Consumer Costs at Stake: The Case for an Organized Approach to Principle-Based Reserving
By John R. Hurley
The National Association of Insurance Commissioners (NAIC) has been developing a different approach to life insurance reserving and pricing for almost 10 years. The current system used by each state, the Standard Valuation Law (SVL) involves pricing and reserving assumptions fixed by law and regulation and applicable to all life insurance products, regardless of product design or the purpose of the design of the product for consumer use. It is stated by many that as a result of the current SVL, many products are over-reserved and thus more expensive to consumers.
NAIC’s changes to SVL involve an amended SVL and adoption of an approach used in Canadian and European regulatory programs called “principlesbased reserving” (PBR). The general (not unanimous) consensus among companies, regulators and actuarial experts is that current SVL should be changed to give companies the ability to price their products using rules and assumptions that “fit” the design and purpose of the policy. This relative freedom is subject to substantive and complex rules that must be followed during the companies’ reserving process, peer review, and regulator oversight. It was recognized very early on that a new and substantial amount of experience data relevant to the PBR process would be required.
Data Calls The New York State Department of Financial Services (NYDFS) has in recent years taken to declaring “data calls” on short notice for numerous areas of regulatory interest, such as universal life pricing, long term care, and variable annuities with guaranteed living benefits, among others. However, an example of a reasonable data call strategy is under PBR and is being supervised by the New York and Kansas insurance departments. Data calls for experience reporting are annual efforts that permit companies to plan accordingly. (It should be noted that New York opposes the changes to the SVL adopting PBR.) Use of a statistical agent simplifies interactions by offering companies a resource that is wholly focused on the data call task. This appointment and the interaction with companies create an environment that is organized, objective, transparent and cooperative. In 2011, the NAIC appointed MIB Solutions (a subsidiary of MIB) as the statistical agent for the PBR process, working with New York and Kansas insurance regulators.
The industry’s and the regulators’ interests are better served by transparency and clear expectations. Companies should know exactly what regulators are looking for, when it is required to be submitted, and how any data submitted to a data call will be used. Regulators should offer companies the means to successfully comply with data call requirements without undue burden. A successful outcome has benefits for companies, regulators and consumers.
Future Impacts and the Data Call Process As PBR begins to take effect (legislative approval is required in 40 states with 75% of the affected business, implying a 2017 implementation), companies should be confident that even as there will be complex reserving rules and modeling required, there is no need for the experience reporting to create any additional burden. Assuming that MIB continues in its role, companies can be confident that MIB’s practices since 2011 will remain a steady presence in this environment, giving companies and regulators one less thing to worry about with PBR.
Many opinion leaders have begun to join with us here at Park Strategies to urge the parties to begin the detailed discussions that will eventually ensure that such value can be unlocked, subject to proper confidentiality and oversight.
PBR requires data reporting on a fairly sophisticated basis. Regulators can take a lesson for data calls in other domains from the current experience from the PBR reporting data call structure.
Let the dialogue escalate.
