The countdown to principle-based reserving has begun

Few people outside of insurance senior leaders and actuaries are familiar with principle-based reserving (PBR), and yet its large impact is just starting.

When PBR implementation takes full effect, January 2020 will mark the first major change to reserve requirements in the US in 150 years. Its changes are far reaching and worth a closer look. 

While all change can be unsettling, we've already been working with insurers to use this opportunity to optimize and enhance their statutory reserves. Here is some background and guidance to ensure you're ready for your transition.

What is it?

PBR is an updated approach to statutory-reserve requirements that was introduced by the National Association of Insurance Commissioners (NAIC). It went into effect January 1, 2017, but the NAIC provided a three-year transition period before PBR becomes mandatory January 1, 2020.

Change is afoot

Prior to PBR, insurers used a rules-based approach for reserving to calculate capital needs. But that caused excessive reserves for some insurance products and inadequate reserves for others because the assumptions and formulas were prescribed by state laws and regulations. There were also concerns that reserves calculated under the valuation standards didn't accurately reflect the features and risk profiles of certain products. 

The "one size fits all" approach is currently being phased out. The claim-paying obligation of any insurer is dependent on reserving calculations, so changing the standard will have an impact on the price of insurance — e.g., a high reserve may raise the cost of the policy, while a low reserve may impact the claims-paying ability of an insurer. 

Understanding the new calculation

PBR requires insurers to make complex calculations and establish assumptions based on their actual company experience, with additional margins added for prudency. That will result in substantial changes to processes, IT systems, and internal controls, and will introduce inter-company variability in capital required to back life-insurance policies. PBR will require insurers to calculate up to three separate reserve requirements and monitor internal control over their process to perform PBR valuations. An actuarial report will be filed with the insurance company's domicile state and made available upon request. 

Some tips to help make the transition

While working through your PBR implementation:

  • Familiarize yourself with key recent amendments made to the Valuation Manual. These include clarifications about mortality assumption-setting — e.g., how mortality aggregation for credibility works, disallowing of capping face amounts in studies, the PLT deterministic reserve limitation being seriatim, as well as additional disclosure requirements for the PBR actuarial report.
  • Make allowance for product filing delays. That's because of new or refiled products getting to market simultaneously.
  • Engage with reinsurers earlier in the pricing process. Reinsurance cash flows will influence the price and profitability of your product. Ask how your reinsurer may be able to assist you with your pain points.

Leverage Swiss Re’s expertise on PBR

The task of implementing this law may seem daunting, but carriers now have an opportunity to optimize their statutory reserves. By partnering with us, many Swiss Re clients have already benefited financially by improving their pricing competitiveness, product profitability, and stability of statutory earnings.

Let's have a discussion about how we can use our perspective and relevant claims experience to help you. Contact your Swiss Re representative to learn more about our PBR Experience Sharing solution.

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