WASHINGTON — The reserve requirements for universal life insurance with secondary guarantees and term life insurance products will shift to a more flexible evaluation system under a recent decision made by the National Association of Insurance Commissioners (NAIC).
The new, so-called “principles-based reserving system” marks the most significant change in regulating life insurers since before World War II, according to Scott Harrison, executive director of the Affordable Life Insurance Alliance.
This group, based in Washington, D.C., has been working on the issue since 2005, Harrison said. The Alliance has three members: Lincoln Financial, Pacific Life and John Hancock. “There was huge skepticism that this could be accomplished,” Harrison said.
The final decision was made Friday by the NAIC based on a recommendation from the PBR Implementation Task Force. The Task Force has been dealing with the issue since 2013. NAIC approval was triggered after laws supporting the use of PBR were approved by 45 states, representing nearly 80 percent of the U.S life insurance market.
The only current major holdout is New York; California commissioner Dave Jones agreed to support it through legislation passed by the state last winter after the state’s insurers agreed to fund the state’s costs of having adequate actuaries monitor insurers’ books.
For life insurers, the implementation of PBR will provide certainty around reserving and may reduce requirements for some, according to Deloitte’s annual report on life insurance regulatory issues.
The change also has the support of industry rating agencies. Deep Banerjee, a director at S&P Global Ratings in New York, said it will have no impact on ratings.
That’s because over the last several years, rating agencies have shifted to evaluating reserves on an economic level. “The whole idea is that the statutory reserving system used by the states does not capture the true economics of these products,” Banerjee said.
Under statutory accounting principles (SAP), Banerjee said, insurers had to maintain a relatively high amount of reserves on these products. Now, with PBR, insurers can hold onto those liabilities without having to send them off to captive reinsurers, he said.
In most cases, insurers will now have to use captives to reduce their capital costs, he said. Thus, as a result of PBR, S&P believes use of captives will be reduced, Banerjee said.
He added that there will be some transition by insurers, i.e., some growing pains, “But, we believe the industry will be able to move through this pretty quickly,” Banerjee said. He added that this is also a move toward more use of GAAP (Generally Acceptable Accounting Principles), because GAAP uses more of a principles-based methodology of evaluating reserves,” Banerjee said.
The implementation of PBR will likely have ripple effects throughout the insurance business, starting with the actuarial, product design and pricing functions, Deloitte said in projecting the potential impact of the new standard. To avoid getting blindsided, insurers should already be examining the potential impacts and adjusting their products and processes accordingly, Deloitte said.
Dirk Kempthorne, president and CEO of the American Council of Life Insurers, voiced strong support.
“PBR will enhance the current system for calculating policy reserves resulting in reserve levels that more accurately reflect risks assumed by life insurers for the policies they underwrite,” Kempthorne said.
He said PBR also will strengthen solvency oversight authority of regulators to help ensure companies will be able to fulfill their promises to policyholders. Ultimately, “PBR’s modernized reserve methodology will enable companies to develop innovative life insurance products and services that help consumers address their ever-changing financial needs,” Kempthorne said.
John M. Huff, NAIC president and Missouri insurance director, said the approval is “an historic accomplishment for the state-based system of insurance regulation that marks the beginning of a new policy valuation system that can adapt to new and innovative life insurance products benefiting consumers and life insurers.”
He explained that for many years, life insurers and insurance regulators contended with “an outdated formulaic based system that was challenged to keep pace with consumer demands for new life insurance products.”