Life Insurers Seek More Flexibility

Group Endorses a New System for Reserve Requirements

An assembly of state insurance regulators endorsed a new system for determining how much money life insurers must hold in reserve to cover future claims, potentially giving individual companies and regulators greater flexibility.

Where standard industry-wide formulas have long dictated reserve requirements, the plan endorsed Wednesday by the National Association of Insurance Commissioners would establish what the NAIC calls "principles-based" reserving based largely on the risks related to individual products.

The NAIC said the plan would lead to more accurate reserves, raising requirements for some insurance products and lowering them for others.

Critics have said principles-based reserving would give insurers greater discretion when making decisions that can profoundly affect their profits, their financial stability and their ability to keep promises to policyholders. Earlier this year, New York Life vice chairman Gary Wendlandt described it as a "trust me" approach to regulation.

Higher reserve requirements may provide added protection for policyholders, but they can also make insurance less affordable.

The NAIC on Wednesday approved a new model law, which will next be submitted to the states for ratification.

Connecticut insurance commissioner Thomas R. Sullivan, a former insurance executive who chairs a key NAIC committee, said the proposed law would make it easier for regulators to set reserves for new types of insurance. "First and foremost, we're protecting consumers and making sure the reserving standards are responsive to product designs and changes," he said. The changes would apply only to reserves for policies issued in the future, he added.

The NAIC had been working on a shift to principles-based reserving for several years, at the urging of insurance companies that claimed certain reserve requirements were excessive.

If adopted, the model law endorsed Wednesday would work in tandem with revisions that are still in progress to an NAIC manual that would help regulators apply the law.

The proposed approach to reserving would not become operative until the law is adopted in 42 states and the states adopting it represent 75 percent of the insurance market, measured by premiums.

Wisconsin insurance commissioner Sean Dilweg, one of two who voted against the model law, said he sought unsuccessfully to have minimum reserves written into the model law, not just included in the NAIC manual. "I'm afraid that the consumer may not have the reserves there when we face a future financial crisis," Dilweg said.