A.M. Best Briefing: U.S. Life Insurers Move Slowly Into Principle-Based Reserves Era

OLDWICK, N.J.--(BUSINESS WIRE)-- With the move to principle-based reserving for U.S. life insurance products, A.M. Best notes in a new briefing that reserves may be subject to increased volatility, reflecting changes in company assumptions that evolve after policies are issued.

A new Best’s Briefing, “Principle-Based Reserves Here at Last?” states that principle-based reserves (PBR) are applicable to all individual life policies except for insurers’ pre-need and industrial life businesses. The initial impact may be limited since the new reserve regime only will apply to policies issued on or after Jan. 1, 2017, and companies may elect to defer adoption of PBR. A.M. Best believes the complexity of PBR as well as uncertainties regarding the level of tax reserves will contribute to low adoption rates during the transition period. Companies must implement PBR by Jan. 1, 2020.

Under PBR, companies may need to calculate up to three different reserves depending on the riskiness of the products. The ending reserve is the maximum of a net premium reserve, a deterministic reserve and a stochastic reserve. The briefing notes that NPR reserves are expected to be lower than current reserves primarily due to use of the new 2017 CSO mortality rates. Reserves for level premium term products, particularly those with level premium periods of 20 years and higher, may see substantial reserve reductions under the PBR framework. The reduction of the so-called reserve redundancy under the current methodology may lead to reduced use of captives and other reserve financing mechanisms. However, A.M. Best does not believe captives will completely disappear as the reserves still may be higher than what companies consider the economic reserves.

PBR marks a significant change in the life industry, changing reserves from a factor-based approach with standardized assumptions to reserves based more on company-specific assumptions. A.M. Best does not anticipate that PBR will have a material impact on ratings. However, there will be increased disclosures by way of supplemental annual statement filings related to PBR. Companies also will be challenged when projecting future results due to the difficulty of estimating reserves subject to PBR as assumptions may change at future valuation dates.

To access the full copy of this briefing, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=263270.

A.M. Best is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

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Source: A.M. Best