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PBR in final stretch before getting NAIC seal of approval

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PBR in final stretch before getting NAIC seal of approval

A newsystem designed to help insurers tailor their life insurance reserves more closelyto the risk they hold on their books is in the final stretch for acceptance by theNAIC, making a Jan. 1, 2017, implementation date likely. But all eyes are now onaction in Louisiana.

The system,called principle-based reserving, has been underway as a project between the insuranceregulatory standard-setting body and the industry for more than a decade. It requires a threshold of 42 statesrepresenting 75% of health industry premium volume as of 2008 by July 1 to triggerimplementation by the first day of 2017.

The current,or as some say, old-fashioned, system uses actuarial methodology that life insurersconsider prescriptive, requiring insurers to hold more reserves than they believenecessary for some of their newly developed products.

A legalopinion from the NAIC legal division headed by General Counsel Kay Noonan gaveforce to an approach that would allow the required threshold number of states and the amount of premiums tobe met.

Thatopinion, adopted May 2 by the NAIC PBR Implementation Task Force, finds that, todate, 43 states representing more than 75% of premium (76.17%) have enacted theNAIC's Model Standard Valuation Law, as amended by the NAIC in 2009, or legislationthat is "substantially similar" to it in terms and provisions.

However,there is one caveat: Legislative action in Louisiana is needed, according to thelegal opinion.

Louisianais one of the states where regulators had struggled to figure out whether its lawswere indeed substantially similar to the Standard Valuation Law, or SVL, as required.The NAIC has taken an outcomes-based approach in the past weeks to assess the statelaws that varied most from the NAIC standard.

Noonanwrote in the April 26 opinion that Louisiana's general exemption giving the insurancecommissioner authority to exempt any domiciliary company from the Valuation Manualneeds to be repealed for the state and its premiums to be considered substantiallysimilar, counting toward the threshold. She noted that pending legislation to repealthe general exemption has already passed the Louisiana House and is pending in thestate Senate. She wrote that the NAIC has been advised that it is expected to becomelaw before July 1. The Louisiana legislative session is expected to end by June6.

The NAIClegal division also had to tussle with the written condition that an objective thirdparty would agree with what was deemed to be substantially similar.

Noonanwrote that "uniformity of reserving methods among all states utilizing PBRis essential for it to work effectively as part of the national system of state-basedregulation."

Takingan outcomes-based approach, Noonan reasoned that an objective third party woulddetermine substantial similarity based on whether a state model was adopted in afashion that fills the bill for the reason behind the requirement: the need foruniformity in the calculation of reserves. A state's own version need not, nor wasit required, to be identical, she explained. An outcomes-driven standard of review"considers whether the identified deviations from Model #820 [the SVL] … impactuniformity in the reserving requirements" as applied to the companies, shewrote.

The NAIC'sValuation Manual sets a companywide exemption for smaller companies, identifiedas those that have less than $300 million of ordinary life premiums and, for groups,combined ordinary life premiums of less than $600 million.

The taskforce had identified 10 states that have adopted versions of the companywide exemptioninto state law: Arkansas, Georgia, Kentucky, Louisiana, Maryland, Michigan, Missouri,South Carolina, Texas and Utah. But most of those states were deemed to have adoptedan exemption consistent with the Valuation Manual.

BesidesLouisiana, states that had variants to the SVL that called for some additional scrutinywere Maryland and Michigan, which have company exemption limits of $500 millionfor a single company and $1 billion for groups, according to Noonan's memo.

"Weconsidered the make-up of the domestic market of these states with higher exemptionthresholds to determine the impact the exemption levels would have on uniformityof reserving. Given the current domestic market in Maryland and Michigan, no additionalcompanies can claim the exemption outside of those exempt under the Valuation Manualformulation," she wrote.

The NAICsaid the next step will be for the full NAIC membership to consider the recommendationfrom the NAIC's legal division. The expectation is that adoption of the recommendationwill be followed by appropriate state action, according to NAIC staff.

The NAIChas been augmenting its actuarial staff to prepare for PBR implementation.