The National Association of Insurance Commissioners (“NAIC”) voted to adopt a Valuation Manual (the “Manual”) at its National Meeting on December 2, 2012 in Washington D.C., setting forth a principles-based approach to life insurance company reserves (known as principles-based reserving or “PBR”). Currently, insurance company reserves are calculated using formulas prescribed by state insurance laws and regulations. PBR moves away from this formulaic approach by incorporating other experience factors to assess risks. The Manual includes both PBR and non-PBR elements.
In addition to adopting the Manual, the NAIC voted to establish an executive-level Joint Working Group of the Life Insurance and Annuities and Financial Condition Committees, which will mandate consumer participation in designing the transition to the PBR process. The working group will work on guidelines to ensure that states have sufficient resources to implement PBR and transitioning reserving practices, among other things.
Supporters of the Manual believe the PBR approach will allow insurers to better assess their risks, thereby eliminating reserve redundancies and freeing-up capital, while maintaining company solvency. Critics, including New York, are concerned that reserves will decrease under PBR, while risks will increase, thereby weakening existing solvency protections. Furthermore, there is concern that regulators are not presently equipped to implement and oversee a PBR regime.
It is expected that the Valuation Manual will be presented to states for consideration during the 2013 legislative session.