Officials are developing a general guide for creating a new “principles-based” reserving system.
District of Columbia Insurance Commissioner Thomas Hampton, chair of the PBR working group at the National Association of Insurance Commissioners, Kansas City, Mo., and Alfred Gross, have prepared a draft that lists 6 guiding principles for PBR efforts:
- Regulatory requirements should be open and transparent, and U.S. principles and standards should be becoming more similar to international solvency principles and standards.
- Accounting for reserve liabilities should rely on sound accounting and actuarial principles.
- Capital adequacy principles should provide sufficient capital for insurers to pay policy claims and meet other obligations even under adverse conditions.
- Corporate governance principles should include sound risk management practices.
- Some solvency information should be public, and the information not made public should be identified.
- Financial examinations principles should allow for on-site inspections.
Regulators and others should help the PBR task force make sure that any PBR principles developed complement the solvency principles efforts of the International Association of Insurance Supervisors, Basel, Switzerland, Hampton and Gross write.
In related news, the NAIC’s Life & Health Actuarial Task Force has submitted a memorandum recommending that any PBR framework be created through state laws and regulations in a way that ensures uniform adoption.
The principles should address measurement of risk in assets, liabilities and cash flows that are not necessarily directly related to the insurance contracts of an insurance entity, Larry Bruning, chair of the task force, writes in the memo.
Bruning writes in the memo that much work remains.
Legal changes still must be made to the standard valuation law and the standard non-forfeiture law, and regulators must develop a valuation manual, Bruning writes.
Regulators also have to work on the PBR risk based capital structure and also to consider how much time and money it takes companies to calculate reserves using the new valuation methodology, Bruning writes.