Principles Project Draws Fire

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.