Many insurance company executives are too unfamiliar with principles-based reserving efforts to answer basic questions about how their companies are preparing for the change.
Consultants from the Chicago, Washington and Richmond, Va., offices of Deloitte & Touche USA presented figures supporting that conclusion in a summary of results from a recent insurance company executive survey.
Members of national actuarial groups and regulators at the National Association of Insurance Commissioners, Kansas City, Mo., are developing new approaches to reserving requirements that would give companies more flexibility in exchange for requiring them to use more sophisticated statistical forecasting techniques.
Only 25% of the survey participants said their companies are following the looming change in actuarial requirements closely, and 48% said they did not know whether their companies were following the principles-based reserving efforts or were unable to provide any answer at all.
Similarly, although 34% of the participants said they are starting to gather the mortality, morbidity, persistency and election of benefits data necessary to set assumptions, 54% were unable even to answer the question. Another 12% of the survey participants said that their companies are not gathering what a new principles-based reserving regime would require.
The relatively low PBR awareness rate among survey participants confirms regulators’ concerns that the shift might be challenging, Steven Foster, a former Virginia insurance commissioner who is a director in Deloitte’s Richmond office, said during a Webcast held to discuss the principles-based reserving issue.
NAIC commissioners seem to be committed to implementing principles-based reserving, but there are concerns that the large influx of new commissioners could lead to delays, Foster said.
Frederic Gelfond, a senior manager in Deloitte’s Washington office, talked about tax issues.
Today, insurers reserve for business on a contract by contract basis. To move away from contract-by-contract reserving under a principles-based system, insurers would have to work out an approach that would be acceptable to the Treasury Department, Gelfond said.
Similarly, insurers have been using pre-set federal and state interest rates when conducting life insurance policy calculations for tax purposes. Under a full-blown principles-based reserving system, a company might be able to use another rate by changing the long-term yield curve, Gelfond said.
Moreover, insurers and regulators still have to find out how any tax treatment changes triggered by a shift to principles-based reserving will affect the way the Treasury Department interprets the definition of insurance, Gelfond said.
The Internal Revenue Service and interested parties had a meeting 2 weeks ago, Gelfond said.