The National Association of Insurance Commissioners (NAIC) wants an actuarial consulting firm to help it study the effects of a proposed shift to a principles-based approach to valuations.

The shift would lead to use of principles-based analysis of the reserves for life insurance products.

Advocates of principles-based reserving (PBR) want insurers and regulators to make more use of actuarial judgment and modern statistical forecasting methods when setting reserves, and less use of static, one-size-fits-most formulas.

Advocates say a PBR approach would force insurers to think harder about their reserves and do a better job of reserving adequately for rare, extreme “tail events.”

Some critics worry that a PBR approach might be too complicated for smaller insurers to use, and other critics fear that a PBR approach would give struggling insurers the freedom to cut reserves to unrealistically low levels.

The Life and Health Actuarial Task Force (LHATF) at the NAIC, Kansas City, Mo., has developed a working draft of VM-20, a valuation manual section covering the PBR life reserve valuation process.

The regulator group is looking for an independent firm to evaluate the possible impact of that valuation manual section, according to James Woody, a senior manager at the NAIC.

The NAIC will hold a bidder’s teleconference on the project Aug. 5.

Impact study topics might include the effectiveness of specific statistical tools included in the VM-20 working draft; methods for recognizing reinsurance; understanding how insurers will make assumptions and plan for unexpected problems; determining how life insurers will decide which economic scenarios to use in their models; and how insurers ought to report reserve results, modeling assumptions, experience assumptions, margins and sensitivity testing.

The consulting firm also will look at “the ease of implementation of the proposed methodology, taking into account human resources, information technology resources, computer modeling run times and required sensitivity analysis,” officials say in the request for proposals.