Members of the National Association of Insurance Commissioners (NAIC) ( passed legislation today that adds changes to the Standard Valuation Model Law. When enacted by state legislatures, the changes, addressed at the Executive/Plenary session of NAIC’s Fall national meeting in National Harbor, Md., are designed to improve the way life insurers calculate the reserves held to protect consumer’s financial interests in insurance products, says the organization.

Currently, insurance reserves are calculated using static formulas that are not always optimal when matching risks to reserves.

“This significant action replaces static formulas with a principles-based approach — using risk analysis techniques such as modeling and simulation to better capture the various risks inherent in establishing adequate reserves,” said Roger Sevigny, NAIC President and New Hampshire Insurance Commissioner. “Modernizing these methods provides regulators with better tools to protect insurance consumers.”

“Changes in the Standard Valuation Model Law will be closely associated with changes in the Valuation Manual used by regulatory actuaries to verify the accuracy and adequacy of the reserves being held by insurers,” said Tom Sullivan, Chair of the Life Insurance and Annuities Committee and Connecticut Insurance Commissioner. “This will add important consumer protections to safeguard consumer’s investments in life insurance products.” 

The Valuation Manual provides specific guidance for each product to make sure the life insurer is holding the correct amount in reserve to meet its obligations to policyholders. The changes made to the Standard Valuation Model Law will:

* Add reserves for certain benefits, options and guarantees that involve significant risks, but previously had little or no reserves required under static formulas; and

* Right size other reserves for products that consumers find beneficial, but previously formulas caused insurers to maintain reserves in excess of what may be considered reasonably conservative. 

Begun in 2004, considerable efforts behind this action came through the NAIC’s Life and Health Actuarial Task Force, the Life Insurance and Annuities Committee and the Principles Based (EX) Working Group. Further action on the model requires an update to the NAIC’s Standard Valuation Manual, which is scheduled to be completed by the end of 2009. 

“I look forward to advancing forth these efforts,” said Adam Hamm, Chair of the Principles-Based Working Group and North Dakota Insurance Commissioner. “State legislation based on this model will provide the tools needed to execute this modernization effort.”


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