Shifting to principles-based reserving methods for life insurance policies could increase reserve requirements for some universal life and whole life polices, according to authors of a new PBR study.
The authors, actuaries at Milliman Inc., Seattle, prepared the study for the Society of Actuaries, Schaumburg, Ill., which is trying to help the Life and Health Actuarial Task Force, an arm of the National Association of Insurance Commissioners, Kansas City, Mo., and other organizations grapple with principles-based reserving issues — and discuss the kinds of resources, such as additional computing time, that insurers and their actuaries will need to implement a PBR system.
Advocates of a PBR approach want to shift toward reliance on actuarial judgment and modern statistical forecasting methods, and away from reliance on static formulas.
Advocates say a principles-based approach could ensure that reserves reflect the risks insurers and their products really face. Critics worry that some insurers could use the new approach to cut reserves to unrealistically low levels.
The LHATF has scheduled a teleconference on VM-20, a life products reserving valuation manual draft, for Thursday.
The LHATF has posted the SOA/Milliman study on the principles-based approach to reserving on its section of the NAIC website.
The actuaries who worked on the study reviewed case studies submitted by participating life insurers.
“The objective of this research is to serve as a field test for the proposed principle-based approach to statutory reserves and required capital,” the actuaries write in
The actuaries say they hope their research will give the working groups and the life insurance industry as a whole a look at modeling results based on actual data from insurers’ in-force blocks of business.
The actuaries compared how various blocks of business meet the current statutory minimum reserve requirements and how well-reserved they would look in a PBR universe.
“When compared to current statutory minimum reserve requirements, this research test bed suggests a wide range of possible outcomes,” the actuaries write in their study.
Factors influencing that range include how well the premiums support benefits, expenses and profit; the maturity of a block; the level of margins used in the valuation; and the characteristics of the asset portfolio supporting the policies, the actuaries write.
Applying a cash value floor can “mute” the value of margins, the actuaries write.
“Determining the direction and ultimate impact to the entire modeled block of margins that are established on each individual risk factor will be difficult,” the actuaries warn.