Consultants: Principles-Based Reserving Could Have Mixed Effects

Shifting toward a principles-based reserving (PBR) approach could lead to a modest increase in reserve requirements for universal life (UL) policies with secondary guarantees and big decreases in reserve requirements for term life policies.

Towers Watson & Company, New York (NYSE:TW), makes those predictions in a preliminary version of a long-awaited analysis of the possible impact of shifting to a PBR system for life products.

The Life Actuarial Task Force at the National Association of Insurance Commissioners, Kansas City, Mo., has posted a copy of the analysis on its section of the NAIC website.

The NAIC has been working on PBR projects for years.

A shift to a PBR approach would involve a move away from reliance on unchanging financial safety formulas, toward analyses based on modern statistical forecasting techniques and actuarial judgment.

Advocates of the PBR approach say it would force insurers to think more carefully about their finances, and, in some cases, free them from the need to keep unnecessarily large reserves to satisfy the demands of unrealistically conservative formulas.

Critics say some insurers could use PBR flexibility as an excuse to reduce reserves to unsafe levels, and that conducting high-quality statistical analyses could be too difficult for smaller companies.

The actuarial task force picked Towers Watson to look at the possible effects of VM-20, a section of a draft valuation manual that deals with PBR issues.

Towers Watson had hoped to complete the study by March, but it had to postpone the release date because it had trouble getting data, and the current version of the analysis includes data on just a few