An arm of the National Association of Insurance Commissioners is seeking comments on a report that could lead to changes in reserving rules for life and annuity products.

The Life Risk-Based Capital Working Group, part of the Financial Conditions Committee at the NAIC, Kansas City, Mo., says it is exposing the C-3 Phase III proposal from the American Academy of Actuaries, Washington, for 60 days.

The C-3 Phase III project is an effort to apply the “principles-based approach” to calculating the “C-3″ component – or interest-rate and market-risk component – of life insurance product reserves.

Advocates of a principles-based approach to reserving want to shift toward reliance on general principles, modern statistical forecasting methods and actuarial judgment, and away from reliance on static formulas.

The C-3 Life and Annuity Capital Work Group, part of the AAA, “is working on a proposal for a single C3 framework that covers interest rate risk and market risk for both life insurance and annuities,” the AAA work group says in a report presented to the NAIC’s Life Risk-Based Capital Working Group earlier this month at the NAIC’s spring meeting. “It is envisioned that, in the future, C3 risk for both life and annuities will be determined under a single combined framework, perhaps with separate nuances within that framework that reflect product differences.”

The NAIC has posted a copy of the AAA work group’s report here.

A copy of an AAA comparison of the work group report and other reserving proposals is available here.

The new version of the report is similar to a draft presented in September 2008, but some of the terms are more similar to those used in another document, the NAIC Requirements for Principles-Based Reserves for Life Products, or VM-20, and another document, VM-01, that defines the terms used on VM-20, the AAA work group writes in the introduction to the new report.

One difference between the AAA work group’s C-3 Phase III report and VM-20 is that VM-20 specifies that the insurance company, not the actuary, is responsible for certain items, the AAA work group says.

Another difference is that the C-3 Phase III report lets companies use calibrated sets of scenarios when coming up with statistical forecasts showing how products might perform under a variety of conditions.

The VM-20 version is “silent on the use of company-generated scenarios,” the AAA work group says. “However, we believe that the VM-20 9.G.3 Guidance Note permits the use of company-generated scenario sets subject to calibration criteria.”

The NAIC’s Life Risk-Based Capital Working Group wants to hold conference calls on the C-3 Phase III proposal during the comment period.

“Insurers were asked to provide input on whether the proposal could be implemented for 2009,” the working group says.

Meanwhile, in related news, another NAIC body, the Principles-Based Reserving Working Group is seeking comments on a draft of a proposed section of the Valuation Manual and a draft of Standard Valuation Law revisions.

The public comment period for the Valuation Manual section is 45 days, and the Standard Valuation Law revision public comment period is 30 days.