IMF calls for implementation of total balance sheet approach in USA

Written by Adam Cadle

12/08/2020

The International Monetary Fund (IMF) is calling for the implementation of a total balance sheet approach to insurer solvency assessment in the USA.

The IMF said this would “require a revised approach to valuation and subsequent recalibration of capital requirements and available capital resources”.

“Insurer statutory valuation requirements for assets and liabilities cannot currently be aligned due to the variety of valuation methods allowed within Principles Based Reserving (PBR) and the gradual adoption of PBR as the liability valuation method,” it added.

“A coherent total balance sheet assessment of insurer solvency cannot be achieved in the absence of consistent valuation of an insurer’s assets and liabilities. In the absence of such consistency, available capital resources are subject to spurious and volatile changes between periods, making it impossible for the determination of risk-based capital (RBC) requirements to provide a desired level of confidence. At present, inconsistent levels of conservatism in the valuation of life insurer products also make it difficult to develop a complementary (i.e., total balance sheet approach) set of capital requirements. Greater consistency in the valuation of life insurer products will necessitate and enable the re-design and recalibration of the life insurer RBC requirements to ensure that together they provide appropriate solvency protection for policyholders based on a clearly stated desired level of policyholder protection.

“The National Association of Insurance Commissioners (NAIC) and state insurance regulators should commence work to re-calibrate the RBC to PBR to reflect the underlying economics and a total balance sheet approach to risk and solvency assessment.”

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