Principle-Based Reserving for Life Insurance
How principle-based reserving (PBR) has changed life insurance reserve calculations in the United States.
What Is PBR?
Principle-based reserving (PBR) replaced the formulaic approach to life insurance statutory reserves in the United States with a framework that uses company-specific experience and stochastic modeling. Under PBR, the minimum reserve is the greater of a net premium reserve (a formula-based floor), a deterministic reserve (projected under a single moderately adverse scenario), and a stochastic reserve (the CTE 70 value from a distribution of present values generated by stochastic economic scenarios). PBR applies to individual life insurance policies issued on or after January 1, 2017, though a transition period allowed companies to adopt it gradually.
Actuarial Requirements
PBR significantly increases the actuarial work required for statutory reserving. Actuaries must develop and justify company-specific mortality, lapse, and expense assumptions grounded in credible experience data. They must build and validate cash flow projection models capable of running under thousands of stochastic economic scenarios generated by a prescribed economic scenario generator. Governance requirements include documentation of assumption-setting processes, model validation, and internal controls. The VM-20 (Valuation Manual section 20) provides detailed requirements for PBR calculations, including prescribed margins, scenario generation, and aggregation rules. PBR has made the valuation actuary's role more complex but also more reflective of actual risk.