Slow pricing will stall some of the biggest benefits of PBR for US insurers
Since its beginnings in 2009, the life insurance industry has been struggling to come to terms with what Principle-Based Reserving (PBR) means in practice. In June, the National Association of Insurance Commissioners (NAIC) officially accepted a recommendation that puts PBR in force from January 1st, 2017, giving insurers a 3 year window (until 1/1/2020) to adopt the policy. This move came as a surprise to few, serving to validate the mounting pressure on life insurers, who already knew they were facing a difficult deadline.
PBR at its core seeks to fix the underlying issues of the one-size-fits-all approach to calculating reserves that’s currently in place. Instead of every insurer being expected to use the same formula, regardless of size, type of business, or potential future events, PBR provides a framework for insurers to model their reserves on a set of fundamental principles. The NAIC hopes this change will better reflect the varied and complex products held by insurers, reducing the instance of reserves that are too high or too low for the products they represent.
As always though, reform doesn’t come easily. The move to PBR will be a difficult one for most insurers. According to a live poll taken at this year’s SOA Life and Annuities Symposium in May only 3% of actuaries claimed their companies were ready for a 1/1/2017 activation date. Clearly there are some major roadblocks.
Once firms do manage to successfully implement PBR though, there will be an opportunity to reprice. The resulting lower or higher reserves could allow for parallel changes in premiums, a business opportunity insurers will want to take advantage of. Repricing for PBR will have its own challenges though, and it’s uncertain of whether current pricing capabilities are up to the task.
Here’s a brief overview some of the higher level challenges insurers need to think about:
Time spent pricing
Not only will repricing for PBR be time consuming, but the time needed for a pricing cycle in general could increase. The process will take longer as more calculations are needed, and despite the temptation, insurers need to be wary of any simplification.
Current computing resources may not be enough to handle beefier pricing within the expected time frame. Insurers need to assess whether their current setup can meet the higher demand from PBR. Appropriate computing capabilities will become essential in keeping pricing time manageable, without negatively affecting other functions within the business.
There will also be a big jump in the expertise needed for pricing in a PBR world. To make sure there aren’t any holes, insurers need to plan for how this knowledge will be built up, and where it will reside within the organisation (i.e. pricing, valuation or corporate).
When it comes down to it, pricing in its current state is too unwieldy to be updated quickly after regulatory changes. As insurers face the potential of such a substantial repricing project, now is an ideal time for them to rethink their modelling capacity and capability. With many still using spreadsheets and outdated legacy systems, the industry’s reaction time is far too slow. Companies that wish to succeed need to look at new tools and processes that allow for rapid reaction times and a more agile pricing cycle. It’s not just regulatory changes that are starting to demand faster reaction times from insurers, but outside forces disrupting the industry no longer allow for the snail's pace of a traditional insurance model. So what can we learn from the life insurance industry’s struggle to implement PBR? How can insurers do better?