Academy Says PBA Project Could Be Ready For Legislatures By The Fall

This past week, the American Academy of Actuaries, Washington, detailed just how close the principles-based approach to reserving is to being completed and how associated projects are progressing.

During a recap of the work at the spring meeting of the National Association of Insurance Commissioners, Kansas City, Mo., Donna Claire, chair of the Academy’s PBA Steering Committee, noted how far the work had come and introduced regulators and actuaries closely associated with the project.

Larry Bruning, chair of the NAIC’s Life and Health Actuarial Task Force and chief actuary of the Kansas insurance department, said that the Valuation Manual, the roadmap for implementing PBA, should be adopted by LHATF at the end of June or early July followed by adoption by its parent Life & Annuities “A” Committee by the end of July. That would clear the way for the NAIC’s plenary to adopt the Manual at the August NAIC meeting in Seattle.

The NAIC has already adopted changes to the Standard Valuation Law but agreed as part of its adoption to wait for the Manual’s adoption and present it to state legislatures as a package. If the Manual is fully adopted, the package would be ready for the 2011 legislative sessions.

During its work on the Manual, according to Bruning, LHATF decided that VM-20, a key piece of the Manual, should include all life insurance products with the exception of credit life and pre-need life. And, the body of regulators, many of whom are actuaries, decided to reverse a decision and to allow aggregation of life insurance products for reserving purposes although that changed has not been finalized.

Dave Neve, chair of the Academy’s Life Reserve Work Group and a vice president of capital management with Aviva USA, said that a full aggregation approach is important for reasons including creating an incentive for a company to make a non-economic decision by deciding against issuing a new product with risks that offset current products. He pointed out that regulators can audit and analyze aggregation’s impact by using appropriate disclosure requirements.

PBA work is also being undertaken by the NAIC’s Life Risk-based Capital working group led by Philip Barlow, chair of the group and associate commissioner of the insurance bureau for the District of Columbia.

Barlow discussed the latest stage of the C3 project, C3 Phase III, noting that the earliest potential date for implementation would be in 2011. The first step which will start after April 10, is to develop a list of outstanding items to address regarding C3 Phase III. The goal of the LRBCWG is to complete this project by the end of the year.

The LRBCWG also discussed observations on C3 Phase II of a subgroup which was gathered from a review of actuarial memoranda from companies that participated in the effort.

Among the observations observed was that C-3 Phase II was low for companies reviewed, which may be explained by several companies ceding business to offshore affiliates that are not subject to U.S. RBC requirements. Another possible reason is that most companies are increasing reserves so that it equals total asset requirements to maintain a higher RBC ratio than if they reported TAR as RBC. This “optics issue” is driven by stakeholders including ratings agencies, Barlow explained.

A second observation was that current disclosures and assumptions for C-3 Phase II are not adequate because of a “formulaic ‘cookbook’” approach and a lack of identification and quantification of key risk factors, he added.

Other findings by the subgroup, Barlow said, included the fact that lapse assumptions on deep in-the-money guaranteed living benefits are developed in a variety of ways.

The Academy update concluded with Nancy Bennett, a senior life fellow with the Academy giving an update on the NAIC’s Solvency Modernization Initiative. One of the first goals she discussed was the NAIC’s intention of creating a roadmap outlining the current U.S. regulatory system, what is being done such as PBA and what still needs to be done such as implementing new ideas on solvency.

Bennett noted that the NAIC is aware of how its activities may impact an insurer’s ability to compete globally. Another area that has to be examined, she said in her recap of events at the NAIC meeting, is what the role of regulators will be in a new system.

The convergence of global accounting methods was also discussed but the NAIC has not yet made a commitment on what approach it will follow, she said. The standing policy between the International Association of Insurance Supervisors, Basel, Switzerland and the NAIC is to have as few differences as possible, Bennett explained.