Change in Valuation Basis for Life Contracts

Submitted by Cynthia Braman on Wed, 04/19/2017 - 11:40am

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By Barry Wilhelm, Booke Instructor

Image of man at deskHistorically, changes in valuation basis related to policy reserves have been treated as surplus adjustments for statutory reporting purposes.

In the Life Annual Statement the impact of such changes has been reported on Page 4, Line 43, entitled “Change in Reserve on Account of Change in Valuation Basis, (Increase) or Decrease” and in the Health Annual Statement on Page 5, Line 35, entitled “Change in Valuation Basis of Aggregate Policy  and Claim Reserves.” 

The impact on surplus is based on the difference between the reserve under the old and new methods as of the beginning of the year.  The difference shall not be graded in overtime unless an actuarial guideline adopted by the NAIC prescribes a new method and a specific transition that allows grading.

SSAP 51 explicitly included changes in assumptions as being a change in valuation basis. However, under the principle-based reserving methodology, some reserving assumptions are expected to change annually.  Last August, the NAIC adopted a change to SSAP 51 updating the change in valuation basis guidance for policies issued on or after January 1, 2017 (the operative date of principle-based reserving for life contracts). The guidance for contracts that are not subject to principle-based reserving remains unchanged.

The new language in SSAP 51 identifies changes which will be reflected as a change in valuation basis (for example, changes in methodology and adoption of new mortality tables) that will continue to be reflected as surplus adjustments and “routine” changes as required by principle-based reserving methodology (such as required annual assumption changes) which will be reported as a change in reserves through operations.

SSAP 51, as amended, states the following:

“Changes in principle-based reserving assumptions are often the result of updating assumptions and other factors required by the existing reserving methodology. Reserve changes resulting from the application of principle-based reserving methodology including, but not limited to, updating assumptions based on reporting entity, industry or other experience, and having the reported reserve transition between net premium reserve, deterministic reserve or stochastic reserve, as required under existing guidance, shall not be considered a change in valuation basis. These types of changes also include, but are not limited to, periodic updates in Valuation Manual tables, such as industry valuation basic tables, asset spread tables and default cost tables.

 A change in valuation basis for principle-based reserves shall include cases where the required reserve methodology has changed or the insurer makes a voluntary decision to choose one allowable reserving method over another. These types of changes include, but are not limited to, new standardized mortality tables such as CSO and regulatory changes in methodology.”

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