Houston–The NAIC released the the principle-based reserving implementation plan for for comment for 30 days with features such as a a new NAIC working group that would help support individual states in running PBR, recommendations for changes to annual forms, a training agenda and an evaluation of risk-based capital (RBC) requirements.
A sizable PBR implementation knot to untangle involve the RBC requirements and the impact on capital of PBR. New modeling uncertainties–errors, basically–could be introduced int calculations, possibly increasing reserve volatility and the overall desired level of solvency measurement, regulators noted in the implementation plan.
The NAIC also tied the PBR implementation boat to the solvency implications of life insurer-owned captive insurers and special purpose -vehicles (SPVs) and said it would likely create a working group to concentrate on this issue and propose a way forward.
“The solution for captives and SPVs within the context of PBR will be largely based on the Captives and SPV Subgroup’s report as adopted,” stated the draft document.
The March draft of the NAIC Captive & SPV (special purpose vehicle) Use Subgroup called for enhancement of the current regulatory process so that regulators can actually see the captive transactions of commercial insurers, and changes to rein in, or at least better view, the practice by some insurers to offload perceived excess reserves to free up capital. It also suggested beefing up the state accreditation requirements to include a key model law, the Special Purpose Reinsurance Vehicles (SPRVs) model act.
Gathered at the NAIC National Spring meeting here, the PBR Implementation (EX) Task Force wrestled with the captives issue, with Joe Torti III of Rhode island, both head of the Subgroup and chair of the Implementation Task Force, noting that once PBR is fully implemented, the use of SPVs will be hopefully very limited.
A fellow state regulator on the Task Force warned that there are still redundant reserves and he would still see the industry take advantage of captives and SPVs.
Torti responded that, well, yes, the industry feels PBR still has a level of conservatism in it, and hopes that PBR will come to a point in development where industry and regulators agree on what the reserves should be so there will be no need for the life insurers to fiance their reserves.
The group also tussled with the role that the Federal Advisory Committee on insurance (FACI) serving Treasury’s Federal Insurance Office (FIO) would have, with some regulators saying the questions should be filtered through the NAIC. State regulatory concern was whipped up by word that FIO’s director wants his advisors to also study the issue and report back to Treasury.
FACI member and Washington D.C. Commissioner William White, who heads the new FACI captives task force, posed questions the nascent group he is heading on captives at FACI might be exploring acknowledged a broader concern about captives centering around solvency, he believed, at the FIO level.
Torti said he thinks any questions pondered by the federal government need to be addressed at the NAIC first and foremost.
“If problems brought up at FACI that are not being brought up at the NAIC, that is a problem,” Torti said.
White said that would not happened and that he will also function as a conduit for the discussion between FACI and the NAIC. State regulators don’t want FIO “to reinvent the wheel,” they said afterward in comments to press.
Some state regulators afterward said they were waiting to see how the FIO work would develop, and said they knew FIO had been interested in the issue for awhile. No one said that FIO has actually asked for the extensiveNAIC background research on captives –which involves proprietary data–that the NAIC did to develop its Captives and SPV white paper, which has been exposed through April 29.
“States have different viewpoints and I hope they consider all those viewpoints in their work product.” said Tennessee Commissioner Julie Mix McPeak, who co-chairs the PMR Implementation Task Force.
NAIC President Jim Donelon, Louisiana’s Commissioner also noted later to reporters that the captives issues remain to be addressed–and said the industry divided on that as well.
The implementation draft also zeroed in on concern of many departments, resources required to implement and run PBR. California, for one which does not plan to recommend the adoption to the state legislature until it is comfortable, as California Insurance Commissioner Dave Jones reiterated today in comments to press.
A Kansas insurance regulator noted that his state is a Republican one and some smaller states concerned about cost benefit for them of PBR, and how his department is trying to warm over the industry there and wondered if it could offer additional things to sweeten the deal.
The PBR Valuation Manual has to pass at least 42 state legislatures to become the de facto reserving model.
California, New York and Texas are key states, representing more than 25% of total 2008 premiums. All three together could hold up the effort, or New York and California together, because of the premiums volume written there. New York regulators said they stand by its earlier concerns against it.
At the December 2012 NAIC meeting, the Valuation Manual passed very narrowly; and there are states like New York and California that were very vocal in their opposition,as the Society of Actuaries pointed out in a paper by Mark Rowley on Preparing Small Company Actuaries for Principle-Based Reserves.
Of interest is the data collection process. New York’s Department of Financial Services, though opposed to PBR as a right-sizing reserve fix-all and skeptical of it as a solution to the captive/SPV perceived financing exploitation issues, has a statistical data project that started in 2010, with 55 companies representing roughly 40% of the subject premium from direct writings and reinsurers in the entire US market submitting data,
The Task Force hopes that this data can be used for companies in the PBR credibility process.
The first statistical data collection will need to be in place for the annual 2015 reporting. New York is willing to continue the project, and some hope other states joining on.A number of other NAIC working groups and task forces are going to be involved in the PBR implementation, especially those involving accounting and capital adequacy, according to the PBR implementation draft.
The task force was given the green-light at the NAIC commissioner’s retreat this winter in St. Thomas, Virgin Islands.