April, 2013

Dear Friends and Clients:

For the past ten years or so now, the life insurance industry has devoted a major amount of time and money to the creation of a new statutory reserve protocol, known as Principles-Based Reserves, or PBR. The actuarial community was at the forefront of this crusade. PBR, the theory went, would bring the calculation of statutory reserves into the modern Technology Age. It would "right-size" reserves, stripping out redundant components of formulaic reserves, and would reflect the experience of and risks faced by each specific company.

The development of PBR was a tough, gut-wrenching odyssey involving many constituents. The process was largely completed in 2012, although its ultimate implementation depends on the breadth of individual state adoptions. And the result? According to many of those close to PBR, reserves for all products except term life will likely be pretty much the same as current formulaic reserves. This is likely the result of the layers of conservatism built into multiple aspects of PBR mechanics. Thus, aside from being a Full Employment Act for Actuaries, it just may be that PBR simply increases expense levels for life companies, and the need for reserve financing solutions and design creativity rolls on.

Is there a lesson in this?

Tim Pfeifer
President