Getting to Principles-Based Reserving Will Not Be Easy

But the new approach limits the length of time that a company can reflect company experience based on a defined "sufficient data period" determined based on a minimum number of claims within each duration of the study. This approach regulates the number of durations before the company needs to grade into an industry table, the ACLI complains. 

The NAIC Valuation Manual was exposed by LATF on June 19. The SVL enables PBR, which is to be introduced in  state legislatures beginning in 2013 if all goes well. The ACLI board and others want their issues satisfactorily addressed between now and the end of 2012.  The PBR framework relies heavily on the standards embedded in the Valuation Manual, as the ACLI noted. Once adopted by the NAIC, the reserve requirements in the Manual will be automatically deemed adopted by the states that have enacted laws recognizing the Manual.

"Given the significant authority that this process bestows upon the NAIC, it is important that formal due process and governance for the ongoing maintenance of the Valuation Manual be comparable to what would be required for similar changes if made by the individual states," the ACLI's Graham writes. 

Although the draft contains recent changes made by LATF that move significantly in the right direction, those changes were adopted with little discussion, and the ACLI would like to encourage LATF to make some additional changes to those recently approved, it says.

America's Health Insurance Plans (AHIP) states, for its part, that LATF, with input from the Health Actuarial Task Force and the health industry, must  make changes prior to the actual use of the initial manual. The changes  AHIP lists include coordinating the use of the Valuation Manual for both life insurance and health insurance, inclusion of the currently under-development  minimum standards for group long-term disability claim reserves AHIP also prefers inclusion of a company's own experience.

USAA says that it believes that  the changes that were made in the latest exposure draft concerning schedules for grading company mortality experience into industry tables were not reasonable. 

"This is especially true for companies with a highly credible book of business where the actual experience is different from the industry experience for a significant number of years," wrote Shawn Loftus, USAA's chief actuary.

"These companies would be forced to begin grading into the industry experience by the fourth year after the sufficient data period and completely grade into the industry table by the eighth year after the sufficient data period. We believe the currently proposed short grading schedule would result in a disconnect in both the level and slope of the mortality assumption."

In a comment letter, a New York Department of Financial Services's actuary, Fred Andersen, expressed concern for  the  ACLI's net premium reserve approach in  requirements  for PBR for life products under Valuation Manual section 20. He argues that the ACLI's approach contains drawbacks, such as it "is not a familiar methodology and has not been thoroughly tested," it contains too many "loopholes," and some assumptions that are not appropriate, New York's Andersen charges.

"Our proposal would be a familiar and tested methodology and therefore remove at least a little of the uncertainty as we head into principles-based reserving. Each key assumption (mortality, lapse, premiums, and discount rate) would be relaxed compared to current standards," Andersen wrote. 

LATF members were originally looking at a mid- to late June time frame for adoption of a valuation manual. Then, the project would move to the full NAIC for adoption at its national meeting in Atlanta this August.

There may be less time for re-exposure of edits to key documents, LATF task force members noted, but said that work will continue after June, and if some issues are put to bed prematurely, there will be time to "wake them up," a key LATF member said May 3.

There will still be time after June to make sure additional areas are covered, Boerner the managing actuary at the Texas Department of Insurance an the task force had said back in May on a conference call.