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Life Health > Life Insurance

Regulator: Reserve Shift Effort Nears Milestone

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The National Association of Insurance Commissioners could have a new version of the Standard Valuation Law ready for consideration by state legislators by January 2010.

Leslie Jones, a South Carolina regulator and co-chair of the Life & Health Actuarial Task Force at the NAIC, Kansas City, Mo., gave that assessment during a recent discussion of work on the SVL.

The SVL model sets the standards for calculating life insurance reserves.

The LHATF wants to complete the SVL amendments and vote on them during the NAIC’s winter meeting, which is set to start Dec. 5 in Grapevine, Texas, Jones said.

The LHATF also is plowing ahead with efforts to complete the Valuation Manual, Jones said.

The manual is a guide that will help users implement the revised SVL.

To get both the SVL amendments and the manual ready for adoption by the full NAIC by November 2009, the LHATF needs to adopt the valuation manual by September 2009, by the latest, and preferably by June 2009, according to participants in the SVL discussion.

To keep the project on schedule, LHATF subgroups need to complete parts of the valuation manual by March 2009, regulators said.

The SVL and valuation manual efforts have been shaped by efforts to shift the U.S. life insurance industry to a “principles-based” reserving system.

Advocates of a PBR approach want to shift to an emphasis on general principles, “stochastic” statistical forecasting techniques and thoughtful use of actuarial judgment, and away from reliance on static formulas.

Regulators are trying to speed up the work by making decisions about Valuation Manual specifics.

With regard to Section 20 of the valuation manual, for example, regulators decided during the LHATF discussion to require insurers to use standard scenarios developed by regulators rather than company-specific scenarios.

Using standard scenarios supplied by regulators should simplify the review process, allow for better company-to-company comparisons and create greater uniformity, regulators said.

The American Academy of Actuaries, Washington, an advocate of the PBR approach, says risks can be better assessed if insurers can develop the scenarios used in their stochastic models.

In some cases, individualized scenarios would do a better job of reflecting the information that an insurer has, according to Donna Claire, who spoke for the AAA.

The AAA also believes that insurance company management teams need to understand the stochastic modeling process, and that management teams will understand the modeling better if companies are actively involved in developing scenarios that are relevant to the companies, Claire said.

Prescribing standard scenarios moves away from the whole goal of establishing a PBR system, according to John Bruins, a life actuary with the American Council of Life Insurers, Washington.

Claire also expressed concern that companies might have to run two different sets of scenarios to accommodate Valuation Manual Section 20 and C3 Phase II.

C3 Phase II helps to establish capital requirements for variable annuities.

Running two different sets of scenarios would be a “major undertaking,” Claire said.

Allen Elstein, a Connecticut regulator and life actuary, said companies investing in esoteric investments should be able to get an idea of how to develop their models from preliminary testing before they go ahead with more extensive testing.

If pre-set scenarios are used, a company is less likely to go off on its own tangent and rationalize investments in products such as collateralized debt obligations, regulators said.

The VM 20 work also includes discussions about whether net or gross reserves should be used and how calculations should be determined.


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