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Principle-Based Reserving To Be Implemented January 1, 2017

When the National Association of Insurance Commissioners (NAIC) adopted the revisions to the Model Standard Valuation Law (SVL – NAIC MDL #820) in 2009, it introduced a new methodology for calculating life insurance policy reserves called Principle-Based Reserving, or PBR. According to the American Academy of Actuaries, which worked closely with the NAIC to develop this new framework, PBR is more responsive to changes in the financial landscape and to changes in life insurance product features than the current formulaic approach used to determine policy reserves. Subsequent to the adoption of the revised SVL, the NAIC in August 2012 adopted a new valuation manual, which was referenced in the model law and which incorporates and sets forth in detail the PBR requirements.

Pursuant to Section 11.B. of the SVL, the effective (or operative) date of the Valuation Manual is January 1 of the first calendar year following the first July 1, by which at least 42 states (a supermajority) representing more than 75% of total U.S. premium have enacted the revisions to the SVL. Over the past several years, state legislatures have introduced and enacted legislation to adopt the new SVL. And, on June 10, 2016, the NAIC voted unanimously to recognize that this threshold had been met: as of that date, 45 states had enacted the revised SVL (or laws substantially similar), representing more than 79% of the applicable premium volume. (NOTE: Since that date, Pennsylvania has enacted the 2009 version of the standard valuation model law, bringing the total number of states to 46. The states that have not yet adopted SVL include Alaska, Massachusetts (where legislation is currently pending), New York, and Wyoming. The District of Columbia has also not yet adopted the revised model law.)

As a result of the threshold being met and upon the recommendation of the PBR Implementation Task Force, principle-based reserving and the required use of the new uniform valuation manual will begin on January 1, 2017. Importantly, PRB will be implemented over approximately three years and will only apply to life products issued after the January 1, 2017 effective date; the reserving basis and methodology for life products issued prior to the effective date of the new PBR requirements remain unchanged. Moreover, the NAIC PBR Implementation Task Force continues to work, finalizing important aspects of the new PBR methodology before it is fully implemented, including the development of regulatory review and analysis procedures and the development of training materials. The NAIC has undertaken a pilot actuarial surveillance project to assist in refining this new approach to establishing life insurance reserves.

According to NAIC President and Missouri Insurance Director John M. Huff, “This 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. For many years, life insurers and insurance regulators contended with an outdated formulaic system that was challenged to keep pace with consumer demands for new life insurance products, while providing life insurers with reasonable valuation guidance for ensuring financial soundness.”

A copy of the NAIC June 10, 2016 press release is available at
www.naic.org/Releases/2016_docs/naic_life_insurance_revamp_arriving.htm

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