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Principle-based reserving reaches 42-state minimum needed for implementation, but victory not yet declared

Legislationneeded to enable principle-based reserving, or PBR, methods in the life insuranceindustry had been enacted by 42 states representing more than 75% of industry premiumsby the end of March.

But neitherthe NAIC nor the life insurance industry is sounding the trumpet in triumph afterostensibly reaching the minimum threshold to implement PBR at the beginning of 2017.July 1, 2016, is the cutoff date for the threshold to be met for PBR to go intoeffect Jan. 1, 2017, according to the NAIC. This comes with the caveat that thestate legislation enacted must be "substantially similar in terms and provisions"to the revised model Standard Valuation Law adopted by the NAIC in 2009.

Idaho,Washington and Utah enactedlegislation in March, bringing the number of states with PBR-enabling legislationto 42. Sources say South Carolina has a bill ready for enactment.There are also high hopes for a Massachusetts adoption of PBR by July 1. A big hurdlewas crossed when California,which had voiced concern about available budgetary resources to implement PBR inthe state, enacted legislation in October 2015.

However,there is NAIC concern that the laws in several states, including Michigan and Maryland,have small-company exemptions that might not meet the "substantially similar"definition, according to one industry source. Thus, the life insurance industryis awaiting clarification from the NAIC. Sources have said the American Councilof Life Insurers has a press release ready to go but cannot issue it without knowingif the current state adoptions pass muster.

One insurancecompany source noted that the NAIC is struggling with how to define the scope of"substantially similar." The phrase "substantially similar termsand provisions" is undefined in the law and has not been used in other insurance-relatedstate laws, according tothe NAIC's "Substantially Similar" Drafting Group.

"Acaveat is that the determination of the meaning of the phrase in the law must besuch that an objective third party would agree, as opposed to the NAIC having completecontrol over the definition used in the accreditation program," the draftinggroup wrote in an August 2015 memo to the PBR Implementation Task Force.

The NAICacknowledged at its Spring National Meeting that it is conducting a careful reviewof various states' standard valuation laws to assure they are substantially similarto what is set out in the NAIC model.

NAICPresident and Missouri Insurance Director John Huff said he anticipates that PBRwill be implemented in 2017 and bring more affordable products to consumers. Huffmade his remarks during the national meeting's opening ceremony on April3 in New Orleans.

PBR,underway for more than a decade,was once touted as having the potential for eliminating perceived reserve redundanciesand lowering the need for new life insurance captives, but it remains to be seenif that happens.