■ Exemptions. If a company (or group of companies) sells less
than a certain amount of life insurance premium, a company
may be exempt from the PBR regulation altogether, in which
case it could continue using the current CRVM framework for
■ National Companies. One concern for the companies operating
nationally is that there are still a few jurisdictions which have
not passed enabling laws—Alaska, Massachusetts, New York,
and the District of Columbia have not passed enabling legislation. Alaska and the District of Columbia have no life insurance
companies domiciled in the state; Massachusetts has 17. Alaska
and Massachusetts have PBR legislation in various stages of the
legislative process. The District of Columbia does not.
New York has not yet adopted PBR. The New York Department
of Financial Services has publicly stated that it will adopt PBR as
a minimum reserve standard as of January 1, 2018. Companies
domiciled in New York as well as companies domiciled elsewhere
that file a “NY Supplement” may want to consider that New York
could require either different or more conservative assumptions,
methods, or models for PBR valuation than other states. If New
York adopts a form of PBR that is different than other states, then
applicable companies may be required to hold the higher of the
two reserve standards. In this situation, companies may want to
consider whether additional costs will need to be built in to products.
■ ■ Governance. Along with the advanced modeling capabilities
and company-specific assumptions that come with PBR, we
believe there is also an increased need for company governance
and internal controls.
One approach to handling governance over methodologies
and assumptions is to establish an internal committee to oversee
these aspects. This committee can provide guidance for elements
of PBR, as well as assumptions and methodologies used outside
of PBR. In addition, a model validation team can help inspect
various architectural and coding features of how PBR models
Additional controls may be required in addition to the current
Model Audit Rule (MAR) controls needed to govern statutory
accounting. Companies may find that these current controls are
adequate, or they may determine that additional documentation
of these controls is useful. Other companies may need to set up
additional controls around modeling, setting assumptions, and
reporting. If the company has placed controls with the finance
team, the actuaries should then seek to be involved, as there is
a new requirement that the actuary verify that the controls are
adequate for statutory valuation.
With the introduction of PBR also comes the emergence of
VM-G, the governance section of the NAIC Valuation Manual.
VM-G requires that the appointed actuary, senior management,
and executive board members take responsibility for certain aspects of governing PBR and the associated control environment.
While VM-G is only required for PBR at the time the company
transitions to PBR, VM-G requirements also apply to companies
that already sell variable annuities under VM- 21 (Actuarial
Guideline 43) starting in 2017.
VM-G states that the CEO, CFO, and executive board members—who may have previously had minimal exposure to specific reserve topics—will be required by state law to document
performance of certain oversight responsibilities associated with
these calculations. If a company has not informed its most senior
leaders of these emerging requirements, it would be wise to start
communicating this information to ensure compliance with VM-G.
There is nothing new about regulatory change. It has been going
on in the insurance industry for years. But now more than ever
companies need to focus on the regulation and make sure they
understand the effects on their business. PBR is a good example
of regulation that leaves some choice to the practitioners. We only
scratched the surface on the high-level decisions around PBR;
there is much, much more that needs to be discussed.
For a deeper dive into some PBR workstream implications,
refer to our article in this issue of Contingencies titled “The Details
Behind Principle-Based Reserving Implementation.”
LINDA LANKOWSKI, MAAA, FSA, is vice president and actuary
at Prudential Financial. KEVIN PIO TROWSKI, MAAA, FSA,
CERA, is a manager in the Advisory Services practice of Ernst &
Young. BENJAMIN SLUTSKER, MAAA, FSA, is corporate vice
president and actuary at New York Life Insurance Company.
This article is solely the opinion of its authors. It does not express an official
position of the American Academy of Actuaries; it does not necessarily
reflect the opinions of the Academy’s individual officers, members, or
staff, nor those of the authors’ employers. It should not be construed as an
Academy Practice Note, and it is not an interpretation of guidance from the
Actuarial Standards Board.
[ 1] The American Academy of Actuaries’ PBR page may be found at
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