Preparing for VM-22: Nonvariable annuity readiness for principle-based reserving

The insurance industry is undergoing a significant change with the adoption of the National Association of Insurance Commissioners’ Valuation Manual-22, the principle-based reserving (PBR) standard for nonvariable annuities. Effective Jan. 1, 2026, VM-22 builds on the evolution of variable annuities (VM-21) and life insurance (VM-20), introducing a more dynamic and risk-sensitive approach to reserve calculation.

For insurers, this shift brings new opportunities to align reserves more closely with actual product risks and prevailing economic conditions. Adoption of the new standard also introduces operational, technological and governance challenges that insurance companies must address to ensure compliance and effective implementation.

Understanding VM-22 and actuarial modernization

VM-22 modernizes reserve calculations for nonvariable annuities, moving away from a traditional formulaic approach to one that incorporates deterministic and stochastic modeling. Previously, reserve requirements were driven by set formulas based on regulatory assumptions, such as interest rates, mortality rates and policyholder behavior. The principle-based approach allows company models to account for how assets and liabilities interact under various economic scenarios. This approach enables more accurate projections and better reflects the realities of today's financial environment.

Historically, VM‑22 applied mainly to single-premium immediate annuity-type payout products and prescribed interest rate-based reserve requirements. The new VM‑22 framework significantly broadens this scope to include accumulation annuities, payout annuities and longevity reinsurance. It also introduces a required testing hierarchy to determine whether a block may use deterministic reserves or must be valued stochastically. This structured framework helps align reserves more closely with economic reality, strengthens policyholder protection and supports broader actuarial modernization efforts.

The regulatory timeline includes optional adoption in 2026 and mandatory compliance by 2029, with ongoing discussions about possible retrospective application for business from previous years. This phased implementation provides insurers with a window to prepare and adapt their processes, systems and teams.

Key readiness challenges for insurers

As insurers gear up for VM-22 compliance, readiness challenges include data quality, technology infrastructure, model risk management and operational complexity.

1. Data and technology

One of the most significant hurdles, especially for midsize and smaller insurers, is the credibility and completeness of in-house data. Legacy systems may not be able to support the advanced actuarial modeling tools required by VM-22. While larger companies often repurpose existing cash flow testing models to accommodate the new requirements, smaller insurers may need to invest in new platforms or undertake extensive customization, which third-party advisors can help with. The transition to PBR demands robust data architecture, data governance, scalable actuarial software and seamless integration across departments.

Solutions in this area may include:

• Upgrading legacy modeling platforms
• Working with technology vendors
• Using cloud-based actuarial tools that can handle complex scenario modeling analysis

Insurers should assess whether their current systems can support the increased demands of stochastic modeling, which may require running thousands of scenarios to test reserve sufficiency adequately.

2. Model risk management and governance

With the heightened reliance on models, insurers must establish comprehensive model risk management programs. These programs include model validation, documentation and periodic review to ensure accuracy and compliance. Regulators increasingly scrutinize whether companies have robust processes in place for model governance, including clear documentation of assumptions, methodologies and validation of results.

For organizations without prior experience in building actuarial models, engaging external consultants or third-party modeling services can be helpful. Even when models are built externally, though, insurers still need to understand their model risk management processes inside and out. This means developing internal knowledge to oversee validation and documentation, and implementing a governance framework that can withstand regulatory examination.

3. Operational complexity

VM-22 introduces new layers of operational complexity, affecting multiple functions within the insurance enterprise. The increased computational demands of principle-based models can dramatically extend run times; if a process that once took an hour now takes 10 hours, for instance, an insurer would need to revisit its financial reporting and close processes to account for that extended timeframe.

The transition to VM-22 will also require greater collaboration across multiple business functions, including IT, accounting and finance departments and between the actuarial and asset management departments. Asset liability management will also be more tightly integrated with reserve projections, necessitating coordinated data sharing and reporting. Insurers should consider forming cross-functional teams and updating workflows to support these new requirements.

Steps to prepare for VM-22 compliance

To successfully navigate VM-22 compliance, insurers should conduct a structured readiness assessment that focuses on technology, data and governance capabilities. Key steps include:

• Evaluating existing systems: Assess whether current actuarial platforms can support deterministic and stochastic modeling for nonvariable annuities.
• Upgrading data infrastructure: Invest in data quality initiatives, data storage pipelines and integration tools to ensure reliable inputs for modeling.
• Establishing a model risk management framework: Develop formal programs for model validation, documentation, model change management and periodic review.
• Enhancing operational processes: Redesign reporting and close cycles to accommodate longer modeling run times and cross-departmental collaboration.
• Building internal knowledge: Train staff or partner with advisors to develop actuarial modeling, model governance capabilities and compliance expertise.

VM-22 marks a critical shift in statutory reserving for nonvariable annuities, ushering in a principle-based era that is more risk-sensitive and demands greater flexibility and operational rigor. Tackling the challenges highlighted above can position insurers for successful compliance while enhancing their ability to manage risk and protect policyholders.

Risk & Regulatory Consulting, LLC, an affiliate of RSM US LLP, contributed to this article.