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State needs to address insurance reserves to stay in synch with national standard

Life insurers set aside capital reserves to ensure that they can pay future claims. But the formula for calculating reserves is outdated leading state insurance commissioners and industry associations to seek change to a Principal Based Reserved System.

Sponsored by Rep. Joe Hoppe (R-Chaska), HF3384 that would adopt the new system language was passed 94-35 by the House on Friday. It now moves to the Senate where Sen. Vicki Jensen (R-Owatonna) is the sponsor.

How much money insurance companies need to have in reserve to ensure there’s enough to pay claims is about to change, and supporters say Minnesota needs to support the new language if it is to remain competitive with states that do. However, critics say there’s some problems and the process isn’t ready for primetime.

Hoppe said the language has been adopted by 40 states, with two more needed for the standards to be implemented nationally, which should account for about 75 percent of the insurance premiums in the U.S. “This would mean that PBR will be operational starting Jan. 1 of next year,” he said during a committee hearing on the bill. “I’m worried about our Minnesota-based life insurance companies being left behind their competitors in all the other states that do base this which is going to be the new national standard.”

“PBR is not ready for primetime nationally,” Commerce Commissioner Michael Rothman told the House Commerce and Regulatory Reform Committee earlier in session. “It’s important to get this right as it is about the long-term solvency of life insurance policies, and that companies will have adequate reserves to fulfill their insurance obligations.”

Rothman said problems have risen recently with the evaluation manual and that this “is the engine for this thing.” He said that the National Association of Insurance Commissioners wants to see the new valuations adopted by 2018, with a three-year implementation period.

According to the nonpartisan House Research Department, insurers must now use a formulaic approach to determine the how much to hold in reserve for accident and health insurance policies, annuity contract and life insurance policies. This bill would require insurers to use the PBR method to determine the amount they must hold in reserve. 


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