§ 3791o. Requirements of a principle-based valuation
(a) A company must establish reserves using a principle-based valuation that meets the
following conditions for policies or contracts as specified in the Valuation Manual:
(1) Quantify the benefits and guarantees, and the funding, associated with the contracts
and their risks at a level of conservatism that reflects conditions that include unfavorable
events that have a reasonable probability of occurring during the lifetime of the
contracts. For policies or contracts with significant tail risk, reflects conditions
appropriately adverse to quantify the tail risk.
(2) Incorporate assumptions, risk analysis methods and financial models, and management
techniques that are consistent with, but not necessarily identical to, those used
within the company’s overall risk assessment process, while recognizing potential
differences in financial reporting structures and any prescribed assumptions or methods.
(3) Incorporate assumptions that are derived in one of the following manners:
(A) The assumption is prescribed in the Valuation Manual.
(B) For assumptions that are not prescribed, the assumptions shall:
(i) be established using the company’s available experience, to the extent it is relevant
and statistically credible; or
(ii) to the extent that company data is not available, relevant, or statistically credible,
be established using other relevant, statistically credible experience.
(4) Provide margins for uncertainty, including adverse deviation and estimation error,
such that the greater the uncertainty, the larger the margin and resulting reserve.
(b) A company using a principle-based valuation for one or more policies or contracts
subject to this section as specified in the Valuation Manual shall:
(1) Establish procedures for corporate governance and oversight of the actuarial valuation
function consistent with those described in the Valuation Manual.
(2) Provide to the Commissioner and its Board of Directors an annual certification of
the effectiveness of the internal controls with respect to the principle-based valuation.
Such controls shall be designed to ensure that all material risks inherent in the
liabilities and associated assets subject to such valuation are included in the valuation,
and that valuations are made in accordance with the Valuation Manual. The certification
shall be based on the controls in place as of the end of the preceding calendar year.
(3) Develop and file with the Commissioner, upon request, a principle-based valuation
report that complies with standards prescribed in the Valuation Manual.
(c) A principle-based valuation may include a prescribed formulaic reserve component. (Added 2015, No. 63, § 1, eff. June 17, 2015.)