Insurance Regulation: Shortcomings in Statutory Asset Reserving Methods
for Life Insurers (Letter Report, 06/03/94, GAO/GGD-94-124).

An adequate asset reserve is crucial to insurer solvency and for early
detection of deteriorating financial conditions. Inappropriate asset
reserving methods can mask an insurer's true condition and the potential
need for regulatory intervention. GAO reviewed the new methods of
calculating statutory asset reserves for life insurers to determine the
extent to which they overcome the shortcomings of the old method, the
mandatory securities valuation reserve (MSVR). The National Association
of Insurance Commissioners (NAIC) termed GAO's earlier criticisms of the
MSVR "moot" because NAIC replaced the MSVR method with the asset
valuation reserve and the interest maintenance reserve methods. The new
asset valuation reserve serves to buffer capital against fluctuating
asset prices caused by changes in the credit quality of an insurer's
portfolio. The new interest maintenance reserve serves to buffer capital
against losses caused by general interest rate changes. This report
evaluates how these two methods overcome the MSVR's shortcomings, which
were that it (1) did not cover all types of risky investments and
accumulated slowly; (2) buffered capital and surplus from changes in the
value of assets, masking the true financial condition of the insurer;
and (3) had a poorly defined purpose, hindering regulators' assessment
of capital adequacy.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-94-124
     TITLE:  Insurance Regulation: Shortcomings in Statutory Asset 
             Reserving Methods for Life Insurers
      DATE:  06/03/94
   SUBJECT:  Insurance companies
             Insurance regulation
             Accounting procedures
             Financial disclosure reporting
             Reporting requirements
             Financial management
             Life insurance
             Investments
             Losses

             
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