that it is “highly optimistic” that the tax issue will be addressed by year-end 2006.

There could be a need for additional “tweaking,” depending on feedback from Treasury, according to Jenner. “Fluidity is the key word here.”

The tax impact was just one of several issues touched on as part of the principles-based discussion.

The impact on small companies as compared with large companies was raised by Kent Michie, Utah commissioner.

Dave Sandberg, a life actuary working with the Academy, said that the system would measure risk and not size when considering reserving requirements.

Rob Esson, an NAIC staff person, noted that there is a parallel between international accounting and solvency work and the PBA project.

And, NAIC staff person Randall Stevenson noted that lower reserving requirements could reduce the need to reinsure products overseas and could result in companies deciding to write more business such as term insurance. A principles-based system is an alternative to a federal charter. If this is not addressed, it could provide another argument for a federal charter, he noted.

Steve Broadie, a representative with the Property Casualty Insurers Association of America, Des Plaines, Ill., noted that principles-based reserving could be a system that would be applicable to property-casualty insurers if companies were able to use internal models to calculate their own risk. Corporate governance standards that are currently being developed by the American Academy of Actuaries, Washington, could be applied to p-c insurers, he said.

It was also noted during the NAIC meeting that the new reserving approach is also starting to be considered for long term care insurance.