Contingencies Online - January/February 2013

a fundamental difference exists between the pro-
posed european and U.s. valuation systems, dardis
said. solvency ii will look at reserves and capital on a
market-consistent basis, which calculates the amount
needed to fund the short-term transfer of liabilities
and their risks to another entity. in the U.s., the PBa
for reserves and capital uses a real-world runoff
basis, in which reserves and capital are calculated
at whatever is required to fund all future liability
cash flows from existing businesses as they fall due.
the market-consistent approach is more variable
and could change every day, while the real-world
approach is more stable, dardis said. so even though
both the U.s. and european methodologies are
moving toward PBa, the outcome for life insurance
products under solvency ii and U.s. PBa might be
very different, he said.
still, both PBa in the U.s. and solvency ii are mov-

“It’s going to give actuaries an opportunity to come up with
reserves that are a lot more accurate and tied in to the compa-
nies’ own personal experience,” said Cande Olsen, current vice
president of the Academy’s Life Practice Council. “There’s a lot
of work that needs to be done.”
This change will create a greater need for actuaries with PBR
skills at insurance companies and regulatory bodies, as well as
at some accounting and financial firms that work with insurers.

of the failures in the banking sector, we’re going to have to make sure that people understand why this is different,” vaughan said. “I think the key to having this happen quickly and seamlessly is for everyone to work together.” that will mean a concerted effort by groups of life insur- ers, actuaries, consumers, state regulators, and others that see this change to right-sizing risks for calculating reserves as a benefit. lawmakers and regulators at state capitols will have to become comfortable with this change before they approve it, which is why the effort will take some time, vaughan said. “there’s going to be a lot of work to gain the expertise in the states to do this,” she said. “we need to make sure that he states have the resources they need to do the job. there’s going to have to be training for examiners in the states.” state officials will be concerned about having a staff that is large enough and knowledgeable enough to oversee Pbr modeling, said larry bruning, a former chief actuary for the

ing in the same general direction in terms of building risk-based models to calculate statutory reserves and capital rather than using standard formulas. some expect the United states to adopt PBa by 2015, and they expect that the major changes in calculating reserves for life insurers could occur at close to the same time in both the U.s. and europe.

Countries in other parts of the world also are eyeing risk-based modeling. australia is supporting solvency ii, asian nations are watching what’s happening in europe and the United states, and Canada is moving forward as well, said Larry Bruning, former chief actuary for the Kansas insurance department who now works at the national association of insurance Commissioners.

“i actually think it was our neighbors to the north that gave us the kick-start to begin modernizing our system,” he said.

Larger insurers already are getting ready for this switch and have the actuaries on staff and plans in place to implement new valuation models. But the initial introduction period will cause a ripple of change throughout the industry.

“We’re talking about a major ramp-up in systems needed to calculate these reserves,” said Nancy Bennett, the Academy’s senior life fellow. “This will affect a lot of people. This requires people who have a lot of knowledge of building corporate

kansas Insurance Department who now works at the naIC. state offices will need additional regulatory actuaries, he said, and that will cost additional money at a time of tight state budgets.

one suggestion for addressing this problem would be to create a centralized review office that could do Pbr reviews of products from 3,500 life insurance companies around the nation, he said. this would take a lot of burden off state offices, bruning said. but it also would standardize how regulators from different states interpret Pbr models and regulations, rather than having various review processes occurring across the nation.

“I know it’s a complicated system and it’s taking a long time to develop, but I’m glad to see it approaching fruition,” said bruning, who has served as chairperson of the naIC’s life and Health actuarial task Force. “we need to be evaluating all the risks. I think we’re taking some risks by not right-sizing the risk.”