Please Pass the PBR (or Just When You Were Feeling Safe…)
by Christopher H. HauseMarch 2007
Before we get started, I want to point out that Principles-Based Reserves just happens to share the abbreviation of a popular beverage in the upper Midwest, Pabst Blue Ribbon.
There is a stretch of interstate 435 near my house that has been under construction for, well, ever. Drivers who look into the setting sun during their evening commute have an additional challenge every few weeks. The workers change the way the lanes are routed around the construction. Now, being intelligent and courteous Midwestern drivers, they adapt easily and usually within a week or so they get used to the new lane configuration and traffic flows smoothly again. Then, "progress" dictates that they have to get used to another new lane shift. The end result is that they still get home, it just takes a little more time and trouble to achieve the same result.
Some time mid-last year, I (well, John really) finished the conversion of our in-house computer system away from previous versions of Windows and entirely to XP. I am still not sure what the big deal was, except that I was told that 98 and Millennium would not be "supported" (whatever that means) and XP was a more stable environment (whatever that means). Every few years, I look forward to replacing fifteen operating systems and spending time learning new tricks in order to continue the same work I was already doing. Lately I heard that some versions of the new 6 billion dollar operating system will only be "supported" for five years. Given my historically lax conversion schedule, I probably won’t be done converting to it by then, much less proficient at using it.
I believe we have finally achieved an acceptable level of efficiency in our year-end processing. Getting used to cash flow testing was a bit of a chore, but my associates are forward-thinking and light on their feet. I must admit though, there was a bit of resistance on the part of some of our smaller clients who offer simple products that do not appreciate the value added by cash flow testing. In many cases it is a matter of continuing to do the same things they were doing before, such as investing wisely and matching yields and durations properly (i.e. managing an insurance company in a prudent manner). It is just more expensive and time-consuming to continue to do so.
Rumor has it that the 2001 CSO Table will be adopted by the final state some time this year, just about the same time its date with the scrap heap is finalized by PBR. I am not looking forward to visiting with some of my clients to explain why PBR and its associated cost is a good idea for them and worth the price of progress. I may need a few PBR’s to get me through this.
However, just like the highway and the computer running smoother, the insurance industry will be able to employ modern means to set reserves and utilize capital more effectively and it will all be worth it in the long run. And as always, we have to live through the pain to participate in the gain. Thank goodness for PBR.