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NAIC preview: PBR implementation plan gets serious

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At the upcoming meeting of the National Association of Insurance Commissioners (NAIC) in Indianapolis, state regulatory leadership will begin in earnest to steer implementation of principle-based reserving, the so-called modernization of reserving for life insurers.

The Executive Committee of the NAIC will consider adoption of items from the PBR Implementation Task Force, including a plan to modify the regulatory system in order to implement PBR in about three years.

The PBR Task Force recommended to the executivecommittee that two major components as necessary to support the review and updating process: an NAIC-staffed actuarial team, or review board, and another working group to work on valuation analysis — a sort of think tank for reserving issues. 

A team of actuaries with PBR certification, if it is developed, would be hired on as staff at the NAIC and the state regulators’ association would also contract with actuarial consultants — as it has done in the past to look at actuarial issues — and/or modeling experts to supplement this NAIC team.

Besides providing analysis, support and consistency, this team would also maintain a confidential database accessible by regulators “to support consistent judgment and treatment of PBR questions and issues,” according to the task force’s  document, adopted July 26.

This implementation is contingent upon the operating manual, or the Valuation Manual, becoming operative six to 18 months after 42 states with at least 75 percent of subject premium have adopted the revised law. Adoption usually means state legislative passage.

Based upon premium math, only New York state, whose top regulators remain concerned about solvency practices, opposed PBR. It could move forward, but if California, where lead regulators are worried about sufficient state resources, and Texas both declined, then the critical threshold would not be reached.

The planned staffing at the NAIC level, if robust, may assuage some concerns on both coasts, or perhaps in Washington, D.C., if New York is not convinced. Under PBR, reserves will decrease and the risk of insurer insolvency in the life insurance industry will increase warned New York Department of Financial Services (DFS) Superintendent Benjamin Lawsky last year. 

Advocates say a PBR approach would replace reliance on static formulas with use of modern statistical forecasting methods and reliance on actuarial judgment. Supporters say a shift to PBR would force insurers to think about their assets and liabilities more carefully and, in some cases, free them from the need to keep unnecessarily large reserves to satisfy the demand of an unrealistically conservative formula. However, the life industry has said it will continue the controversial use of captives and special purpose vehicles for reinsuring reserves as the practice is deeply embedded in the industry.

Captive reinsurance arrangements “will likely be useful into the future since they support a pledge of assets to a particular block of business,” the life insurance industry has said.

The recommendations will be considered and likely adopted by the executive committee Aug. 25 in Indianapolis.


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