Regulator: Reserve Shift Effort Nears Milestone

Using standard scenarios supplied by regulators should simplify the review process, allow for better company-to-company comparisons and create greater uniformity, regulators said.

The American Academy of Actuaries, Washington, an advocate of the PBR approach, says risks can be better assessed if insurers can develop the scenarios used in their stochastic models.

In some cases, individualized scenarios would do a better job of reflecting the information that an insurer has, according to Donna Claire, who spoke for the AAA.

The AAA also believes that insurance company management teams need to understand the stochastic modeling process, and that management teams will understand the modeling better if companies are actively involved in developing scenarios that are relevant to the companies, Claire said.

Prescribing standard scenarios moves away from the whole goal of establishing a PBR system, according to John Bruins, a life actuary with the American Council of Life Insurers, Washington.

Claire also expressed concern that companies might have to run two different sets of scenarios to accommodate Valuation Manual Section 20 and C3 Phase II.

C3 Phase II helps to establish capital requirements for variable annuities.

Running two different sets of scenarios would be a "major undertaking," Claire said.

Allen Elstein, a Connecticut regulator and life actuary, said companies investing in esoteric investments should be able to get an idea of how to develop their models from preliminary testing before they go ahead with more extensive testing.

If pre-set scenarios are used, a company is less likely to go off on its own tangent and rationalize investments in products such as collateralized debt obligations, regulators said.

The VM 20 work also includes discussions about whether net or gross reserves should be used and how calculations should be determined.