Principles-Based Reserving Delay Expected

Two major pieces of a new principles-based reserving system are not expected to be delivered on time, say actuaries and regulators working on the proposal.

During the spring meeting here of the National Association of Insurance Commissioners, Kansas City, Mo., a delay in the delivery of a new, finalized draft of the Standard Valuation Law and a Valuation Manual, that serves as a guide for the details that make SVL work, highlighted two sets of realities that state insurance regulators and the American Academy of Actuaries, Washington, face as they work on a new system of reserving. The aim of PBR is to make reserves more accurately reflect the risks of an insurer.

“I need something concrete. They say show me the law, and I don’t have the law,” said Thomas Hampton, commissioner of the District of Columbia and chair of the principles-based working group. Hampton was referring to plans to present the PBR project to legislators at the National Conference of Insurance Legislators, Troy, N.Y., and the National Conference of State Legislatures, Denver, as well as other state legislators. Although Hampton expressed frustration when told that the final SVL draft probably would not be available before the fall NAIC meeting in September, he did listen to explanations that major points such as tax treatment under the new system cannot be rushed. The Valuation Manual is expected to be delivered after the SVL.

Hampton said he thought the SVL would be an easier piece of the project than the Valuation Manual.

Kent Michie, Utah insurance commissioner, explained that in his state, the legislative session runs about 45 days and is over in the first week in March, so it is preferable to have potential legislation ready to be presented to state legislators this summer if the plan is still to go to state legislatures in 2009. PBR is such a complex issue, he added, that it will take time to help legislators understand it.

Leslie Jones, an actuary and regulator with South Carolina, a co-chair of the Life & Health Actuarial Task Force, pointed out that LHATF is trying to go through recommended changes in the SVL draft and actually got through many of the roughly 100 proposed amendments during the spring meeting here.

Paul Graham, a life actuary with the American Council of Life Insurers, Washington, cautioned against “going to legislatures with a manual that is still squishy.” The reason, he explained, is that it makes it a lot easier for legislatures to kill the concept. And, if a product that is not fully completed is brought to legislatures, he said, companies might not lend it support if issues that are important to them are not addressed. “No one wants to get this done faster than the industry with high reserves, but let’s get this done right.”