(a) Characteristics of valuation.--For policies or contracts specified in the valuation manual, a company shall establish reserves using a principle-based valuation that:

(1) Quantifies benefits and guarantees and the funding associated with contracts and their risks at a level of conservatism that reflects conditions that include unfavorable events having a reasonable probability of occurring during the lifetime of the contracts. For policies or contracts with significant tail risk, the valuation must reflect conditions appropriately adverse to quantify the tail risk.

(2) Incorporates assumptions, risk analysis methods and financial models and management techniques that are consistent with, but not necessarily identical to, those utilized within the company's overall risk assessment process, while recognizing potential differences in financial reporting structures and any prescribed assumptions or methods.

(3) Incorporates assumptions that are:

(i) Prescribed in the valuation manual.

(ii) If not prescribed in the valuation manual, established by utilizing either of the following:

(A) The company's available experience, to the extent it is relevant and statistically credible.

(B) Other relevant and statistically credible experience, to the extent that company data is not available, relevant or statistically credible.

(4) Provides margins for uncertainty, including adverse deviation and estimation error, so that the greater the uncertainty, the larger the margin and resulting reserve.

(b) Company requirements.--A company using a principle-based valuation for one or more policies or contracts subject to this section as specified in the valuation manual shall:

(1) Establish procedures for corporate governance and oversight of the actuarial valuation function consistent with those described in the valuation manual.

(2) Provide to the commissioner and the board of directors an annual certification of the effectiveness of the internal controls with respect to the principle-based valuation. These controls shall be designed to assure that all material risks inherent in the liabilities and associated assets subject to this valuation are included in the valuation and that valuations are made in accordance with the valuation manual. The certification shall be based on the controls in place as of the end of the preceding calendar year.

(3) Develop and file with the commissioner upon request a principle-based valuation report that complies with standards prescribed in the valuation manual.

(c) Formulaic reserve component.--A principle-based valuation may include a prescribed formulaic reserve component.

Cross References. Section 7126 is referred to in sections 7102, 7103, 7112, 7125, 7131, 7137, 7141 of this title.