Filed Under:Life Insurance, Life Products

Valuation Manual heads to NAIC meeting with fingers crossed

Updated: Adoption of Manual to be considered at Exec/Plenary Sunday, Dec. 2

NAIC hopes to get Valuation Manual passed before year-end--will it at National Meeting?  (AP Photo/Jacquelyn Martin)
NAIC hopes to get Valuation Manual passed before year-end--will it at National Meeting? (AP Photo/Jacquelyn Martin)

The upcoming NAIC meeting later this week will spotlight work on the vaunted Valuation Manual as it heads toward completion, but with regulators inching toward a vote, it was uncertain whether the matter would reach the full NAIC membership by the last national meeting of the year.

The goal has always been to have the manual ready before the 2013 legislative season, and the adoption has been a moving target all year, with revisions and edits powering through to the understood finish line of year-end 2012.

NAIC full state membership is due to consider adoption of the Valuation Manual at the Fall National Meeting at National Harbor, Md. 

Forty-two state bodies need to pass it so that it can become the defacto model of reserving by 2015.

The NAIC has been moving from formulaic approaches to reserving with the advent of new product designs to PBR methods over the past 10 years. 

According to the most recent draft of the Executive Committee and Plenary session meeting Dec. 2, the Valuation Manual is on the agenda, item number nine, although an industry source said that the vote count is not certain. 

The Valuation Manual sets forth the minimum reserve and related requirements and its terms needed to be adopted or otherwise enacted by jurisdictions to be operative.

The Standard Valuation Model Law with the PBR approach was adopted by the NAIC in 2009. For Principles-Based reserving methodology (PBR) to go forward, the Valuation Manual (VM) must first be adopted, with VM-20, the requirements for PBR for life products, having taken the bulk of time and effort, with impact studies done by actuarial firms for the industry over the course of many months. 

The reserve requirements in the Valuation Manual satisfy the minimum valuation requirements of the Standard Valuation Law. Life Insurance and Annuities Committee Chair and Tennessee Commissioner Julie Mix McPeak noted 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.

McPeak also stressed, according to the minutes of a Nov. 13 meeting, that the Valuation Manual and the amendments adopted so far remain under the parent committee’s jurisdiction while LATF works through remaining issues.

Commissioner McPeak at the time noted that she anticipates “discussion” of the Valuation Manual at the Fall National Meeting. 

The Principle-Based Reserves (PBR) Valuation Manual got the nod from the Life Committee during a vote in mid-August and then underwent revisions this fall.

The motion passed with a “No” vote by New York's insurance regulator, and abstentions from Minnesota and California. New York's insurance regulatory arm had not responded to a query by presstime. The New York Department of Financial Services holds some cards in the process, as always, and there have not been public signs of approval yet, although things could change. 

Actuaries from New York, Bill Carmello and Amanda Fenwick, have previously expressed concern for proposed reserving methodology, and, more recently, Rob Easton, the deputy superintendent for insurance, has been on Valuation Manual teleconference calls, as well.

"It’s been around since Moses was clean-shaven,” said Adam Hamm back in August, in reference to all the work done on the manual and PBR. Hamm is the North Dakota Commissioner, former Life Committee chair and NAIC vice president, about to move into the NAIC president-elect slot. “It’s high time we put in place [a system] that right-size reserves,” he said, noting it will keep the life insurance industry solvency and will help companies price their products, which will in turn help consumers.

The life insurance industry has been supportive of PBR—and has said it is committed to continue to work through those issues to make PBR a better product.

The Valuation Manual could still pass through for 2013 legislative consideration if there is a full plenary vote by phone in December or very early January.

Late last month, the Life Actuarial Task Force, adopted seven amendments and the Life Committee adopted them on a Nov. 13 conference call, according to the minutes. Significant amendments included those related to mortality, credibility percentages and economic scenarios.

Certain items dealing with things such as determining reserve liabilities for an effective date of Jan. 1, 2014, were adopted this fall to clear the path for adoption of the revised model by the Executive (EX) Committee and Plenary at the Fall National Meeting. 

The Valuation Manual will allow a company in its financial statements to use principles-based reserving (PBR) methodology and its own computer models to figure out required reserves.

“As insurance products have increased in their complexity, and as companies have developed new and innovative product designs that change their risk profile, the need to develop new valuation methodologies or revisions to existing requirements to address these changes has led to the development of the Valuation Manual,” the NAIC document on the subject states.

In addition, the NAIC has stated, the “Valuation Manual addresses the need to develop a valuation standard that enhances uniformity among the principle-based valuation requirements across states and insurance departments. Finally, the Valuation Manual defines a process to facilitate future changes in valuation requirements on a more uniform, timely and efficient basis.”

PBR is the calculation of statutory reserves for life insurance under what many in the industry have called a more modern method to “right-size” reserves rather than the traditional, formulaic approach, which doesn’t anticipate unusual events but is much more readable and rote to regulators.

The Manual has PBR and non-PBR components. The Manual consolidates into one document the minimum reserve requirements for life insurance contracts, accident and health insurance contracts and deposit-type contracts pursuant to the SVL, including those products subject to principle- based valuation requirements and those not subject to principle-based valuation requirements.

The manual has a three-year transition.

McPeak has called the manual “a living, breathing document.”

NAIC members will also consider at the Fall National Meeting the 2013 proposed budget and will conduct the 2013 Officer Election, ushering in the era of Louisiana Insurance Commissioner Jim Donelon.

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