Texas Insurance Code 425.074 – Requirements of a Principle-Based Valuation
(a) A company shall establish reserves using a principle-based valuation that meets the conditions for policies or contracts provided by the valuation manual. At a minimum, the valuation shall:
(1) quantify the benefits and guarantees, and the funding, associated with the contracts and their risks at a level of conservatism that reflects conditions that include unfavorable events that have a reasonable probability of occurring during the terms of the contracts;
(2) with respect to policies and contracts with significant tail risk, reflect conditions appropriately adverse to quantify the tail risk;
(3) incorporate assumptions, risk analysis methods, and financial models and management techniques that are consistent with those used in the company’s overall risk assessment process, while recognizing potential differences in financial reporting structures and any prescribed assumptions or methods;
(4) incorporate assumptions:
(A) prescribed by the valuation manual; or
(B) established:
(i) using the company’s available experience, to the extent that data is relevant and statistically credible; or
(ii) to the extent that the company data is not available, relevant, or statistically credible, using other relevant, statistically credible experience; and
(5) provide margins for uncertainty, including adverse deviation and estimation error, such that the greater the uncertainty the larger the margin and resulting reserve.
(b) A company using a principle-based valuation for one or more policies or contracts subject to this section and as specified by the valuation manual shall:
(1) establish procedures for corporate governance and oversight of the actuarial valuation function consistent with procedures specified by the valuation manual;
(2) provide to the commissioner and the company’s board of directors an annual certification of the effectiveness of the internal controls with respect to the principle-based valuation; and
(3) develop, and file with the commissioner on request, a principle-based valuation report that complies with standards prescribed in the valuation manual.
Terms Used In Texas Insurance Code 425.074
- Assets: (1) The property comprising the estate of a deceased person, or (2) the property in a trust account.
- Company: means an entity that:
(A) has written, issued, or reinsured life insurance contracts, accident and health insurance contracts, or deposit-type contracts in this state and has at least one such policy in force or on claim; or
(B) has written, issued, or reinsured life insurance contracts, accident and health insurance contracts, or deposit-type contracts in any state and is required to hold a certificate of authority to write life insurance, accident and health insurance, or deposit-type contracts in this state. See Texas Insurance Code 425.052 - Liabilities: The aggregate of all debts and other legal obligations of a particular person or legal entity.
- Oversight: Committee review of the activities of a Federal agency or program.
- Principle-based valuation: means the valuation described by § 425. See Texas Insurance Code 425.052
- Reserves: means reserve liabilities. See Texas Insurance Code 425.052
- Tail risk: means a risk that occurs either where the frequency of low probability events is higher than expected under a normal probability distribution or where there are observed events of very significant size or magnitude. See Texas Insurance Code 425.052
- Valuation manual: means the manual of valuation instructions adopted by the commissioner by rule. See Texas Insurance Code 425.052
- Year: means 12 consecutive months. See Texas Government Code 311.005
(c) A company’s internal controls with respect to the principle-based valuation must be designed to ensure that all material risks inherent in the liabilities and associated assets subject to the valuation are included in the valuation, and that valuations are made in accordance with the valuation manual. The certification described by Subsection (b)(2) must be based on the controls in place as of the end of the preceding calendar year.
(d) A principle-based valuation may include a prescribed formulaic reserve component.