Taking shape: having heard from a cavalcade of interested parties, NAIC readies a principles-based model law to create a new regulatory framework life and health insurers.

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Insurance regulators have moved into the final phase of creating a model law, based on principles rather than formulas, that would serve as the basis for a new regulatory regime for life and health insurance.

Beginning with its Fall National Meeting in Washington D.C. earlier this month, the National Association of Insurance Commissioners' Principles-Based Reserving Working Group is incorporating suggestions into the model law's draft, which was opened for comment June 3 to Aug. 17.

NAIC and the American Academy of Actuaries have been working on the new law since 2002. Thomas E. Hampton, chairman of the working group and commissioner of the District of Columbia Department of Insurance, Securities and Banking, provided Best's Review with an update in late August.

Who would benefit from these change?

Right now, the system we have doesn't incorporate all the products that are in the marketplace. Some companies have found ways to put certain guarantees or benefits on products outside the realm of the valuation manual. Some call that gaming the system. So this new system of reserving is important if we're going to get to a point of having a true analysis of what the reserve requirements should be for a particular product, and to have it systematically put across all product lines on the life side.

Many say that Europe is doing a good job with a principles-based regulatory framework. The issue is whether we need to move toward where they're going. I think we need to have the system developed, and if it's determined it's not the way to go, at least we have it developed, and we can analyze it against our current process. A lot of U.S. companies do international business now. We need to develop a process that will help their managers better understand their companies' risk exposures. Banking and securities firms, through Basel II and the Solvency II processes in Europe, are going toward the principles-based approach, and insurance is a big part of the financial-services industry. We also need to be involved in the process, and the NAIC--through state insurance regulators--is working toward that end.

Who has been commenting about the proposed life and health insurance principles, and what have they been saying?

Most comments received came from the NAIC task force and working group. We got comments from the capital adequacy task force, and all the financial task forces. We also have comments from the health insurers, the ACLI, and other trade associations.

Did you get more comments than you expected, or fewer?

I'm surprised and pleased with the amount of comments and their comprehensiveness. They've been pointed and have gotten right to the issues we need to address. I think that's great. The next thing is to make sure we can get a lot of these items completed.

Why is 2010 the earliest adoption date for life reserves?

This is a very comprehensive and intensive process. All of the states and the District of Columbia will have to adopt by statute the new standard valuation manuals, so it's going to take that much time. The year 2010 sounds like it's a long way off, but with the amount of work and effort needed, that sounds like a pretty good deadline.

Based on the comments, will you have to make many changes to the exposed draft?

We'll have to make some changes, but not many. Some of the changes we'll make may be perceived as substantive changes.

Our fellow regulators received the draft work in the particular areas day-to-day so they might see some impediments and suggest how to address them in a precise way. I think everyone agrees with the direction we're going and the framework we've developed.

The American Academy of Actuaries said these principles cannot be applied to non-life insurance product lines. Does NAIC intend to apply them to other lines?

No. The life insurance lines have the standard valuation manual. The others don't have manuals. They use the aggregation of their loss exposures to determine what their appropriate loss reserve should be. So what they're saying is that my work with the reserving working group is to move the life insurance products to a manual that closely relates to what's being done in the other lines of business.

About Thomas E. Hampton

* Commissioner, District of Columbia Department of Insurance, Securities and Banking

* Joined the DISB in 1988

* Previously managed accounting and financial activities of captive insurers for Cigna Worldwide in New York and was a supervisor in general accounting with American International Group 

* Certified Public Accountant and Certified Financial Examiner

* Holds BS and MBA degrees in accounting

Six Action Items

NAIC's Principles-Based Reserving Working Group has suggested numerous reforms in six topic areas:

1. Regulatory framework

2. Reserve liabilities

3. Capital adequacy

4. Corporate governance 

5. Public disclosure

6. Financial examination process

Working group chairman Thomas Hampton said the most significant change probably will be in the financial examination process. "So much of our time is currently in auditing and public accounting of the financial statements, annual statements and other reports that come in from insurance companies," be said. "With a new regulatory framework, we're going to have to change the paradigm, to look more at their stochastic models versus looking at the actual financial statements."