NAIC Backs Standard Valuation Model, Plans for Implementation Manual

A new Standard Valuation Model Law adopted at the National Association of Insurance Commissioners' fall meeting is a significant step toward applying principles-based reserves methodology to the regulation of life insurance and annuity products, supporters said.

The full Executive Committee and Plenary formally approved the model, which, if enacted in the states, would modernize how insurance companies calculate the amount of reserves held to offset potential risks to consumers' financial interests in their products. If broadly adopted, it would provide more uniformity in reserves requirements across the states.

"This significant action replaces static formulas with a principles-based approach ? using risk analysis techniques such as modeling and simulation to better capture the various risks inherent in establishing adequate reserves," said NAIC President and New Hampshire Insurance Commissioner Roger Sevigny.

Changes from the existing model law include the addition of required reserves for certain benefits, options and guarantees that involve risk but have so far not been uniformly regulated, if at all; and "right-sizing" of products for which formulas have caused insurers to maintain reserves in excess of what may now be deemed necessary.

The model provides a broad outline for implementation. Details will be determined in a separate valuation manual, which commissioners are now committed to drafting by the end of 2009. The valuation manual will provide specific guidance on what are the correct amounts that must be held in reserve for each insurance product.

"We want to be more proscriptive in the manual, not in the law," Connecticut Insurance Commissioner Thomas Sullivan said.

Citing concerns about how the law will be implemented, Wisconsin Insurance Commissioner Sean Dilweg proposed an amendment to add disclosure and evaluation requirements to the model law. A reliance on "pure financial formulas" may not be enough should the industry experience severe stress, he said. NAIC members rejected the amendment. Dilweg said he will press his concerns in the drafting of the valuation manual.

The new model has the backing of the American Council of Life Insurers and the American Academy of Actuaries.

An A.M. Best Co. special report at the start of the year recognized that principles-based approaches to capital and reserves were picking up. A.M. Best anticipated that PBA could be implemented fully in the United States between 2012 and 2013, which could coincide with implementation of Solvency II in Europe, with the earliest effective date for PBA for life reserves expected to be Jan. 1, 2012. The time line for life reserves depends on adoption of a new Standard Valuation Law and a new Valuation Manual by at least 42 states (BestWire, June 15, 2009).

The report said A.M. Best expects PBA to yield more volatile financial results, especially for leading writers of variable annuity living benefits. It may take several years, however, for the impact of the new reserve requirements for life insurance products to be fully felt, because the new standards will only apply to new issues (BestWire, Jan. 26, 2009).