Preserving reserves: modernizing life insurance reserve formulas has been challenging for regulators and policymakers.

• Author: Morton, Heather
• Position: INSURANCE

Life insurance is for those "what if' situations. What if something happens to me? What if something happens to my spouse? Maintaining adequate life insurance reserves ensures that those "what if' situations will be taken care of. Having enough reserves on hand ensures that life insurers will remain solvent so that policyholders will receive the benefits they need, when they need them most.

Why the Change?

Every state requires insurers to set aside enough money to pay a reasonable number of claims at any given time. But the traditional method used most often to calculate the required reserves has raised concerns among many life insurers, actuaries and insurance regulators. The formula takes a "one-size-fits-all" approach to regulation and hasn't changed much over the years.

Proponents of modernizing the system through principlebased reserving say the traditional way hasn't kept up with the times and can't easily adapt to today's innovative and increasingly complex life insurance products. To remain current, the traditional method forces frequent and time-consuming changes to state laws and regulations.

Advocates for a change also point out that the current formula too often produces results that inaccurately reflect the risks or the true cost of the insurers' liabilities and obligations. They fear that some reserve requirements may be too high, while others may be too low. If the reserve requirements are too high, consumers are at risk of paying more than they need to. If they're too low, insurance companies could become insolvent, leaving consumers high and dry.

In response to concerns, the National Association of Insurance Commissioners began the difficult task of modernizing the way reserve requirements are calculated nearly a decade ago. The process was arduous, with intense debate at numerous meetings, working groups and task forces, followed by revision after revision. The actuarial guidelines, for example, for just one specific kind of coverage (universal life insurance with secondary guarantees) have gone through several revisions since they were developed in 2003.

The insurance commissioners finally adopted a new method to calculate life insurance policy reserves in 2009 that is based on certain principles rather than on a pre-set formula. The association finished an updated Valuation Manual at the end of 2012 and, along with life insurers, began encouraging state legislators to revise their life insurance laws to incorporate the...