The U.S. may gravitate toward principles-based reserving says Therese Vaughan, CEO of the National Association of Insurance Commissioners (NAIC). Speaking in Washington at the Networks Financial Institutes 6th Annual Insurance Reform Summit, Vaughn juxtaposed the U.S. system of determining solvency based primarily on internal models with the principles-based Solvency II standards under consideration by the European Commission. Vaughn said in light of the recent financial service meltdown, the internal models used in a rules-based approach might not be sufficient to guarantee effective risk management. Given recent developments, it behooves insurance supervisors to take a step back, revisit the underlying assumptions, and assess what implications, if any, their conclusions have for future work, she said. The use of internal models to establish regulatory capital requirements cannot and should not disappear. However, internal models must be used appropriately, with recognition of their significant limitations. The optimal structure of insurance supervision is likely to be a combination of a rules-based and a principles-based approach.
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