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Principles-based Reserving Actuarial Opinion Discussed

By Jim Connolly

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Efforts continue to narrow what regulators feel will work and what won’t as the principles-based reserving project continues toward completion.

State insurance regulators at the National Association of Insurance Commissioners, Kansas City, Mo., are working with life insurers and actuaries to develop a new reserving system. The work is looking at many facets of such a new system. As part of that overview, regulators are discussing an exposure draft of the Principles-based Valuation Review Opinion model regulation.

Many in the industry feel that a system based on actuarial principles rather than formulaic reserves would make for more efficient use of capital and a more competitive life insurance industry. However, some regulators feel that governance measures need to be in place to ensure that companies accurately portray their financial picture and do not make assumptions that are overly aggressive.

Shirley Hwei-Chung Shao, chairperson of the American Academy of Actuaries principles-based review and governance working group, reviewed the Academy’s latest discussions regarding issues surrounding governance and requested feedback from regulators.

Regulators participating in the NAIC’s Life & Health Actuarial Task Force took a straw poll on 3 questions posed by Mike Batte, a New Mexico life actuary and co-chair of the group.

The first question posed was whether actuaries auditing a principles-based review should be associated with a consulting firm that is contracted by an insurer. Seven regulators responded ‘yes’; 4, ‘no’; one abstained; and one did not respond to the question.

A second straw poll taken among regulators addressed whether the principles-based actuarial review opinion should be made public or should be kept confidential. Five regulators said that it should be made public; 2 that it should not be made public; and 6 abstained on the issue.

A third question addressed the issue of whether the actuarial report should be a single report for all lines of business or whether there should be individual reports for individual lines of business. Nine regulators responded that the Academy recommendation should be for a single line of business; 3 abstained and 1 did not respond to the question.

During the course of the discussion, Shao made clear that in the Academy draft, principles-based reviewers would not be in the position of reviewing their own work and that if a reviewer was employed by an auditing company, neither the reviewer nor the auditing company that hired the reviewer would be checking each other’s work.

An important point to consider, according to Joe Musgrove, an Arkansas regulator, is that regardless of who conducts the review, there is a certification of adequacy of reserves so that “some party is on the line to say ‘yes, we reviewed the reserves and they are adequate.’”

On the issue of making an opinion public, Shao noted that the opinion was a work step and not a final product, and the cost of a public opinion would be much greater for a company because of the potential liability that the auditor was assuming.

Regulators differed on the issue, with some saying that an opinion should be public, but others noting that regulators might receive more pertinent information that they could use if the process remained confidential.

During the discussion, John Bruins, a life actuary representing the American Council of Life Insurers, Washington, expressed support for the principles-based reserves project but also noted concern about the oversight process.

The concern, according to Bruins, referencing a letter from Paul Graham, ACLI vice president, insurance regulation and chief actuary, is the potential for “an extremely redundant and expensive model of oversight.”

The letter continues: “In addition, the industry is already subject to annual audits, annual asset adequacy analysis reporting, and triennial examinations. If we are to build an efficient and effective oversight model, we need to clearly identify the roles and responsibilities of each area of oversight and determine the amount of reliance that will be placed on each piece. It appears that, as currently being developed, there is a significant amount of overlapping oversight being contemplated, resulting in redundant work being performed.”

Bruins noted that “for companies, this is a fairly time-consuming and expensive process.” But, he continued, if it is a substantial part of the process, then it “will be money well spent.”

The ACLI’s Graham comments in his letter that “if the regulators do not believe that they can rely on such an opinion and report in the discharge of their duties, then we believe there needs to be a discussion about the desirability of such a review being performed.”

Additionally, Graham notes that if regulators do rely on the principles-based actuarial opinion, and they feel that they can put a meaningful reliance on the review and it receives an unqualified opinion, then there needs to be a discussion to make sure it will not be “arbitrarily be challenged by regulators.”

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