New York issues heavy-duty warning against PBR

Indeed, banks like Lehman Brothers that reduced their reserves under the Basel II regime were hit hardest by the financial crisis, he said.

Moreover, he wrote, state regulators are ill equipped at present to implement and oversee PBR.

"There is universal agreement-among state regulators, the insurance industry, and even the American Academy of Actuaries-that the administration of a PBR reserving regime will create significant challenges for state insurance regulators," Lawsky wrote, and many departments lack actuaries or experts to police or administer the PBR framework (New York's DFS is richer in actuaries than most).

Lawsky noted that many states, on both ends of the political spectrum, have expressed apprehension about moving forward with PBR unless and until state insurance regulators across the board have a concrete understanding of the resource drain and cost that administration of PBR will inevitably require.

Christopher Garrett, a spokesman for Life Committee Chair and Tennessee Insurance Commissioner Julie Mix McPeak responded by stating that, "PBR is the product of a deliberative process lasting more than six years and bolstered by input from regulators, legislators, actuarial associations, and consumer and industry organizations and associations. 

"Conservative, long-term safeguards in PBR are designed to ensure that reserves are appropriate. In fact, some actuaries have argued that PBR might verge on being too conservative," he argued.

McPeak, who also is commissioner of Tennessee's Department of Commerce and Insurance, has said that the Valuation Manual is not intransigent but that it can be modified as situations warrant.

"Continuing to delay PBR neither helps consumers who, under its implementation, might see more affordable and more innovative products, nor benefits an industry that is required to keep artificially high reserves for certain product lines. Instead, under PBR, companies could direct formerly excess reserves toward innovation, research and reduced premiums for customers," Garrett said.

Lawsky did offer a compromise approach, but it is unclear how it will be taken and whether his letter is enough to shake adoption of the Valuation Manual at this meeting or this year, effectively delaying PBR.

If, Lawsky said, a supermajority of state regulators are at this time resolved to plow forward with PBR, then at least we as commissioners ought to do the following: run the PBR and rules-based approaches in parallel for at least a three-year period, while still booking the numbers from the current system, before making a final, irrevocable commitment to PBR."

"Given the importance of the solvency and soundness of the life insurance industry to ordinary Americans, state insurance regulators need to be careful about removing the current regulatory scaffolding and replacing it with a structure whose ramifications are not clearly and fully understood," Lawsky wrote.

McPeak had indeed noted earlier this month that the Valuation Manual is still a work in progress while speaking during the most recent teleconference meeting this month. She pointed to the continuing work of the Life Actuarial Task Force (LATF) to address issues through the amendment process.