Principle-Based Reserves


Life insurers set aside capital—called reserves—to ensure they will be able to pay all future expected claims. State insurance regulators closely monitor reserves and take action if a company’s reserve levels jeopardize policyholders’ interests.

The current system to calculate reserves dates back to Civil War times and utilizes a formulaic, one-size-fits-all approach to determine those reserves. Many regulators and life insurance companies believe that reserve requirements need to evolve in order to keep pace with new product designs. For nearly a decade, state regulators, with the support of life insurers and actuaries, have developed an improved method for calculating life insurance policy reserves. This proposal replaces that system with a principle-based reserving approach that “right sizes” the reserve to ensure that it matches the actual risk being assumed. The new principle-based reserves (PBR) approach will enhance the current system for calculating policy reserves, resulting in reserve levels that more accurately reflect risks assumed by life insurers for the policies they underwrite. This new system will provide regulators with tools to properly monitor a life insurer’s reserve levels through annual reporting and review.

To implement PBR, state legislatures must adopt both the Standard Valuation Model Law that was approved by the National Association of Insurance Commissioners (NAIC) in 2009, and the 2012 revisions to the NAIC Standard Nonforfeiture Law. PBR will only be operational once it has been adopted in at least 42 U.S. jurisdictions, accounting for 75 percent of U.S. life insurance premiums combined.

PBR legislation benefits consumers in three distinct ways:

  • PBR helps to ensure that consumers are paying the appropriate price for the insurance coverage being provided.
  • PBR helps insurance companies develop and reserve for new products and product features that the current system inhibits.
  • PBR strengthens the solvency oversight authority of regulators to help ensure that companies will be able to fulfill their promises.

ACLI Position

ACLI supports the implementation of PBR and encourages state legislatures to adopt the revisions to the Standard Valuation Model Law and the revisions to the NAIC Standard Nonforfeiture Law. PBR has been designed to enhance regulatory oversight, not to weaken it. It is in the interest of the entire industry and its policyholders that companies are well capitalized.

To date, 45 states have enacted legislation to implement principle-based reserving: Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, and Wisconsin.

Publications & Resources

ACLI Policy Issue Brief: Principal-Based Reserves, March 2016