The National Association of Insurance Commissioners (“NAIC”), at the Executive/Plenary session of its Fall National Meeting, adopted revisions to the Standard Valuation Model Law (“Valuation Model”) replacing the existing formula based approach for reserving life insurance policies with a principles based approach. The revisions come in response to concern that the formula based approach does not appropriately capture the various risks inherent in establishing adequate reserves to meet policyholder obligations. Specifically, the revisions:
- Add reserves for certain benefits, options and guarantees that involve significant risks – under the formula based approach, little or no reserves were required for these benefits; and
- Right size other reserves for products that consumers find beneficial – under the formula based approach, insurers were required to maintain reserves in excess of reasonably conservative amounts.
Further action on the Valuation Model requires an update to the NAIC’s Standard Valuation Manual (which provides specific guidance for each product to ensure that life insurers maintain the correct amount in reserve to meet their policyholder obligations). Revisions to the Manual are scheduled to be completed by the end of 2009.
Click here for the NAIC press release announcing revisions to the Valuation Model.
