If and when states adopt a flexible, principles-based approach to reserving, some products may come under the reach of the new system earlier than others.
Members of the Life & Health Actuarial Task Force of the National Association of Insurance Commissioners, Kansas City, Mo., talked about the possible timing of principles-based reserving compliance during a recent conference call.
The new reserving system could apply to all life products right out of the gate. But the system could be phased in, with some products coming first and other products added later, according to Pamela Hutchins, chief actuary of Government Personnel Mutual Life Insurance Company, San Antonio.
Task force members talked about several different ways to phase in use of a principles-based reserving system.
1. Regulators could decide what products must conform first to the principles-based reserving framework now being developed by the life reserve working group at the American Academy of Actuaries, Washington.
Sheldon Summers, a California regulator, and Mike Bohner, a Texas regulator, asked with dividing line regulators would use to make such a determination.
2. Insurance company actuaries could choose to avoid the complexities of meeting principles-based system standards by developing, and justifying, simplified reserving approaches for particular products.
3. An insurance company could get an initial actuarial opinion classifying its products as being best matched with formulaic, deterministic or stochastic reserving approaches.
The formulaic approach – the approach used today – would fit with simpler products.
The deterministic approach could be used for evaluating how a somewhat more complicated product might perform under a single set of assumptions.
The stochastic approach could be used for evaluating how more complex products might perform under a number of scenarios.
Once a product was matched with a reserving method, an insurance company would need to get permission from an insurance commissioner to change the method.
Tomasz Serbinowski, a life actuary and Utah regulator, said a phase-in would give regulators “something to get comfortable with.”
The phase-in, based either on the filings of a number of companies or a number of products, would help regulators learn about what in the new reserving system worked and what did not work, Serbinowski said.
It could be possible to have a phased-in approach while regulators weighed a simplified approach for companies to follow, said Paul Graham, a life actuary representing the American Council of Life Insurers, Washington.
Armand dePalo, chief actuary at Guardian Life Insurance Company of America, New York, warned about a potential tax risk.
If there is a phase-in but an insurance company stays within a policy form and there is just 1 possible calculation within the form, then there are no tax issues, dePalo said.
However, if, within a policy form, there are 2 possible calculations, there could be a tax problem, dePalo said.