In a major step forward in the move toward adopting principles-based reserving, the Life Insurance and Annuities (A) Committee ((A) Committee) of the National Association of Insurance Commissioners (NAIC) voted on September 9, 2009, to approve revisions to the Standard Valuation Law (Model 820) (SVL), which had previously been approved by the NAIC Life and Health Actuarial Task Force to enable a principles-based approach to reserve valuation for insurance companies.1 Click here for a copy of the SVL draft that the (A) Committee considered.2 The revised SVL and the accompanying Valuation Manual (which has not yet been approved) represent the model legislation at the core of the NAIC’s framework for principles-based reserving.3 The SVL and Valuation Manual would replace the current formulaic method of calculating reserves with principles-based reserving, a more dynamic approach to reserving that would more easily account for the ever-more complex insurance products that have become prevalent in today’s marketplace.
The (A) Committee specified that its approval of the SVL revisions would incorporate one amendment proposed by the American Council of Life Insurers that adds language to SVL section 12 stating that principles-based valuation shall not preclude a prescribed formulaic reserve component. In addition, the (A) Committee’s approval was contingent on the following conditions:
- That the Valuation Manual would be completed by year-end 2009; and
- That the completed Valuation Manual would contain prescribed formulaic reserves.
The (A) Committee’s approval of the revised SVL followed a 30-day exposure period of the proposed revisions and an earlier joint conference call to discuss the revisions. This conference call, which occurred on July 28, 2009, was attended by the (A) Committee, the NAIC Principles-Based Reserving (EX) Working Group (Working Group), and the NAIC Solvency Modernization Initiative (EX) Task Force (Task Force). The Working Group and the Task Force approved the proposed SVL revisions during the July 28 conference call, but the (A) Committee deferred its own vote on the revisions at that time.
The next step toward implementation of a principles-based approach to reserve valuation is the approval of the SVL revisions by the NAIC Executive Committee/Plenary. Once the NAIC adopts as final the revisions to the SVL and the Valuation Manual, individual state regulators and legislatures then must adopt the revised SVL and Valuation Manual. Seventy-five (75) percent of the NAIC members must adopt the SVL and the Valuation Manual in order for the Valuation Manual to become operative and for the principles-based reserving framework to become effective.4
The SVL revisions and the Valuation Manual will likely be a source of special focus during the NAIC Fall 2009 National Meeting, which will occur later this month. We will keep you apprised of these developments.