Fitch: PBR Implications Mixed for US Life Insurers
The National Association of Insurance Commissioners (NAIC) this month adopted a recommendation for PBR standards for statutory reporting. The revised reserving standard, which will become effective Jan. 1, 2017 with a three-year transition period, represents a significant departure from the formulaic reserving approach that has been in place for over 150 years.
Fitch expects PBR to materially affect the industry's regulatory reporting, capital and risk management and product pricing and design. While near-term impacts on the industry's overall reserve and capital adequacy are expected to be minimal, longer term impacts could be significant. The limited near-term impact reflects the prospective nature of the proposed implementation given that PBR only applies to business written after Jan. 1, 2017 and the expectation that life insurers will make use of the transition period and potential exclusions.
Level-premium term and universal life insurance with secondary guarantees (ULSG) are expected to be most affected. PBR will reduce reserving requirements for term policies, which should benefit companies that do not currently reinsure excess XXX reserves to captive insurers. For companies that use captives to finance term reserves, the impact of PBR could be modestly negative due to the effect on tax reserves. The magnitude and directional impact on ULSG products is less certain and will vary by company. The impact on annuities, health insurance and other life insurance products is expected to be minimal.
Fitch thinks PBR will reduce but not necessarily eliminate the industry's use of captive insurers to finance excess XXX/AXXX reserves.
We anticipate that large insurers will move more quickly toward the adoption of PBR, particularly those that write significant amounts of term insurance while UL-focused companies will likely move more slowly. Smaller companies could be disadvantaged given the resources required to implement PBR. Furthermore, companies that qualify for and elect to adopt the size exemption could face increased competitive pressure due to less favorable pricing.
Overall, Fitch's longer term concerns include the potential for less conservative reserves and a resulting weakening of the statutory balance sheet, as well as increased volatility in statutory earnings and capital associated with the unlocking of previous assumptions. Separately, the industry will update its mortality table on Jan. 1, 2017, which could have a meaningful impact on reserves for all life insurance products; there will be a three-year transition period for its implementation.
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