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Principles Project Draws Fire

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Officials at the National Association of Insurance Commission are hoping to complete work on some components of a new reserving system by June 2007.

Pieces of a “principles-based” reserving system that could be ready by mid-year could include a revised Standard Valuation model law and a valuation manual, according to Donna Claire, who is helping to lead work on the new system at the American Academy of Actuaries, Washington.

But another major component, arrangements to analyze and minimize the effects the shift might have on taxes, will probably still be in progress, Claire said here at the NAIC’s winter meeting.

The American Council of Life Insurers, Washington, expects to have its first formal meeting with Treasury Department officials before the end of 2006, according to Paul Graham, the ACLI’s chief life actuary.

“We will discuss policy issues and how tax policy fits in with what is happening with the NAIC’s reserve modernization,” Graham said.

Advocates of a principles-based approach say they want insurers to shift toward using advanced statistical analysis and sound actuarial judgment to set reserves, rather than using static reserving formulas.

The Life & Health Actuarial Task Force, an arm of the NAIC, Kansas City, Mo., has been working on a principles-based reserving project for more than 2 years.

Several speakers at a task force meeting raised concerns about the project.

Larry Bruning, a Kansas regulator and task force co-chair, asked why the current AAA principles-based reserving draft excludes products such as credit life, industrial life, and pre-need and final expense policies.

Dave Neve, co-chair of the AAA’s life reserves working group, said the working group had responded to industry concerns about principles-based reserving testing requirements.

The actual principles-based reserving system could handle the products exempted in the current draft by replacing the proposed exemption with a simplified testing approach, Neve said.

Mark Birdsall, a life actuary who was representing the National Alliance of Life Companies, Sarasota, Fla., said the current principles-based reserving proposal would be bad for small companies, and that product exemptions would make matters worse.

Smaller companies would have more trouble handling the required statistical modeling, and the current version would create a non-level playing field by officially giving some companies’ modeling assumptions more “credibility” than others, Birdsall said.

The credibility system could give larger companies a pricing advantage over smaller companies by forcing the smaller companies to hold higher levels of reserves, Birdsall said.

A large company might even be able to fund an acquisition by using its superior credibility to release some of the reserves held by a smaller, less credible acquired company, Birdsall warned.

America’s Health Insurance Plans, Washington, sent William Weller to the task force meeting to object to the idea of regulators applying a principles-based reserving system to its members.

Health insurance products are much different from typical life insurance products, and applying a full-blown principles-based system to health insurers would force them to put far more effort into setting reserves, Weller said.

A tabular reserving approach fits the health insurance business better, because the reserving requirements set by that approach do not change unless the company’s experience changes, Weller said.


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