Principles-based reserving:
Life insurance
As part of the Academy’s principles-based initiative, the Life Reserve Work Group (LRWG) was formed in July 2004 to develop a new principles-based valuation standard for life products. The group is working closely with the C3 Phase 3 Work Group (which is developing risk-based life capital requirements under a principles-based approach) to develop a consistent framework both for reserves and capital.
About the new valuation framework
The proposed framework would define the minimum reserve as the greater of the amounts calculated using a seriatim deterministic method (deterministic reserve) and a stochastic method when the underlying risks of the polices require a stochastic approach (stochastic reserve). Both the deterministic reserve and the stochastic reserve would be determined by taking the present value of net cash flows arising from the contract, where the net cash flows reflect all cash outflows (e.g. benefits, expenses, but excluding FIT) less all cash inflows (gross premiums and other revenue items).
In the past year, several drafts outlining a conceptual framework for this new principles-based approach (PBA) have been prepared and discussed with the NAIC’s Life and Health Actuarial Task Force (LHATF).
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