CHANGES TO DETERMINING STATUTORY RESERVES for the life insurance business remained static for more than a century because the
calculations were simple and sufficient. But these simple formulas ran into more complex life insurance products. This ultimately has
led to the adoption of complex economic modeling that is reshaping the life insurance industry in this country.
1858—Massachusetts becomes the first
state to adopt a Standard Valuation Law
for life insurance. The formula used was
based on British mortality rates of 1843
and a 4 percent interest rate.
1986—New York adopts rules that require
companies to perform asset adequacy
analyses on reserves, an early foray into
principle-based reserves (PBR) that move
beyond simple static formulas.
1997—The National Association of Insurance Commissioners (NAIC) and the American
Academy of Actuaries take up the Unified
Valuation System in hopes of introducing
PBR to numerous insurance products. The
effort dies out in the early 2000s.
2004—Work begins at the NAIC and the
Academy to change the Standard Valuation
Model Law to allow for PBR calculations
2005—The NAIC adopts capital requirement regulations on variable annuities
under its C3 Phase II—one of the first steps
in implementing PBR.
2009—The NAIC adopts changes to the
Standard Valuation Model Law that would
allow PBR calculations once it is passed by
2012—The NAIC adopts the Valuation
Manual needed to implement PBR calculations for the life insurance industry.
2013—States are scheduled to start
considering approval of changes to the
Standard Valuation Model Law and the
Valuation Manual, which contains guidelines
for integrating PBR into reserve calculations.
A supermajority of 42 out of 55 states and
other U.S. jurisdictions must approve the
Standard Valuation Model Law and the
manual before they can be implemented
2015—This year marks the current estimate of when companies could start issuing
insurance products based on PBR models.
????—The European Union implements
Solvency II, which calls for PBR calculations
for life insurance reserves.
remembers early discussions in the 1990s on PBR and how
actuaries who were working on the issue understood the complications of implementation. Not only were there differences
of opinion among actuaries on various components of a new
system, but also the regulators needed to understand it and have
confidence that it would work.
“There is a reason that we regulate, and that reason is to
ensure that companies are behaving in a way to ensure that
policyholders are protected,” Vaughan explained. “When you
get to stochastic modeling of very complicated risks with lots of
moving pieces, then the first things regulators ask themselves is
how can I get comfortable with this.”
Some state regulators—including those in New York—still
aren’t fully comfortable with all the changes being made to cal-
culating reserves for risk. At the same time, regulators will have
to be made aware of and educated on these major changes as the
industry works to see the Standard Valuation Law implemented
across the nation.
“There’s a little reluctance to move away from a system that
has worked for 150 years,” Claire said, speaking of the regulators.
“Some states want to make sure there are enough safeguards in
the modeling assumptions. They’re concerned about whether
the companies will be more secure. What regulators are trying
to do is protect the consumer.”
Moving to a PBR system actually benefits both the companies
and consumers by right-sizing reserves using a principle-based
approach, many actuaries argue. Under the new valuation
model, reserves on some products might rise. On other prod-
ucts, reserves might drop. Another benefit to the principle-based
approach is that by allowing models to be built to reflect various
risks it creates a process that can react to new products, said
Tom Campbell, who was the Academy’s Life Practice Council
vice president during much of the PBR development. Under old
valuation systems, new methodologies to determine risk had
to be established for various new products—a cumbersome
DOUG ABRAHMS is the academy’s senior policy writer/editor.
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