11 pd statutory life and annuity valuation...

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Valuation Actuary Symposium

September 23-24, 2013

Copyright © 2013 by the American Academy of Actuaries

All Rights Reserved. 1

11 PD – Statutory Life

and Annuity Valuation Issues 2013 Valuation Actuary Symposium

Thomas A. Campbell, FSA, CERA, MAAA

Donna R. Claire, FSA, CERA, MAAA

David E. Neve, FSA, CERA, MAAA





Life and Annuity Valuation Issues

Principle-Based Approaches

Reserve Issues (non-PBR)

Update on Other Issues

2013 Appointed Actuary Topics

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Principle-Based

Approaches (PBA)





Principle-Based Approaches

PBA Reserve Requirements (PBR)

Focus now is on state adoption

Minor clarifications in some requirements

NAIC focus is on implementation

PBA Risk-Based Capital Requirements

Mark Birdsall is reinvigorating Life Risk-Based Capital Working Group at the NAIC

Focus is on stress testing

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Sections of Valuation Manual

VM-00 Valuation Manual and VM-01: Overview and Definitions

VM-20 Life Reserving

VM-21 Variable Annuities

VM-22 Fixed Annuities [TBD - in progress]

VM-25 Health Reserves and VM-26 Credit Life and Disability

VM-30 AOMR and VM-31 Reporting and Documentation

VM-50 Experience Reporting and VM-51 Experience Reporting Formats





Status of Valuation Manual Adoption

NAIC adopted VM in December of 2012

State-by-state legislative approval process of SVL began in 2013

State legislatures are only adopting the SVL that enables the VM; they are not adopting the VM itself

Current approval status:

7 have approved (AZ, IN, LA, ME, NH, RI, and TN)

3 had it on their agenda, but did not act before adjournment (CT, NM and TX)

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Steps for VM to Become Operative

VM becomes operative on January 1st

following:

SVL legislative enactment by at least 42 of the

56 jurisdictions and,

SVL legislative enactment by states representing

greater than 75% of direct premiums written as

reported in 2008 annual statements; and,

NAIC adoption of VM by 42 members or 75% of

members voting, whichever is greater





PBR Implementation Plan

NAIC PBR Implementation Task Force

Coordinate PBR initiatives with all NAIC

technical groups, including LATF

Adopted plan to provide framework for

PBR implementation

www.naic.org/committees_ex_pbr_implementation_tf.htm

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PBR Implementation Plan

Review Process and Staffing

Pre-Implementation and Training

Actuarial and Accounting

Capital Requirements – RBC

Captives and Special Purpose Vehicles (SPV)

Accreditation

PBR Legislative Packet

Timeline





Legislative Briefing Document

NAIC has drafted a briefing document to help state legislators understand the impact of adopting the enabling SVL

Briefing document includes a one-page executive summary and a

set of Q&A that provides more details on things such as impact on consumers, companies and regulators

Academy also has drafted a legislative brief

Outlines why the Academy supports the adoption

Emphasizes the critical need for additional resources (both companies and regulators) for the effective implementation of the VM once adopted

www.actuary.org/category/site-section/public-policy/life/reports-to-NAIC

www.naic.org/committees_ex_pbr_implementation_tf.htm

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Valuation Manual Additional Work

Given the scope of requirements in the VM there will always be ongoing work

Some projects:

Aggregate vs. individual margins

Modeling efficiency

Experience studies

PBR Reporting for blanks

Financial Analysis Handbook & Examination PBR procedures





VM-20 status: PBR for Life Products

Reserves under VM-20 are greatest of:

Deterministic Reserve

Stochastic Reserve

Net Premium Reserve

Exclusion Tests

Can be applied to certain products on an optional basis

Separate tests for exclusion from deterministic reserve and from stochastic reserve

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VM-20 Amendments Introduced in 2013

Alternative approach to calculate Deterministic Reserve Solve for amount of starting assets that exactly

accumulates to zero at end of projection

Mathematically equivalent to GPV, but in practice can produce difference reserve amounts

Alternative approach to reflect pre-tax IMR (PIMR) Remove PIMR from Net Asset Earned Rate calculation,

and subtract initial PIMR from calculated minimum reserve

Clarification of Policy Loan Cash flows Treat like benefit cash flows – Adopted by LATF





VM-20 Amendments Introduced in 2013

Treatment of Due Premiums Treat similar to deferred premiums

Treatment of Letters of Credit (LOC) and other assets Include LOC in starting assets; treat LOC costs as a

cash outflow

Include individually underwritten certificates under a Group Life Insurance contract in scope Definition of “individually underwritten certificates”

needs further refinement

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VM-20 Outstanding Issues

Credibility Method for Mortality Assumptions VM-20 does not prescribe a credibility method

However, for valuations after 1/1/2015, credibility must be determined such that the minimum probability is at least 95% with an error margin of no more than 5% (parameters used in the Limited Fluctuation Method)

The current 95% / 5% credibility requirements need to be revised/redefined to apply to other methods

Investment Return on Starting Assets NY Dept. Financial Services/Insurance (NYDFS) is exploring a cap on the

return of starting assets, equal to current “A” market spread for each asset (similar to AG 38, section 8D)

ACLI has prepared proposals to address these concerns which are planned to be discussed at future LATF meetings

Should an aggregate margin replace individual margin approach?





VM-20 Aggregate Margin

VM-20 requires a margin on each individual assumption

Concerns were raised by companies in the NAIC Impact Study on difficulties of determining individual margins

LATF formed a subgroup, chaired by Mark Birdsall of Kansas to study the issue

LATF asked the Academy to develop a recommendation Academy LPC Task Force was formed, chaired by Patricia Matson

Final report outlining the recommendations of the Task Force were discussed at August LATF meeting

Report was referred to LATF Aggregate Margin Subgroup for their review

www.actuary.org/files/Aggregate_Margin_Proposal_to_LATF_8-22-13.pdf

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Recommendations of

Academy Aggregate Margin Task Force

Aggregate margin should be added to the “best estimate” reserve

Several methods were considered; two rose to the top: Cost of Capital Method

Confidence Interval Method

The Task Force tentatively recommends the Cost of Capital Method, pending further analysis of its practical implementation But further analysis of the potential implementation approach for the

Confidence Interval Method should also be considered as a backstop

To address implementation concerns, the Task Force also recommends a Representative Scenarios Approach be utilized Define small number of scenarios for each risk

Similar to approach being proposed for Modeled Reserve under VM-22





PBA for Variable Annuities

NAIC C-3 Phase II/AG 43 Subgroup Charges Evaluate the overall effectiveness of the

methodology by conducting an in-depth analysis

Make recommendations to LATF / CADTF

Academy AG 43/C-3 Phase II WG Comments June, October and December 2012

Work plan and a review of work performed Pilot for PBR Implementation

Resource needs


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PBA for Variable Annuities

NY Insurance Department (DFS) proposals Updated Standard Scenario (SS) definition of in-the-money

Updated stochastic and SS lapse rates

Updated calibration criteria and SS drops

Academy WG June 2013 report on calibration criteria Current criteria captures recent market performance

No statistical evidence for need to update current criteria

NY DFS proposed change would be a new direction

Academy WG comments at August NAIC meeting Refocus on long-term work plan and review of practice;

NAIC PBR Implementation Plan; address resource issue





VM-22 Status:

PBR for Non-Variable Annuities

Academy’s Annuity Reserve Work Group (ARWG) Goals Work with LATF to get VM-22 ready for effective date of the VM

Develop an appropriate formulaic floor reserve that extends the current CARVM methodology

Develop a modeled reserve approach that Properly reflects the critical risks of the business

Includes an aggregate margin

Helps make the audit process more manageable

August NAIC meeting Presented a potential framework, which is a departure from the

approach used in AG 43/VM-21 and VM-20

The concepts behind the modeled reserve are new and many details need to be considered

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VM-22 Status:

PBR for Non-Variable Annuities

Reserve is greater of a Floor Reserve and a Modeled Reserve Floor Reserve based on AG33, but may permit lapse assumptions

and incidence rates under certain conditions (Listed Benefits)

Modeled Reserve based on a small number of scenarios for each critical risk (not just interest rate and equity risk) Representative Scenarios are used to determine an aggregate margin

Additional scenario testing may be needed and is under consideration

KS DOI is conducting a “proof of concept” pilot project to test the new framework ARWG not involved in the design or performance of the test






Experience Reporting Requirements

New York/Kansas Departments are currently collecting mortality data Company data is confidential; aggregate data can be used

for studies

Next year will expand to lapses on term and ULSG

More expansion in the future, e.g., to premium patterns

Project will also expand to be basis for the NAIC project to develop the Statistical Agent process for PBR and subsequent analysis

May also be expanded to cover Long-Term Care experience reporting requirements for the Valuation Manual

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Reserve Issues

(non-PBR)





Actuarial Guideline 38

New requirements went live last year

NAIC Emerging Actuarial Issues WG is working on answers to specific questions – are up to about 30

Most companies reportedly are filing under 8D; some companies have stopped selling ULSG

www.naic.org/committees_e_emerging_actuarial_issues_wg.htm

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Actuarial Guideline 33

Non-elective Benefits

Academy AG 33 Non-elective Incidence Task Force Interaction of benefits under AG 33 could create issues

e.g., contingent waiver of surrender charges (waiver of SC) along with guaranteed benefits, such as lifetime income (GLIBs)

Defined by AG 33 as being non-elective However, when projected account value = 0, for example, it doesn’t

make sense to assume policyholders take waiver of SC benefits when there are remaining guaranteed payments

Several potential solutions have been provided Academy TF recommends “turning off” waiver of SC benefit

incidence rates when the initial surrender charge period ends

Also, report suggests actuaries check for proper handling in valuation systems and modeling assumptions

www.actuary.org/files/AG-33_Non-Elective_Incidence_Reserve_Proposal_8-22-13.pdf





Fixed Annuities with GLIBs

In November 2012, LATF discussed whether to consider temporary changes to AG 33 as an interim solution until VM-22 becomes effective to address reserving concerns for guaranteed living income benefits (GLIBs) within fixed annuities Two potential approaches: AG43 and modifications to

AG33

LATF voted to pursue implementing an interim solution, but did not reach agreement on which approach to use

At the August 2013 LATF meeting, a motion to pursue a modified AG33 approach was defeated.

Future direction of a possible interim solution is unclear

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Contingent Deferred Annuities

A CDA is essentially a guaranteed living benefit wrapped around a third-party mutual fund

The Academy’s Contingent Annuity Work Group has found that current capital and reserving requirements as set forth in AG43 and C3P2 are applicable to CDAs

The NAIC: Has determined that CDAs should be registered as a

security

Is still looking at issue www.naic.org/committees_a_contingent_deferred_annuity_wg.htm





Update on

Other Issues

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Payout Annuity Mortality Table

2012 IAR Effective 1/1/14

Replaces a2000 Table

Can be used for asset adequacy testing now

Generational mortality table, so may require programming changes

Reserves using table will generally increase over those using the a2000 table for males and deferred annuitization benefits





Life Mortality

Joint SOA/Academy WG chaired by Mary Bahna-Nolan

“2014 VBT” is close to final Will be basis for new CSO

Question on how much margin should be included

Guaranteed Issue/Simplified Issue/Pre-Need Tables Data has been collected

Preliminary tables being worked on

Target to have tables ready in late 2013

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Separate Accounts

2012 Blanks changes

Potentially requires two separate account (S/A)

“greenbook” blanks – one for insulated S/A and the

other for non-insulated S/A

Other NAIC groups looking at separate accounts

Separate Account Risk (E) Working Group

Receivership Separate Accounts (E) Working Group

Financial Examiners Handbook (E) Technical Group





Own Risk and Solvency Assessment

“ORSA is an internal process undertaken by an insurer or insurance group to assess the adequacy of its risk management and current and prospective solvency positions under normal and severe stress scenarios. An ORSA will require insurers to analyze all reasonably foreseeable and relevant material risks (i.e., underwriting, credit, market, operational, liquidity risks, etc.) that could have an impact on an insurer’s ability to meet its policyholder obligations.” (NAIC/CIPR)

Required by NAIC 1/1/15 if Company has more than $500 million in premiums, or insurer group has more than $1 billion

States are using a risk solvency framework in examinations

http://www.naic.org/committees_e_orsa_wg.htm

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Other NAIC Solvency Modernization

Initiatives

SMI TF – draft white paper: The U.S. National State-Based System of Insurance Financial Regulation and the Solvency Modernization Initiative

Other NAIC Groups: Investment RBC

Corporate Governance

Group Solvency Issues

International Solvency and Accounting Issues

ORSA

PBA

RBC Catastrophe Risk

Reinsurance

www.naic.org/committees_e_isftf.htm





Solvency II and IFRS II

Solvency II:

Little progress made in 2013

Effective date is uncertain

IFRS/GAAP convergence

FASB and IASB (International Accounting Standards Board) are working together to converge GAAP and IFRS into one standard

Efforts of FASB and IASB to converge GAAP and IFRS have proven difficult. Little progress made in 2013

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Use of Captives

The Captive and Special Purpose Vehicle Use Subgroup was

formed under the NAIC (E) Committee in early 2012

Concern: broadened use of captives and the potential concern

that a shadow insurance industry is emerging with inadequate

regulation

The Subgroup was charged as follows:

Study insurers’ use of captives and special purpose vehicles to transfer insurance risk,

other than self-insured risk, in relation to existing state laws and regulations and

establish appropriate regulatory requirements to address concerns identified in this

study. The appropriate regulatory requirements may involve modifications to existing

NAIC model laws and/or generation of a new NAIC model law.

www.naic.org/committees_e_cspv_sg.htm





Use of Captives

Hot topic at NAIC; different state regulators have different opinions

The Captive Subgroup of the NAIC prepared a white paper, with the following conclusions and recommendations: Much of the use of captives by insurers is related to XXX and

reserve redundancies

PBR should eliminate the need for captives eventually, but there still is a need to improve the regulation and transparency of these transactions

Recommendations for improvement are still under discussion

Note: some companies reportedly feel that, even with PBA, captives needed for “excess” reserves

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ASB – Exposure Drafts

Modeling Comments on Exposure Draft due 9/30

Credibility Procedures Comments on Exposure Draft due 9/30

Principle-Based Reserves for Life Products Comments on Exposure Draft due 12/16

Life Settlements Mortality Comment period has ended Comments under review by ASB

www.actuarialstandardsboard.org/exposure.asp





GRET

Factors used by about 20% of Illustrations Actuaries

LATF exposed the 2014 Table at the August NAIC meeting

GRET factors up for branch office; down for most others

Expects to vote on approval by end of 2013 www.naic.org/documents/committees_a_latf_exposures_2014_GRET.pdf

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2013 Professionalism Activities

Academy’s Committee on Qualifications began review to determine need for starting process of considering revisions to Qualification Standards

Academy is coordinating heightened professionalism, ASB/ABCD presence with regulators through NAIC to address regulatory issues around standards and discipline

Academy plans to submit comments on a discussion draft prepared by the NAIC’s Joint Qualified Actuary Subgroup, which includes: A recommendation for a uniform definition of the term “appointed

actuary”

A discussion about a process for addressing inappropriate or unprofessional actuarial work





Risk-Based Capital Issues

Changes for 2013 mostly involve C-1 (asset risk) Mandatory Convertible Securities (LR013)

Low Income Housing Tax Credits (LR007)

Working Capital Finance Notes (LR010)

Commercial Mortgage Proposal (LR004)

2014 Initiatives Consider changes in light of PBR, separate accounts, and CDAs

Update C-3 Phase I (fixed annuities) based on new generator?

RBC for reinsurance ceded to an unauthorized reinsurer

Treatment of AVR when needed to support reserve adequacy

Informational stress testing of total provision

More review of C-1 factors

www.naic.org/committees_e_capad.htm

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Life Practice Notes

VM-20 Good progress made in 2013

Exposure Draft expected to be ready by September

Asset Adequacy Analysis Update to the PN that was completed in 2004

Based on survey of companies (190 responded)

Exposure Draft expected to be ready by the end of the year

actuary.org/category/site-section/public-policy/life/practice-notes





2013 Appointed Actuary

Topics

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AOMR Adoption

51 of 52 jurisdictions have adopted the latest

version of the AOMR

Approximately 25 with enhanced RAAIS

Other AOMR issues

Additional requirements contained in VM-30

LATF discussing possibly adding requirements

Report to board of directors before submitting?

Passing level scenario?





Life & Health Valuation Law Manual

Gives summary of each state’s valuation

requirements

Provides one-stop shopping for applicable

actuarial guidelines and NAIC model

regulations

www.actuary.org/content/2013-life-health-valuation-law-manual-0

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AOMR Communications

Academy Discussion Group

Composed of regulatory and appointed actuaries

Discussing ideas for improving communication of key AOMR issues

Group will not recommend changes to requirements, but will rather communicate suggested actions for actuaries

3 Subgroups

Consolidation and Standardization of Memorandums

Communication of Assumptions and Enhanced RAAIS

Adding Links to Memorandums for Key Issues

Val Act Sessions on AG 38 and AG 43 Memorandums





NY Special Considerations Letter

For asset adequacy testing

Possible changes:

NY Dept. more clearly expects all NY7

scenarios to be passed

Maximums on assumed spreads

Have lapse assumptions, e.g. for In-The-

Money variable annuity benefits

Look for this at www.dfs.ny.gov/insurance/ilife.htm#rs later in the year

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2013 Year-end Testing Issues

Reserves may need to be increased

Low interest rates may cause problems

Rates shooting up may cause problems

Equity markets may cause problems

Policyholder behavior

What happens if you run scenario #1 (rates don’t

change) and it fails?





Life & Health Qualifications Seminar

Requirements to sign Statutory Actuarial Statements

Applicable economic, regulatory, and legal environments; and

The identification, evaluation and management of risk

Basic Education requirements

Under SOA 2000-2006 syllabus, must pass this course in order to be qualified as having basic education to sign Annual Statements

For latest SOA syllabus, depends on track

Also, it is a good overview of appointed actuary work

www.actuary.org/content/2013-life-and-health-qualifications-seminar

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Questions

11 pd statutory life and annuity valuation...

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