A.M. Best Special Report: Rising Global Risks Drive Capital and Reserve Standards.

OLDWICK, N.J. -- Activity is picking up in the United States regarding principles-based approaches (PBA) to capital and reserves. U.S. regulators are preparing for developments overseas, so that U.S. companies do not face uncompetitive situations. A.M. Best believes that a global uniform standard, while desirable, will be very difficult to achieve due to the broad array of interested parties and users of financial information.

* The timing of Solvency II will be critical as the United States expands the current PBA methods to life insurance products and fixed annuities.

* It is anticipated that PBA could be implemented fully in the United States between 2012 and 2013, which could coincide with implementation of Solvency II.

* Many of the PBA initiatives are expected to be in place by year-end 2009, which would set the stage for state adoption to begin by 2010.

* By year-end 2009, PBA for variable annuity capital and reserves will be aligned. Similar approaches for life insurance, fixed annuities and health products also are being developed. A principles-based approach for life capital (C-3 Phase III) may be in effect by the end of 2009.

* The earliest effective date for PBA for life reserves is expected to be January 1, 2012. The timeline for life reserves depends on adoption of a new Standard Valuation Law (SVL) and a new Valuation Manual (VM) by at least 42 states.

* A key requirement under the proposed PBA framework is that companies submit experience assumptions on which they based reserves.

* One primary purpose of principles-based reserving is to capture material risk, particularly extreme tail risk. As such, A.M. Best expects PBA to yield more volatile financial results, especially for leading writers of variable annuity living benefits.

* It may take several years, however, for the impact of the new reserve requirements for life insurance products to be fully felt, since the new standards will only apply to new issues.

BestWeek subscribers can download a PDF copy of all special reports as well as the associated spreadsheet data.

Non-subscribers can access an excerpt of each special report and purchase individual reports and spreadsheet data.

Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.