Contingencies Online - January/February 2013

Risk-Based Modeling Comes of Age CONTINUED

Claire, a former vice president of the Academy’s Life Practice Council, has been one of the key players in steering principle-based reserving (PBR) through the regulatory process in her role as chair of the Academy’s Life Financial Soundness/Risk Management Committee (previously known as the SVL2 Committee).

In December, the National Association of Insurance Commissioners (NAIC) adopted final changes to the Valuation Manual, the last key step necessary to usher in PBR components to calculate statutory reserves for the life insurance industry. A supermajority of states still must approve changes to the Standard Valuation Law and accompanying Valuation Manual before they become effective. Some estimate that this could occur in 2015, although dates have a way of slipping when attempts are made to implement major valuation changes.

Regime Change

As products grow increasingly complex, the insurance and financial world has been turning away from simple formulas and more toward economic modeling that employs principle-based approaches to capital and reserves. Because such modeling offers a more accurate means for measuring risk, actuaries and the life insurance companies that employ them have been awaiting the advent of PBR for years. PBR calculations for statutory reserves incorporate stochastic modeling and insurers’ own experience instead of simply plugging in standardized formulas that are used by all companies. PBR is designed to better capture

Moving to the States

While tHe work on principle-based reserving (Pbr) winds
down at the national association of Insurance Commissioners
(naIC), efforts will ramp up next year in state capitals across the
nation to persuade legislatures and insurance commissioners
of the benefits of switching methods to calculate reserves.
a supermajority of jurisdictions—including all states,
the District of Columbia, guam, Puerto rico,
american samoa, and the u.s. virgin Islands—
must approve the standard valuation law (svl)
before the valuation Manual can go into effect.
the manual provides the guidelines and rules for
implementing Pbr. not only must 42 jurisdictions
pass the new svl before it can take effect, they
also must represent states in which at least 75
percent of direct premiums are written.
enough states could pass this legislation next

22 CONTINGENCIES JAN | FEB. 13

Global Initiatives

Progress on adoPting a new valuation regime for U.s. life insurance reserves and capital has been a slow slog, but similar efforts in europe are taking longer than expected as well. solvency ii, the european Union’s makeover to a principle-based approach (PBa) on capital and reserves for insurers, will not take place by 2014 as earlier envisioned.

“We’re looking at possibly January 2015, January 2016, and possibly 2017,” said tony dardis, who heads insurance, north america, for Barrie & Hibbert (a Moody’s analytics subsidiary), which specializes in modeling financial-market risks. “issues still aren’t resolved, and, in fact, more issues are coming up all the time.”

the material risks, benefits, and guarantees associated with contracts, including tail risk.

These new reserve calculations are expected to have a large impact on the industry. A greater volume of actuarial work will be required to build initial economic models for new insurance products, and actuaries themselves will be able to use more of their own judgment and have more flexibility when crafting products.

year to allow companies to introduce new life insur-
ance products based on Pbr reserve calculations
in 2014. but many say that this probably won’t occur until
Jan. 1, 2015, at the earliest. getting so many jurisdictions to
act on such a major change will take time, and this process
could be slowed further by four states—Montana, nevada,
north Dakota, and texas—that have legislatures that meet
only every other year.
while there is little stated opposition to the
new svl, some state commissioners and law-
makers may be skeptical because Pbr is such a
large change, said terri vaughan, former chief
executive officer at the naIC. In addition, some
may see it as deregulation that benefits the
industry and not consumers, she said.