Prudential Calls for Coordination on All Fronts

Prudential noted that Government Accountability Office (GAO) Reports in 2002 and again in 2009 showed that, "differences among states have limited progress toward reciprocity and uniformity" and "lack of uniformity and reciprocity may lead to inefficiencies, higher insurance costs, and uneven consumer protection across states."

Several years ago, the NAIC considered an accreditation program for market conduct, but that effort appears to be dormant, Prudential said. The National Conference of Insurance Legislators (NCOIL) adopted a Model Act with support from industry, but only 13 jurisdictions have adopted provisions from the Model.

"Prudential shares the industry's concern that the NAIC has not adequately addressed issues related to the confidentiality and security of market conduct information," the company said.

In its commentary to the FIO, the Affordable Life Insurance Alliance (ALIA) championed the NAIC's work on solvency through modernizing reserving methods. ALIA focused on the need to move to a principles-based reserves (PBR) approach for valuation of life insurance reserves, a move underway by the NAIC now.

ALIA said it strongly supported the NAIC's decision in 2005 to fundamentally reform the existing formulaic or "rules-based" system for calculating reserves and replace it with a modern, principle-based approach (PBA).

A full manual report for the model law passage is expected in March, and regulators are hoping to have enough (42) state legislatures pass the new PBR so that it can become the defacto model by 2015.

The ALIA, which was born amid the movement to better value life reserves, is one of the first organizations to tie PBR to FIO concerns.

It pointed out that momentum for the PBR project began in 2004 as the industry and regulators worked to find common ground regarding the interpretation of Actuarial Guideline 38 as it applied to Universal Life with secondary guarantees.

AG 38 is still a hot issue now, for other reasons relating to the interpretation of the guidelines and suspected loopholes used by some insurers that mask the need for higher reserves. The NAIC's key parent committees are reviewing AG 38 guidance now for USLG and term life products.

See: http://www.lifehealthpro.com/2011/12/08/naic-top-working-group-tackles-ag-38

The initial AG38 experience "demonstrated to NAIC leadership that the current rules-based valuation system and heavy reliance upon Actuarial Guidelines to provide interpretative guidance was not working for some modern life insurance products. There was general agreement that the "one size fits all" approach inherent in the current formulaic, rules-based approach to valuation was inappropriate for certain products and that better tools were available to value reserves for those products," ALIA stated.

The "NAIC's project to modernize the system for valuing life insurance reserves is just another step in the ongoing process of modernizing valuation methodology in the U.S., to keep pace with the ability of insurers and regulators alike to identify and understand risk. While laser-like precision is not possible, modern technology and risk management techniques now make it possible to identify a level of economic reserves with a high degree of credibility," the ALIA said in comments written by executive director Scott Harrison last week.

If U.S. insurance companies are to remain competitive in an increasingly global marketplace, solvency regulation in the U.S. must continue to evolve and further, companies must not be required to operate in a manner that disadvantages them relative to their European and other international competitors, ALIA concluded.