UPDATE: California weighs in as well, comment from Tennessee’s Department of Commerce and Insurance spokesman for Life (A) Committee Chair Julie Mix McPeak (p. 2).
New York Department of Financial Services (DFS) Superintendent Benjamin Lawsky launched a warning to his insurance commissioners about principles-based reserving (PBR) in a November 26 letter near the eve of the NAIC national meeting where the state-based organization is gathering to adopt as an organization the pivotal Valuation Manual that helps set PBR in motion.
Lawsky said they all should be able to say with a straight face that PBR is the right move, or there could be major solvency issues in the future.
In addition, California Insurance Commissioner Dave Jones also sent a letter to fellow commissioners November 26 expressing concern that regulators may not be effectively prepared to evaluate the reserving models developed by individual companies or have the resources to perform effective oversight, leaving the industry pretty much on tis own to develop its own reserves. Jones wants a study on additional costs and resources needed for departments to ensure that the new PBR computer models can be understood and evaluated by state regulators.
The more deeply skeptical New York letter is a shot across the bow at the NAIC as the timing is critical—if the Valuation Manual does not gain adoption this year or very early next year, it will be hard to get the many states needed to enact it to do so—legislative sessions are starting up in January and in some states, the legislature won’t be back in 2014. The adoption has been a moving target all year, with revisions and edits powering through to the understood finish line of year-end 2012.
Forty-two state bodies need to pass it so that it can become the defacto model of reserving by 2015. California is not voting yes on the Valuation Manual, Jones says, until its resources issues to actually do its job with PBR as regulators have been addressed by the NAIC/Life Insurance and Annuity Committee.
NAIC staff and key state regulators shepherding the process through were unavailable for comment. The item is on the agenda for the Sunday, December 2, Executive/Plenary meeting, but it is unclear if it has the necessary votes. No one wanted to go on the record to discuss its chances.
Under PBR, reserves will decrease, and the risk of insurer insolvency in the life insurance industry will increase, warned Lawsky, who has expressed in the past heightened concern about solvency amid various reserving issues now at play in the life insurance industry.
But before moving away from a proven regulatory regime, insurance regulators ought to understand exactly “(1) how PBR works; (2) how to administer it; (3) what PBR means for the companies they regulate and the industry at large; and (4) be able to say with a straight face that it is at least as good, if not better, than the rules-based system that currently is in place,” Lawsky told his fellow state regulators.
Lawsky arrived to one of his first NAIC national meetings (if not his first) last November, also at National Harbor, with concern about Actuarial Guideline 38 and how some companies were reserving for universal life with secondary guarantees, for instance. Heads of life insurance trade associations and key industry people approached him after general sessions to chat up the AG 38 issue, which was ready to blow up before being taken under the wing of a joint committee of executive-level regulators and industry consultants.
Lawsky, whose department actuaries have long expressed caution about various current or planned practices of life insurance reserving said that PBR does not adequately support product risk, on issues from AG 38 to captive insurance use to offload reserves and free-up capital, they offered reasons why regulators should not “plow forward” with PBR. He even raised the specter of the 2008 financial crisis.
PBR in the banking sector proved “disastrous,” he wrote, noting that while banking is different from insurance the appeal is the same to the industry. Lawsky is also top state regulator for New York banks.
PBR, with its less formulaic approach and its company driven models may seem attractive, but when the industry transitioned under the Basel 2 regime in the early 2000s to a framework also of ”principles based reserving,” failure ensued, Lawsky told commissioners.