Insurance principle-based reserving - Emerging industry challenges and opportunities
On January 1, 2017, a long-anticipated shift is expected to take effect in the U.S. life insurance regulatory framework. A new, more dynamic, more customized approach to calculating required reserves at U.S. insurance companies is making its way through the state-based regulatory system. The shift reflects a multiyear process to implement the National Association of Insurance Commissioners (NAIC) new Standard Valuation Model Law (SVL). The new SVL, upon implementation by states, will shift away from a standardized “one-size-fits-all” reserve requirement to a “Principle-Based Reserving” (PBR) model seeking to align reserves more closely with actual risk profiles at individual firms. While the shift to PBR has been anticipated for years, many life insurance companies have limited their activities around implementation until the adoption date has become clearer.
The next key date for PBR implementation, which applies to new business only, is July 1, 2016; per the SVL, the Valuation Manual (VM), which provides for the details of the methodology, will be effective 6 months after July 1 when the specified written premium requirements are met from the total number of required adopting states. If these requirements are met on July 1, 2016, then the VM will take effect on January 1, 2017. Once the VM is operative, PBR will be optional during a three-year transition period. PBR will then become mandatory on January 1, 2020. KPMG LLP (KPMG) further expects the Federal Reserve to leverage on these rules when setting regulatory capital requirements for insurance companies subject to Federal Reserve jurisdiction.