Overview

The National Association of Insurance Commissioners (NAIC) is planning to adopt a principle-based reserving (PBR) statutory framework for non-variable annuities under Valuation Manual (VM)-22 with an effective date of January 1, 2026. Specifically, the VM-22 statutory framework will apply prospectively to new business issued starting January 1, 2026. However, insurers will be given a three-year transition period with a mandatory application for all business issued starting January 1, 2029. As of the publication of this paper, there is also an exposure draft that proposes retrospective application of VM-22 for business issued on or after January 1, 2017.

Earlier this year, the VM-22 Subgroup, a subcommittee of the NAIC Life Actuarial Task Force, presented the results of the VM-22 field testing that was conducted in fall 2024. Through the feedback obtained from participants in the field test, additional drafts around specific framework elements, such as the reinvestment guardrail and stochastic exclusion ratio test thresholds, were exposed. As the final draft goes through the approval process, the expectation is that the VM-22 statutory framework will be finalized in the latter half of this year.

With the VM-22 statutory framework soon approaching its effective date, we present this paper as the first of a two-part series that highlights and discusses some of the key areas that insurers should take into consideration when preparing for the upcoming PBR framework for non-variable annuities.

Scope of business inclusion

Under the current draft VM-22 statutory framework¹, there is a three-year transition period where companies may elect to establish minimum reserve requirements for blocks of non-variable annuity contracts issued after January 1, 2026.

As companies begin to plan for the upcoming transition to VM-22, they should consider:

• The profitability profile of their products currently being sold when reserved under VM-22 and whether it makes strategic sense to get ahead of competition with a VM-22 transition. If so, companies should decide which products might benefit the most from an earlier transition, such as annuities with guaranteed living benefit riders.
• Developing a plan on whether to perform stochastic exclusion tests on certain blocks of business. This will inform companies on coming up with an internal roadmap for VM-22 implementation.
• The approach to take for allocating assets between pre- and post-VM-22 blocks, as statutory reserves under a PBR framework will be highly sensitive to economic scenarios, and how well-matched assets are to liabilities. In addition, the allocation of assets to blocks of business that apply to VM-22 may have significant impacts on insurer’s investment and asset-liability management (ALM) strategy.
• Additional operational costs associated with a transition to VM-22, as well as the time and effort that need to be set aside for model implementation, developing expertise and building new financial reporting procedures (e.g., VM-31 reporting requirements). As seen from the prior PBR implementation for life (VM-20) and variable annuities (VM-21), there are heavy model governance and documentation requirements under PBR, so a transition will require dedicated time and expense from internal stakeholders. Such a transition (and the associated time and expense) may also be spread over a period of time should a company decide to stagger implementation across different blocks of non-variable annuity contracts.
• It is not uncommon to have reserve financing or reinsurance in place for new business to reduce reserve strain. Some treaties might require renegotiation if statutory reserve shifts to a PBR approach, particularly if there is a retrospective adoption. As such, analysis and planning will be needed to assess current reinsurance arrangements.

Pricing challenges

With the shift to a PBR under VM-22, pricing of new annuity products requires a more nuanced approach. The prescribed mortality assumptions and discount rates that applied uniformly under the previous Commissioners' Annuity Reserve Valuation Method (CARVM) framework will be replaced by company prudent estimate mortality, policyholder behavior, expense and other assumptions under VM-22. This introduces greater sensitivity to profitability and arguably more levers for product competitiveness.

In general, pricing actuaries should start analyzing the impact of VM-22 on the profitability of their current products to get ahead of competition. Under the new PBR paradigm, pricing actuaries should give thought to:

• Aligning assumptions used in pricing with those used in setting VM-22 reserves. This is especially important for key drivers such as lapses and target spreads, since any deviation could lead to unexpected reserve or capital strain.
• The level of conservatism in setting provisions for adverse deviations (PADs), as it will have to be balanced with competitiveness of pricing. Considering this, pricing actuaries will have to work closely with experience study teams to analyze credibility of experience and to ensure that PADs are not too conservative, which would reduce the competitiveness of products, or too aggressive, which would potentially introduce future reserve strengthening.
• The sensitivity of product profitability to different market conditions, investment strategy, asset portfolio mixes, and crediting strategies under the PBR reserving framework. Annuity products that require a stochastic reserving approach could warrant testing under additional economic sensitivities to ensure that product profitability remains desirable under various market conditions.
• The effectiveness of existing reinsurance arrangements for new business, given that the shift to a PBR framework can cause less predictable reserve levels. Companies should evaluate holistically whether their existing reinsurance strategies still provide for and achieve target profitability objectives. Additional scenario testing might help to evaluate how reinsurance treaties respond under a range of conditions and support any treaty renegotiations if needed.

Model readiness

The introduction of the PBR framework for reserving will undoubtedly increase modeling complexity while at the same time require more transparency for governance. Companies that have life or variable annuity blocks that fall under VM-20 and VM-21, respectively, will likely have actuarial models and processes in place that can be leveraged for VM-22. Some of the key modeling considerations are as follows:

• The stochastic reserve under VM-22 requires runs across many scenarios. Companies need to ensure their modeling software supports this capability and allows for use of an on-site grid or cloud computing for fast processing times. Companies can consider model efficiency solutions such as clustering of policies and scenario reduction techniques to help reduce both runtime and costs. For pricing and asset adequacy exercise, companies need to think about an approach for projecting stochastic VM-22 reserves, such as using nested stochastic projections or other simplified methodology.
• Asset modeling is a key driver of VM-22 results as discussed in the VM-22 field testing results. Companies need to assess current model and vendor capabilities in terms of modeling their portfolio of assets supporting VM-22 businesses, as certain assets such as structured and alternative assets require more sophisticated modeling techniques. In addition, companies might need to consider if their systems are capable of modeling asset interactions with liability cash flows such as crediting mechanisms and dynamic policyholder behavior assumptions. Lastly, with the upcoming change to the Generator of Economic Scenarios used for all PBR reserving, companies need to ensure that their models can handle negative interest rates.
• VM-22 expects the use of company-specific assumptions as well as prescribed assumptions (under the standard projection). Companies must ensure their existing actuarial software can handle more complex, dynamic assumptions and support nested projections if required. Based on the experiences from VM-21 adoption, the standard projection prescribed assumptions can be onerous to implement and thus warrant additional time and budget. In addition to incorporating these sets of assumptions, companies must maintain clear audit trails and documentation in support of VM-31 reporting requirements.
• Given the various methodologies (i.e., deterministic reserves, stochastic reserves, and exclusion testing) and the different reserving categories within VM-22, companies will have to restructure backend processes to cater for additional calculations as well as aggregations across different reserving categories and methodologies (i.e., CARVM for older business and exempted blocks). Companies can set up automated processes to ingest large sets of model output files and data produced from various model runs and translate them into analyzable quarterly reports. Lastly, companies need to think about setting up additional attribution analyses to help understand quarterly reserve movements.

Conclusion

As the VM-22 adoption date looms ever closer, it is never too early for companies to start planning for and thinking about the potential impact on their business in the areas of pricing, investment and ALM strategy, reinsurance, and actuarial and financial reporting operations.

¹ Valuation Manual (VM)-22 (A) Subgroup. https://content.naic.org/committees/a/valuation-manual-22-sg.