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ACLI Proposes Oversight Framework for Principles-Based Insurer Reserves

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The American Council of Insurers is proposing a framework of coordinated industry-regulator oversight to be used under the principles-based reserving (PBR) approach so that companies would be comfortable that the methods they are using to calculate insurer reserves are actually in compliance with legal requirements, actuarial standards and basically, make sense. 

This follows discussions held by the NAIC this week at its Fall National Meeting on whether companies are selling universal life products with secondary guarantees in a manner that leaves them under-reserved. According to discussions on the matter by the NAIC’s life actuarial task force (LATF), the companies are “artificially” increasing premiums used in the reserve calculations above the minimum premiums needed to keep the policy in force. This would reduce insurer reserves below the minimum statutory requirement.

The proposed ACLI framework would involve a third-party review process with a continuous feedback loop to identify what is working well and what is not, as PBR evolves over time, said the ACLI’s chief actuary, Paul Graham. 

Graham spoke to state regulators at the NAIC’s fall national meeting in the Maryland harbor, across the river from Washington.

The framework would serve as a reality-check for companies’ reserving assumptions and methodologies and serve as a way for the industry to wean itself from prescriptive reserving methods.

A principles-based approach uses assumptions and methods that are more closely tied to individual company experience than to broad industry benchmarks, Graham said in a letter to the NAIC PBR working group that was to have been presented during the cancelled summer national meeting in Philadelphia. 

 It is the life actuarial task force which is tasked with developing and submitting proposals to facilitate the implementation of a principles-based approach to valuation.  

Graham went so far as to suggest that a single independent reviewer or auditor be considered.

The independent reviewer would be hired by the company out of a pool of individuals pre-qualified by the ANIC, under the proposal. This idea had been rejected once before, but Graham said it would be important to properly monitor company solvency under a PBR system, so that regulators could rest easy knowing that the legal requirements and actuarial standards of practice were followed in the years between states’ financial examinations. 

An actuary from the NAIC staff said the proposal would be mulled and agreed that it wouldn’t necessarily require major changes to the standard valuation law, an argument that Graham had also made to the task force. 

Of course, it would have to be reviewed, and materials from a few years ago relating  to the creation of the standard valuation law would need to be considered, said the actuary, John Englehart, after the session.

Graham wrote that there appears “to be a broad recognition that regulators will need enhanced resources to properly oversee a PBR framework.” He added that many states do not have actuaries on staff, an even those that do might be overwhelmed bu the task for reviewing PBR reports. 

There should be a level playing field for companies, across the country, said the ACLI actuary in is presentation to the h NAIC task force. He sad the matter should go before commissioners for their consideration. 

Without this framework, insurers and regulators may always be worried about what is coming down the road in five years in terms of reserving issues and “we don’t want that.” 

A state regulator chimed in during the discussion that smaller life insurance companies might not take to well to the idea of a single independent reviewer. 


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