The Principle-Based Reserving (“PBR”) Implementation (EX) Task Force (the “Task Force”) discussed a variety of topics related to the development and implementation of PBR at the Spring NAIC Meeting. During introductory comments, it was noted that 9 states have enacted PBR legislation, with 4 states waiting for their respective governors to sign PBR into law. In addition, 9 other states have begun the legislative process to enact PBR, and 7 additional states are expected to begin the process in 2015.
The Task Force proceeded to discuss enhancements to the PBR Statistical Agent Framework, whereby designated statistical agents will analyze data submitted by insurers. Some industry participants raised questions as to what authority and power these statistical agents will have, and the Task Force noted that further guidance will be given. The Task Force then discussed written reports from the PBR Review (EX) Working Group and the Life Actuarial (A) Task Force, recommending that 3 to 5 states be responsible for collecting PBR-related data; such states would then be allowed to share the information with other states. Some industry participants questioned why the NAIC would need to store information collected by statistical agents when such agents would be allowed to share the information; however, several other participants recognized a benefit for having the NAIC store actuarial reports.
The remainder of the session focused heavily on a discussion of the Rector Report, which we have discussed in detail here. The Task Force immediately addressed comments with respect to the concept of “hazardous financial condition” with Rhode Island Commissioner Joe Torti recognizing that the concept may need to be tweaked going forward. California regulators explicitly noted that the state is not currently prepared to implement PBR, and that the process may be in danger of accelerating too quickly. Commissioner Torti responded by arguing that the timelines outlined in the Rector Report are realistic, and not all recommendations are to be implemented in 2014 regardless. The meeting then focused on the actuarial method to be used in the PBR calculation, with many regulators expressing their disdain for the VM-20 approach. New York regulators noted that VM-20 is “not liberal enough” and a wrong reference point. Other regulators favored the VM-22 approach or other recommendations in actuarial opinions. The American Council of Life Insurers believes that so long as the actuarial method achieves a PBR calculated within 15% of what insurers believe is the “right number,” captive reinsurance transactions for purposes of alleviating “redundant” reserves will be eliminated. Mr. Rector defended the VM-20 approach, although he recognized future fine-tuning may be necessary. The meeting concluded with Commissioner Torti apologizing for not being able to address all of the industry’s comments, and proposing a conference call in April to address further concerns.