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Actuary: PBR Would Ease Reinsurance Strictures

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Shifting to a principles-based approach to reserving would change the environment for reinsurers and ceding insurers.

Sheldon Summers made that prediction here at the fall meeting of the National Association of Insurance Commissioners, Kansas City, Mo.

Summers, a life actuary with the California Department of Insurance, appeared on behalf of the American Academy of Actuaries, Washington, to present an AAA paper on principles-based reserving at a session of the NAIC’s Life & Health Actuarial Task Force.

Advocates of PBR want to shift to requirements for insurers to make intelligent, responsible use of modern statistical forecasting methods and keep away from reliance on simple, unchanging formulas.

Members of the LHATF approved a motion to seek public comments on the AAA paper.

At the LHATF session, Summers said adopting a PBR system would free ceding companies and reinsurers from the strictures of current regulations.

Today, life insurers and reinsurers must follow regulations such as the Statement of Statutory Accounting Principles 61 and Appendix A791, parts of the NAIC’s Accounting Practices and Procedures Manual, when establishing reserves for life reinsurance, Summers said.

The current regulations incorporate only a limited number of factors, such as mortality and interest rates, according to the authors of the AAA paper.

A life insurer can take a reserve credit for the reinsured business even though cash flows under the agreement may behave differently than described in the reserve assumptions, according to the authors of the AAA paper.

In a PBR world, insurers and reinsurers would report on risk transfer in financial statements and in the models that assess the risks in those statements, Summers said.

In a PBR world, insurers would have to include assumptions regarding the flow of cash to and from reinsurers in the models, according to the authors of the AAA paper.

Amanda Fenwick, a New York regulator, said during a discussion of Summers’ talk that it would still be necessary to ensure that there had been risk transfer, regardless of the cash flows described in any modeling.