Risk-Based Modeling Comes of Age CONTINUED
A PBR Timeline
models. A lot more judgment will be involved with PBR.”
PBR still has a few years left before being implemented more
fully into the life insurance industry. After the NAIC action in
December, legislatures in at least 42 states and U.S. territories
need to adopt the new Standard Valuation Law. Only then can
companies start issuing insurance products that employ PBR
methodology, which is fleshed out in rules and guidelines con-
tained in the Valuation Manual.
An Antiquated Scheme
The movement toward passage of PBR has been a slow, grinding
push against 150 years of history for the life insurance industry,
which generally has calculated statutory reserves by applying
stock formulas based on mortality tables and interest rates. In
the late 1990s, the NAIC and the Academy tried to implement
the Unified Valuation System, which promised to bring PBR to
many products in the life insurance industry. That effort foundered when it failed to gain acceptance from both insurance
companies and regulators.
At the same time, the old system for calculating reserves
was running into trouble as it attempted to incorporate new
products that were being developed by the life insurance industry. This led to reserve calculations that were too high for
some products and too low for others because they were not
accurately reflecting the various risk profiles. Insurers believed
pricing on some of their products could have been cut because
their reserve costs should have been lower. Desperate to lower
24 CONTINGENCIES JAN | FEB. 13
its holding costs for reserves for term life insurance in the 2000s,
the life industry resorted to reinsurance, securitization, and oth-
“Finally, enough people said ‘enough.’ The system wasn’t
working,” Claire said. “Basically, what you really needed was
regulators and industry to agree on changing the system.”
That was easier said than done. PBR required not only chang-
es in the Standard Valuation Law but also major changes in the
accompanying Valuation Manual to flesh out implementation.
These efforts over the past decade jointly turned into one of the
most time-consuming projects at both the NAIC and the Acad-
emy, which during this time conducted more than two dozen
webinars on the topic for members and other interested parties.
Claire can remember times during her tenure as chairperson of the Academy’s SVL2 Committee when she conducted
weekly calls with 20 subgroups that were working on various
issues surrounding PBR. At one point a few years ago, Claire
said, a colleague estimated that about 400 Academy members
had expended more than 10,000 volunteer hours on the issue.
After that, Claire gave up trying to keep track.
“I think the major thing was [PBR] would not have happened
without the joint effort of the Academy and the NAIC, and the
support of all the volunteers dealing with so many issues that
needed to be dealt with,” Claire said.
Gaining Confidence in the System
Terri Vaughan, former chief executive officer at NAIC,