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The Line's Been Drawn

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Within a cannonball shot of the Alamo, which San Antonio brochures are quick to point out is emblematic of the Texas Revolution, a quieter kind of revolution was recently debated.

Principles-based reserving, the plan to make reserves more reflective of actual risk, received yet another airing during the National Association of Insurance Commissioners’ winter meeting. Actually, it amounted to many airings, as several meetings, a seminar and a steady buzz in the halls between sessions attest to.

What makes this debate different than any of the other quarterly meetings over the last two years in which the PBR plan has been carefully cultivated?

Well, the plan might be getting closer to becoming a reality. But why, you might ask, should we believe we’re getting warmer?

For one, the American Academy of Actuaries is promising a final product in the first part of next year.

Another sign is North Dakota Jim Poolman’s promise that in 2007 he will focus on PBR at the NAIC meetings. Poolman has successfully negotiated several thorny issues, including a COLI/BOLI model, a Suitability model and a Viatical model that he has just shepherded out of the NAIC’s Life and Annuities “A” Committee, which he chairs, to the NAIC’s Executive Committee and Plenary. So, he has a track record.

And it seems from discussions among commissioners that they are, if not supportive, at least willing to listen to arguments for what really would be a revolutionary change in determining reserves.

Then, too, there is the rallying cry of Mike Batte, co-chair of the Life & Health Actuarial Task Force with Larry Bruning, another proponent. LHATF is the petri dish for PBR. Batte is saying that doubts about the system are starting to be voiced because it’s nearly ready to jump off the blueprints and become reality–blueprints that a legion of actuaries the size of Santa Anna’s army have spent countless hours assembling.

Skeptics need only look at the roadmap of Academy workgroups, which, from the look of a slide presented during the meeting, probably surpass the number of missions established in pre-revolution Texas.

But while momentum seems to be on the side of PBR proponents, those questioning the approach offer convincing arguments for a go-slow approach. Will the plan, because of modeling requirements and actuarial staffing requirements, disadvantage smaller companies? Will it accelerate consolidation by allowing freed-up reserves to be used by acquirers of small companies, as the National Alliance of Life Companies recently cautioned?

Or would that consolidation happen anyway in a world of more complex products, greater competition from other financial services industries and the spread of global markets that use PBR-type principles?

Both sides offer cogent arguments. The prognosticators milling around between sessions offer no clear direction how principles-based reserving will turn out.

If you average the opinions of those who think the project will end with a cannonball’s thud with those who see the promise of better use of company and industry resources as strong motivation for success, you end up with a coin toss.

What is clear is that a line is being drawn, one as clear as legend says Colonel William Travis drew on Alamo grounds when he asked those willing to stay and fight to step over. It will be interesting to see how many take the step and if the step amounts to a changed industry.

Jim Connolly

Senior Editor


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