(Reuters) - New York state’s financial regulator will adopt a new method for life insurers to determine how much money they are required to set aside for paying future policy claims, the agency said on Wednesday.
The method, “principle-based reserving,” is pegged to a growing variety of products that life insurance companies sell. It will replace traditional formulas that do not typically adjust for economic conditions or an insurer’s experience in the industry, factors that can affect the insurer’s cash on hand, known as “reserves.”
It will be in place by January 2018, the New York State Department of Financial Service said in a statement.
The new approach has already been adopted by 45 states, the regulator said.
U.S. state insurance regulators have been phasing out inflexible formulas for calculating insurers’ reserves. The current formulas, when applied to certain products, have led to reserves that are either excessive or inadequate, according to the National Association of Insurance Commissioners (NAIC).
The new method more closely reflects the risks of highly complex insurance products, the NAIC has said.
Those products may include, for example, long-term annuities, a type of insurance product that offers investors steady income payments, typically in exchange for a lump-sum investment. Payouts often mean that insurers must make good on the deal for decades.
The New York financial regulator also established a working group on Wednesday that will help develop minimum reserve requirements for any life insurance products sold in the state, regardless of a company’s experience.
The group, consisting of executives from life insurers that do business in New York, as well as community representatives, will also provide input for setting reserve safeguards under the new system, the regulator said.
The working group includes top executives from Axa Equitable Life Insurance Company [AXAFNE.UL], Guardian Life Insurance Company of America [GRDLI.UL], New York Life Insurance Company [NYLIN.UL], Metropolitan Life Insurance Company [METLS.UL] Security Mutual Life Insurance Company of New York [SECMT.UL] and Teachers Insurance & Annuity Association of America [TIAAG.UL].
Reporting by Suzanne Barlyn; Editing by Leslie Adler