Principle-Based Reserving in the Insurance Industry

A task force created by the National Association of Insurance Commissioners called for a study on the impact of principle-based reserving (PBR) in the insurance industry.

Once completed, the study will define regulators’ and insurers’ methods for calculating reserves.  Reserves are how much each company holds in order to pay out on death claims.

The PBR will be used to determine how much insurers must hold in its reserve to remain financially stable. Insurers will use a methodology of basing their reserve amount based on the products they offer and not a generalized method used for all insurers, but one specific to their own company’s size, products and profitability.

This is important because in years past basing a reserve on the claims may have driven up the cost of the insurance because a high reserve means high payments. While the reverse is true for a low reserve, it increased the risk of the insurer.

By its design, principle-based reserving is going to help regulators protect consumers from insurance companies not paying on death claims.

Adam Hamm, Chair of the Principles-Based Reserving Working Group and North Dakota Insurance Commissioner said, “Regulators believe that principle-based reserving will foster a more competitive playing field with better insurance products and prices for consumers.”

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