National Harbor, Md.– Amid criticism that the NAIC was moving too hastily into a worrisome reserving regime involving “black box” models, the Valuation Manual was narrowly adopted by the NAIC plenary today with 43 votes, allowing principles-based reserving (PBR) to move forward to state legislatures.
Champions of PBR and the valuation manual pointed toward adoption as the way forward for state regulation, noting a failure to adopt would have been a failure of state regulation.
NAIC President and Florida Insurance Commissioner Kevin McCarty called the passage a “huge achievement” after many years of getting the project closer to the goal line.
The goal has always been to have the manual ready before the 2013 legislative season, and the adoption has been a moving target all year, with revisions and edits powering through to the understood finish line of year-end 2012.
The passage of the Valuation Manual will strengthen solvency monitoring, said President-Elect and Louisiana Commissioner James “Jim” Donelon, noting that this is the cornerstone of insurance regulation—protecting policyholders. It is also getting a lot of attention now with reserve issues gaining attention on many fronts beyond the exam tables as new products require new evaluations or a second look and companies burdened with redundant reserves look for ways to offload them to free up necessary capital.
Champions of PBR and the Valuation Manual pointed towards adoption as the way forward for state regulation, noting a failure to adopt would have been a failure of state regulation.
However, PBR will not be instituted until adopted by 42 states and until state adoption reflects 75 percent of written life premium in the United States, meaning New York and California, the most vehement objectors, could, with another state, derail the process. California and New York oversee the largest segment of life premiums written in the U.S.
For the “first time,” we are not going to have an (actuarial) checklist and the result will vary by product design, noted Julie Mix McPeak, Tennessee insurance and commerce commissioner and chair of the Life Insurance and Annuities Committee as it ushered through the Valuation Manual successfully this summer and fall.
“It will give us a better idea of how a company is doing,” she said, in comments to reporters after the vote.
“As state regulators, we take insurance company solvency very seriously. It is vital that consumers get the benefit of the promises made by their insurers,” McCarty said in a statement. “The adoption of this manual is a win-win for life insurance consumers, as we expect it will lead to more choices in the marketplace. Additionally, PBR was a key initiative identified by our members this year and its passage signifies our commitment to modernizing our regulatory system to meet the needs of the market. We are committed to providing all the resources necessary for a successful transition.”
Critics said passing it would be a failure of state regulation, with New York’s Deputy Insurance Superintendent and General Counsel Robert H. Easton arguing that PBR will lead to lower reserves “in the aggregate” at a time when the economy is still fragile, when interest rates are low for the foreseeable future and, most interestingly, when Easton said some carriers are “facing stress” because of guarantees currently on their books. Easton did not elaborate on who those companies are and how stressed they may indeed be.
Critics and some concerned state regulators also raised the state resource issue for implementing and understanding the new models with all the training necessary, most explicitly described by California Insurance Commissioner Dave Jones.
“There is no fiscal analysis now. We have no idea what this will cost,” Jones said. “It requires a different skill set to look at these black boxes,” said Jones, who discussed all the unknown and known resources and expertise needed at the state level.
NAIC leadership sought to explain that resources would be devoted and that reserves would be right-sized, not reduced–reserves on some products that have been in an over-reserved position for years, stifling innovation and keeps rates high, could be lowered, and some products that needed higher reserves would be increased under the application of PBR, as Donelon and others close to the project explained.
NAIC leadership said later to reporters that there would be a “ramp-up” of resources that would be explored by a new NAIC joint working group of commissioner reporting to the Executive Committee, as yet uncharged and formed, of the Life and the Financial Condition Committees as was created to deal with Actuarial Guideline 38 (AG 38) issues.
Donelon said with his average-sized department, he felt comfortable that Louisiana departmental staff could be trained to address PBR. Smaller insurance departments will need help.
Texas Insurance Commissioner Eleanor Kitzman, who shepherded through the AG 38 updating through a joint life committee, said the resource issues raised are concerns she has had for quite some time.
Joe Torti III, Rhode Island’s banking and insurance commissioner, who has been very critical of how life insurance companies are allegedly short-circuiting statutory accounting and playing a dodgy game by shoveling excess reserves into captive special purpose vehicles, apparently due to what they see as too- conservative reserving requirements , was very supportive of PBR.