In 2009 the NAIC started the process to update the methodology used to calculate life reserves and move to principles based reserving (“PBR”). As of June 10, 2016 the required number of states had adopted the updated methodology and the NAIC adopted the recommendation to implement principles based reserving as of January 1, 2017 for those states who had adopted the change. Here is what you need to know about the new guidance.
What has changed? In the past, life reserves were based on formulas and tables which had to be updated with changes in laws and regulations. The new approach would allow states to set up fundamental principles to base reserves on and then provide additional guidance in their respective valuation manuals. The current formula locks in certain assumptions, but PBR would allow those estimating reserves to adjust assumptions as available information, loss experience, and circumstances change. This would require a recalculation of reserves on a more regular basis as updated information becomes available. PBR should help reserves better reflect a company’s actual risk profile.
Who does it impact? Right now the changes in reserve only relate to life insurers. There is a small company exemption for companies with premiums less than $300 million for a stand-alone legal entity and less than $600 million for an associated group as long as the group meets other RBC and exemption thresholds.
When is it effective? Insurers may implement PBR as early as January 1, 2017 for new business, but there is an optional 3 year transition period with January 1, 2020 being the final implementation date.
For more information contact Statutory Audit Partner Karsten Hatch.
