Some New York officials have expressed skepticism about doing away entirely with traditional reserving formulas, but Eric Dinallo, the state’s acting insurance superintendent, says principles-based reserving is here to stay.
Principles-based reserving is “the future for the [life] industry to a large degree,” Dinallo said here during a welcome speech at the spring meeting of the National Association of Insurance Commissioners, Kansas City, Mo.
Dinallo ranked principles-based reserving with transparency and suitability as issues of great importance to the New York State Insurance Department.
Advocates of principles-based actuarial reserving want to move away from reliance on simple, static formulas and minimum reserving levels for insurance products. Instead, insurance companies would rely on actuaries to set reserving levels by developing and testing customized statistical models to show how products might perform under a wide range of conditions.
Donna Claire, a life actuary who is spearheading principles-based reserving efforts at the American Academy of Actuaries, Washington, said at the spring meeting that her team might have a good draft of the Valuation Manual, a key component of the principles-based reserving project, ready in time for the NAIC’s June meeting.
The team could have a new Standard Valuation model law draft ready by the end of the year, and it could have the C-3 capital component ready by the end of 2008, Claire said.
But regulators continued to bring up old questions about principles-based reserving and raise new questions here during at Life & Health Actuarial Task Force session.
Actuaries are just starting to talk with officials at the U.S. Treasury Department about the tax implications of a major shift in reserving methods, according to Dave Neve, co-chair of the AAA’s life reserves working group.
The initial work will focus on the VA-CARVM project, which addresses reserving for variable annuities, Neve said.
Discussion participants also returned to the question of whether the industry should phase in principles-based reserving for new products or shift entirely to principles-based reserving for new products.
Because regulators and insurers would start by applying the new system only to new products, the possible effects on insurer solvency would be relatively small, Neve said.
But William Carmello, a life actuary with the New York department, said he would prefer to phase in use of principles-based reserving.
“When we have a comfort level, we can drop the formulas,” Carmello said. “But now we have too much at stake. I don’t like the fact that there are areas of unsubstantiated judgment.”
Today, it appears that regulators would have to wait 5 years, until insurers undergo their regular examinations, to get a close look at the actuarial modeling an insurer is using to perform principle-based reserving calculations, according to Leslie Jones, a life actuary with the South Carolina insurance department.
Jones says she would like to get to see the modeling much earlier.