The National Association of Insurance Commissioners (“NAIC”) held its Fall National Meeting (the “Meeting”) from November 29th through December 2, 2012.  Among the topics discussed was the need to address the perceived “XXX and “AXXX” reserve redundancies applicable to life insurers.  These additional reserve requirements have been seen by many life insurers as excessive and burdensome, and has arguably led to an increased reliance on cession of risk to special purpose vehicles (“SPVs”) where letters of credit and other dependable assets may be used as collateral for such risk.

During the Meeting, the Valuation Manual was passed by 43 of the 50 states, which will allow for a new Principles-Based Reserving (“PBR”) approach to reserve requirements to be presented this year.  If adopted by a state, PBR would shift the reserve requirement analysis to a case-by-case basis, focusing on a life insurer’s history, including its claims experience and the insurer’s own internal forcast.  While there may be some risk that an insurer will intentionally develop favorable models to decrease its reserve requirements, the Valuation Manual provides regulators increased access to information about the insurers’ risk and risk management.  In the long-run, a PBR approach may make available additional capital to the life insurance industry.

The adoption of PBR may complement, rather than eliminate the use of SPVs within the life insurance industry.  While the need to manage perceived reserve redunancies may be eliminated, a number of states allow the use of SPVs as a means to securitize risk and to access the capital markets.  While there are concerns in the industry that proper regulatory supervision of SPVs is lacking, states have the ability to properly regulate the use of SPVs.  PBR may in fact clear some hurdles for the use of SPVs by life insurers to access the capital markets to finance redundant reserves and/or bring in new capital.