Shortcomings in Statutory Asset Reserving Methods for Life Insurers
GGD-94-124: Published: Jun 3, 1994. Publicly Released: Jun 3, 1994.
Pursuant to a congressional request, GAO reviewed the National Association of Insurance Commissioners' new methods of calculating statutory asset reserves for life insurers, focusing on whether the new methods overcome the shortcomings of the old mandatory securities valuation reserve (MSVR) method.
GAO found that: (1) the asset valuation reserve (AVR) and interest maintenance reserve (IMR) methods cover more investment types than the MSVR method, but they retain other MSVR shortcomings; (2) the AVR method uses industrywide formulas based on average default and price variability rather than on an individual insurer's own loss experience; (3) because the AVR method accumulates over time, it lags substantially behind increases in assets' reported value and does not ensure that reserves are sufficient to cover losses on risky and troubled assets; (4) the AVR and IMR methods buffer insurers' reported capital from fluctuations in the market value of assets which masks the impact of losses for insurers with deteriorating investments and their true financial condition; (5) the AVR and IMR methods can hinder regulators' assessments of insurers' capital adequacy and solvency; (6) asset reserves should be more closely linked to the market values of an individual insurer's assets and should fully reflect investment losses at the time they occur; and (7) allowances for current losses on risky and troubled assets should not be counted as capital.