PBR- New Approach to Life Insurance Reserving

The National Association of Insurance Commissioners (NAIC) announced that they have adopted a new recommendation of reserving life insurance policies. Beginning January 1, 2017, the new principle-based reserving (PBR) standard will be activated over a three-year period.  The implementation of PBR will end a 150 year practice of reserving through the use of formulas.

Rating house Fitch expects PBR will significantly affect areas such as product pricing, design, regulatory reporting, and risk management. However, only a limited type of policies will be affected. Mostly affected will be universal life with secondary guarantees (ULSG) and level-premium term policies. The change will take affect on policies written after January 1, 2017.  Updated mortality tables will also be issued on that date.

One objective of the new methodology for reserving life policies is that they better reflect the financial risks and benefits of policies. In addition, they will also reflect individual insurance company’s experience (mortality, expenses, and lapses).  Additional factors will include the ability to update reserves based on changes in the economic environment and changes in the experience of individual companies.