Jim Poolman on Principles-Based Reserves: a discussion of the new Florida regulatory provisions relating to the use of new split mortality tables in calculating reserves

Jim Poolman on Principles-Based Reserves: a discussion of the new Florida regulatory provisions relating to the use of new split mortality tables in calculating reserves

 

In this Expert Commentary, former North Dakota Insurance Commissioner Jim Poolman tackles the topic of Principles-Based Reserves and discusses FAC 69O-162.203, which sets forth the new Florida regulatory provisions relating to the use of new split mortality tables in calculating reserves. The new regulations are considered an interim step in providing reserving relief from redundant reserves to companies that sell term life insurance, and a move that signals further reform that will move toward a more principles based approach to reserving.

Poolman states that Florida’s temporary approach for principles-based reserving is part of a national effort at regulatory reform and uses the new Florida rules to explain the contours of the efforts being undertaken by the National Association of Insurance Commissioners to overhaul the system of how companies determine how much to hold in reserves for different life products. Under this approach, as Poolman explains, “companies would be given more freedom to use their own experiences in setting their reserves based on general reserving principles rather than using formulas that may not be applicable.”

Generic formulas used in the current system of determining necessary reserve levels can sometimes lead to over conservative reserves for some products and lead to inadequate reserves for other products. Those redundant reserves can cause added expense to the consumer because of an efficient use of capital by the company. Poolman discusses how these redundant reserves became more of a problem when the NAIC passed regulation “XXX” or Triple X, which affected how companies reserved for their products and drastically affected the term life insurance business, in many cases drastically raising the reserving levels required for the product. The author states: “Studies by the industry showed that by moving to a more principles based approach, some companies may be able to reduce their reserves by almost half, still have an appropriate reserve to pay claims and still not have any solvency risk to the company. This again allows companies to price their product more competitively, and better utilize the capital in their company.

Poolman also explains how the changes to FAC 69O-162.203, which are designed to address the problem found specifically in the term life insurance business, will allow the use of revisions to the 2001 CSO mortality table that will reflect differences between a standard risk and a preferred risk of potential policyholders when rating and pricing their policy.

In highlighting the relationship between the new Florida rules and the national scope of the NAIC’s ongoing efforts at regulatory reform, Poolman states: “The changes to the Florida rules are based on one of the pieces of a package of regulations created and blessed by the National Association of Insurance Commissioners in September of 2006. Regulators were specifically looking for an interim step to provide more accurate reserving measures for companies while moving toward a more principles based approach for all life products. The life insurance industry and regulators identified the largest problem of disparate reserves that were potentially too conservative or not conservative enough with two specific products. The products identified were term life insurance and universal life policies that had secondary guaranties built in them. Regulators worked quickly to set out a plan to correct the reserve levels so companies would set reserves at a more appropriate level, and came up with the interim approach before wholesale change would take place. The larger changes are predicted to take much longer to be vetted at the NAIC and then potentially be implemented in the states, thus the importance of large market states like Florida implementing the interim steps.”

Poolman’s opinion is clear—these regulatory developments will provide a win-win for both insurers and consumers. The author concludes: “The changes provided by Florida will be advantageous for insurers writing term life business in Florida. They will able to more accurately measure the risks in their term life business by further segmenting the risks and charging the appropriate premium for those risks. By using the new split mortality tables provided in the changes to the reserving regulations, they will be able to better adjust the reserved needed to pay future claims. For those companies holding redundant reserves that are not necessary to pay future claims, they will be able to reduce them. This can result in lower cost to the company and potentially lower cost of insurance to consumers. In an era where insurance costs seem to only continue to rise, regulators and companies are responding in ways that will likely have positive effects across the board.”

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