PBR for life products
IABA Annual Meeting
James Collingwood, ASA, MAAA
August 1, 2014
Agenda
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Overview
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Reserve calculation
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Timeline
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Key considerations
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Overview
What are Principles Based Reserves?
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Quantification of key reserve cashflows, including:
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Benefits
Expenses
Guarantees
Funding
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Quantification is developed using a level of conservatism for unfavorable
events that have a reasonable probability of occurrence
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Calculation utilizes assumptions, financial models, risk analysis and
management actions consistent with the company’s overall risk management
procedures
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Margins used in the quantification are consistent with the level of uncertainty
in the block of business
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Overview
Rules vs. principles based approaches
Rules based
►Calculation
►Calculation
► Formulaic
calculation
► Same formula for broad categories
of products
► Same formula utilized for each
policy
►Assumptions
► Model
based calculations for
groups of similar policies
► Reflective of specific product risks
► Reflective of risk management and
management actions
►Assumptions
► Same
assumptions used for all
companies
► Same margins used for all
companies
► Locked in at issue date
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Principles based
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► Assumptions
and margins are
reflective of company experience
► Assumptions can be unlocked to
reflect changes in experience
Overview
Objectives of PBR
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Capture all the benefits/guarantee and associated quantifiable and material
risks
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Determine reserves that are consistent with company risk analysis, models
and risk management while maintaining a conservative valuation
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Utilize relevant and credible company experience
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Develop a process that is adaptive to changes in a company’s risk profile
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Allow for more efficient, accurate and transparent risk management through
tailoring of risk models and calibrations to the risk profile of the business
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Offer incentives to implement effective risk management strategies in part by
removing incentives to “game the system”
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Reserve calculation
Valuation Manual details
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Valuation Manual (“VM”) applies to all business
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VM-20 applies to new life business only (i.e., prospective application)
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3-year transition period from the operative date of the Valuation Manual is
allowed for new life business
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Once VM-20 methods are applied, however, they must continue to be applied
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Exemption criteria are provided for single state companies or simple, less
risky products
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Products most impacted
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Universal Life with Secondary Guarantees
Term Life
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Reserve calculation
Minimum reserve calculation
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Minimum reserve = NPR + Max(0, A – B)
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A = Max(DR, SR)
B = NPR – DPA
Where
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NPR = Net Premium Reserve
DR = Deterministic Reserve
SR = Stochastic Reserve
DPA = Deferred Premium Assets
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Reserve calculation
Net Premium, Deterministic and Stochastic Reserve
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The Net Premium Reserve is a formulaic reserve calculation – not principles
based
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Serves as a floor to the PBR calculated reserve
Net Premium Reserve calculation methodology
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Universal Life with Secondary Guarantees or Term Life products
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Other products (e.g., Whole Life, Universal Life w/out Secondary Guarantees,
Variable Universal Life)
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Maximum of NPR calculation defined in the Valuation Manual and policy cash value
Current Standard Valuation Law formulaic minimums
Exclusion tests
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Separate exclusion tests for the Deterministic Reserve calculation and the
Stochastic Reserve calculation
Exclusion tests can be applied to certain products on an optional basis
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Timeline
Recent and future anticipated activity
NAIC LATF Work on VM-20
(Summer/Fall 2012)
NAIC Life Insurance and Annuities
Committee adoption of VM
(August 17, 2012)
VM adoption by
NAIC Executive/Plenary
(December 2012)
Anticipated SVL introduction in legislatures
(2013-15)
Earliest projected effective date for VM-20
(January 1, 2016)
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Timeline
Requirements for VM to become operative
The VM becomes operative on the 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
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Timeline
Enabling legislation process
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State legislatures will consider adoption of the Standard Valuation
Law (“SVL”) that enables the VM
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The VM itself is not what state legislatures will adopt
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The NAIC PBR Implementation Task Force developed a briefing
document to help state legislatures understand the enabling SVL and
its relationship to the VM
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Based on the latest American Academy of Actuaries quarterly update
in late June, 17 states representing 27% of US direct written
premiums have adopted the revised SVL
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Many additional states have introduced the revised SVL in their
legislatures in 2014
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Timeline
Regulatory implementation planning
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The PBR Implementation Task Force has created a draft implementation plan
framework for PBR that considers:
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Review process and staffing
Pre-implementation and training
Accounting and actuarial valuation needs
RBC implications
Captives and SPV solvency
Accreditation standards
Timeline/roadmap development
LATF is continuing to work on some areas of VM-20 including:
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Developing maintenance procedures to annually update asset spreads and default
costs and modifications needed to support experience data collection
Considering small company issues including potential modifications to the
stochastic exclusion test
Constructing CSO mortality tables from the 2014 VBT tables (once completed)
Developing an accounting smoothing mechanism to address reserve volatility
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Key considerations
NAIC impact study findings
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A NAIC sponsored VM-20 impact study was performed by Towers Watson
was released in February 2012
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35 companies participated
A number of observations and recommendations resulted
Key findings
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Impact of VM-20 on reserve levels
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ULSG and Term products
Other life products
Implementation considerations
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Setting of assumptions and margins
Model management
Run-time
Understanding results
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Key considerations
Impact on insurers
Challenges
►Modeling
►Explaining
Opportunities
►Efficiency and uniformity
in reserves
volatility
►Links
►Experience
for
assumptions
pricing, ERM and
reserves
►Ability
to modify product
designs to fit risk tolerance
►Enhanced
controls/governance
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Key considerations
Impact on market and consumers
Challenges
►Product offerings vary by
size of insurer
markets potentially
dominated by basic, low
risk products
Opportunities
►Reduced
reinsurance/reserve
financing costs
►New
►Reserve
levels less likely
to distort pricing
►Encourages
various types
of product designs
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