In line with a charge from commissioners at the National Association of Insurance Commissioners, regulators are working on language that will temper broad principles that will be the framework for the new reserving system.

The charge was detailed during the summer NAIC meeting by District of Columbia Commissioner Thomas Hampton who outlined six overarching principles that are being used to create a new principles-based reserving system for life insurers.

In the outline of how commissioners would coordinate the large effort, Hampton, vice chair of the principles-based reserving (EX) working group and Al Gross, Virginia commissioner and working group vice chair, list the following categories:

–PBR framework, emphasizing that the reserve requirements should be based on regulatory principles.

–Reserve liabilities, stating that they must be based upon sound accounting and actuarial principles and guidance.

–Capital adequacy, ensuring sufficient capital to meet adverse conditions, policy claims and obligations,

–Corporate governance should include sound risk management practices.

–Public disclosure for certain solvency information and information not made public should be identified.

–Financial examinations, which would allow for on-site inspections to examine an insurer’s business and compliance with legislative and regulatory requirements.

In the guidance document, Hampton and Gross note that the principles are very much related to some of the international solvency principles being developed by the International Association of Insurance Supervisors, Basel, Switzerland. If deviations from the international principles are discovered in the ones being developed, the commissioners want them identified.

In preparation for the fall NAIC meeting, regulators held two conference calls last month and plan a third to fine-tune language and concepts in these broad principles.

During a July 31 teleconference, particular attention was given to wording in the current draft. For example, one discussion centered on the word “material” and how it would be important to consider including this term in the document since matters that might not initially seem material could prove to be important in solvency.

Another point raised was the process of establishing margins and how principles can help regulators achieve that end.

A July 17 memo to Hampton from Larry Bruning, chief actuary with the Kansas department and chair of the Life & Health Actuarial Task Force, offered the following recommendations from LHATF:

–The framework should be created through state laws and regulations in a way that ensures uniform adoption.

–Principles should address measurement of risk in assets, liabilities, and cash flows that are not directly related to the insurance contracts of an insurance entity.

In his memo, Bruning notes that much work remains including legal changes that still must be made to the standard valuation law, standard non-forfeiture law and the development of the valuation manual.

Additionally, work still needs to be done on the principles-based risk based capital structure. The time and cost of calculating the reserves using the new valuation methodology also need to be examined.

Regulators will also need to work on developing adequate credibility standards of practice and actuarial standards of practice relating to principles-based valuations.