The National Association of Insurance Commissioners (NAIC) has picked Towers Watson & Company to help it assess the possible effects of shifting to a principles-based approach to setting life insurer reserves.

The NAIC, Kansas City, Mo., has been working on the principles-based reserving (PBR) project for years.

Advocates say a PBR approach would replace reliance on static formulas with use of modern statistical forecasting methods and reliance on actuarial judgment.

Supporters say a shift to PBR would force insurers to think about their assets and liabilities more carefully and, in some cases, free them from the need to keep unnecessarily large reserves to satisfy the demand of an unrealistically conservative formula.

Critics say some insurers could use PBR flexibility as an excuse to reduce reserves to unsafe levels.

Towers Watson, New York (NYSE:TW), will examine VM-20, the PBR section of a draft valuation manual.

Towers Watson will calculate the effects of the provisions on industry reserves and compare the results with the results obtained from current methods, NAIC officials say.

The NAIC says 8 firms responded to its request for proposals for a PBR evaluator.

The NAIC hopes to have the PBR impact study completed by March 31, 2011, and have a final report ready for the NAIC’s 2011 summer meeting in Philadelphia.

“Our modernization efforts promise to improve the accuracy with which regulators and companies match reserves to risk,” Thomas Sullivan, the Connecticut insurance commissioner and chair of the NAIC’s Life Insurance and Annuities Committee, says in a statement. “It will be vital that we implement these core consumer protections with the clearest possible view of their impacts.