REINSURANCE OVERVIEW. Mary Bahna-Nolan, MAAA, CERA, FSA Richard Daillak, MAAA, FSA Arnold Dicke, MAAA, FSA, FCA, CERA Sheldon Summers, MAAA, FSA

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1 REINSURANCE OVERVIEW Mary Bahna-Nolan, MAAA, CERA, FSA Richard Daillak, MAAA, FSA Arnold Dicke, MAAA, FSA, FCA, CERA Sheldon Summers, MAAA, FSA 2016 American Academy of Actuaries. All rights reserved. May not be reproduced without express permission. PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

2 Caveats The opinions expressed in this presentation are those of the individual presenters, and do not necessarily represent those of their employers or of the American Academy of Actuaries. It should also be also noted that there may be exceptions to some of the statements made in this presentation. 2 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

3 What Will Be Covered Reinsurance Risk Transfer (Sheldon) Treatment of Reinsurance in PBR (Sheldon) Assets held by Another Party (Richard) Stochastic Exclusion Test YRT (Richard) Use of counter-party reserves and data (Mary) Incorporating reinsurance in the cash flows (Arnold) Relationship of AG48 and Draft XXX/AXXX Regulation to VM-20 (Richard) 3 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

4 Reinsurance Agreements Types subject to risk transfer - Yearly Renewable Term (YRT) - Coinsurance - Coinsurance with funds withheld - Modified coinsurance (ModCo) - Combination coinsurance/modco 4 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

5 Reinsurance Agreements YRT - Company transfers mortality risk to the Reinsurer - Reinsurance premiums typically guaranteed for one year - Example: YRT on ULSG policies; company pays surrender benefits; reinsurer reimburses company for death claims 5 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

6 Reinsurance Agreements Coinsurance - Reinsurer assumes proportional share of risks - Company takes a reserve credit for the proportion of the risk ceded; Reinsurer sets up a reserve for the risk it assumes - Company pays proportional amount of premiums, less an expense allowance typically designed to cover the price of the arrangement - If in-force business ceded, initial premium is proportional amount of reserves less an initial expense allowance - Reinsurer reimburses company for proportional amount of claims - Example: 75% coinsurance on ULSG policies 6 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

7 Reinsurance Agreements Coinsurance with funds withheld Similar to coinsurance except company holds some or all of the funds supporting the reinsurer s share Modified coinsurance - Similar to coinsurance except company holds all of the funds supporting the reinsurer s share and sets up all the reserves 7 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

8 Risk Transfer Applicable Documents: - Life and Health Reinsurance Agreements Model Regulation - Statement of Statutory Accounting Principles (SSAP) No. 61R - Appendix A-791 of the Accounting Practices and Procedures Manual 8 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

9 Life and Health Reinsurance Agreements Model Regulation Subsection 3 Regulation excludes assumption reinsurance, yearly renewable term reinsurance, stop loss reinsurance, and catastrophe reinsurance SSAP 61R YRT is subject to certain provisions of the regulation Appendix A-791 defines YRT that is exempt 9 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

10 Life and Health Reinsurance Agreements Model Regulation Per SSAP 61R, a reinsurance agreement that violates risk transfer criteria shall follow the guidance for deposit accounting. Surplus enhancement must be permanent - Adequate renewal expense allowances, unless a liability for any deficiency is held by the company - No possible deprivation of surplus, with some exceptions 10 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

11 Life and Health Reinsurance Agreements Model Regulation Surplus enhancement must be permanent (cont.) - No reimbursement for negative experience, unless nonperformance by ceding company or recapture - No payments from amounts other than earnings of ceded business - No representations or warranties regarding future performance 11 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

12 Life and Health Reinsurance Agreements Model Regulation Transfer of risks requirement - Table in regulation - Morbidity, mortality, lapse, credit quality, reinvestment, disintermediation - Segregation of assets if funds withheld or ModCo and asset risk is significant 12 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

13 Life and Health Reinsurance Agreements Model Regulation Questions: - Payment of profit and risk charge? - Renewal expense allowances higher than anticipated? - Policy loan participation? - Payment of financing fees? 13 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

14 Life and Health Reinsurance Agreements Model Regulation Commissioner discretion to recognize reinsurance credit - Not in Appendix A-791 Recognition of surplus relief as income 14 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

15 Treatment of Reinsurance in PBR When to include a reinsurance agreement in the PBR calculation of the minimum reserve - Reinsurance agreement meets risk transfer requirements - Reinsurance agreement does not meet risk transfer requirements, but including it results in lower surplus 15 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

16 Treatment of Reinsurance in PBR What reduction is made to the Net Premium Reserve (NPR) on account of ceding mortality risk under YRT agreements? What assumption to use regarding future YRT premiums in stochastic and deterministic reserves? - Current premium rate scale? Add a margin? - Assume immediate increase? How much? - Assume gradual increase? When and how much? 16 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

17 YRT Premium Assumption in PBR VM20-8.C.3.c: Consistency among assumptions - 8.C.7: Counterparties likely to exercise terms of a reinsurance agreement to their respective advantage 17 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

18 YRT Premium Assumption in PBR VM20 (cont.) - 8.C.10: Assumptions used by the ceding company should account for any actions that the assuming company has taken or is likely to take that could affect the expected cash flows of the reinsured business 18 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

19 YRT Premium Assumption in PBR VM20 (cont.) - 8.C.11: Ceding company shall consider all elements of a reinsurance agreement that the assuming company can change and assumptions for those elements are subject to Section7.C. Appropriate assumptions for these elements may depend on the scenario being tested 19 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

20 YRT Premium Assumption in PBR VM20 (cont.) - 7.C.2: The projected Non-Guaranteed Element (NGE) shall reflect: * the nature of contractual guarantees * past practices and established policies * timing of changes relative to date of recognition of a change in experience * benefits/risks of continuing to authorize NGE 20 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

21 YRT Premium Assumption in PBR VM20 (cont.) - 7.C.3: Projected NGE shall be established based on projected experience consistent with how actual NGE are determined - 7.C.4: Projected NGE must be consistent with scenario experience assumptions. Policyholder behavior must be consistent with the NGE assumed in the model. 21 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

22 Assets Held by Another Party Should assets backing the reserve that are held by another party be modeled? If so, how? 8.C.14.a: In deciding, the company should consider: degree of linkage between portfolio performance and calculation of the reinsurance cash flows sensitivity of the valuation result to asset portfolio performance 8.C.14.b: If the decision is that such assets need not be modeled, one must document the testing and logic 22 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

23 Assets Held by Another Party 8.C.14.c: If the decision is to model those assets, comply with 7.E (reinvestment and disinvestment), 7.F (cash flows from invested assets), and 9.F (asset assumptions) taking into account: [Note 8.C.14.c cites only 7.E and 9.F. Likely typo.] investment strategy for the assets, as specified in the reinsurance agreement or other current documentation of the holder actions the may be taken by either party that would affect the net reinsurance cash flows, for example, change in strategy within the agreed guidelines 23 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

24 Modified Coinsurance Under modified coinsurance, it may not be necessary to model the ModCo reserve itself but the ModCo cash flows (ModCo interest and ModCo adjustment) should be modeled, and that may require modeling assets held by a counterparty See 8.C.14.c guidance note 24 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

25 SERT When YRT Has Been Ceded Exclusion tests are elective tests that, if passed, let the company skip calculating Deterministic Reserve or Stochastic Reserve or both. YRT reinsurance ceded may cause a policy block to fail the Stochastic Exclusion Ratio Test (SERT) when it would otherwise pass YRT reinsurance ceded reduces the SERT denominator but may have little impact on the numerator, with the effect that YRT ceded makes the ratio higher, perhaps exceeding the 6% test threshold If a block passes SERT before taking into account YRT ceded, but fails after including YRT ceded, VM20 6.B.2.c allows further analysis that may avoid the need to compute a stochastic reserve 25 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

26 SERT When YRT Has Been Ceded 6.B.2.c: The block may be deemed to pass the SERT if the company can demonstrate that the sensitivity of the adjusted deterministic reserve to the SERT scenarios is comparable before and after YRT ceded 6.B.2.c.i: Offers an example of an acceptable demonstration that is in effect a second level numerical test and safe-harbor 6.B.2.c.ii: Allows other, unspecified qualitative approaches to the demonstration 26 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

27 SERT When YRT Has Been Assumed If a block of YRT reinsurance is aggregated with a block of other policies in calculating the SERT, the aggregate may pass SERT when the other policies would otherwise fail Mechanics: YRT-assumed increases the SERT denominator but might have little impact on the numerator Note, however, that such aggregation may violate 6.B.2.b.iv, which provides that a company may not group together contract types with significantly different risk profiles for purposes of calculating the SERT 27 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

28 Determining the Minimum Reserve Making Use of Counterparty s Reserve Calculations or Data

29 VM-20 References Section 8.A.1 Section 8.C.1 Section 9.A.2 Section 9.A.6 Section 9.B.2 Section 9.C.2 Section 9.D.1.c Section 9.D.3.c Emphasis has been added throughout to show reference within VM-20 to the use of other party s data or calculations and is highlighted in red. 29 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

30 Making Use of Calculations of the Other Reinsurance Party 8.A.1 Guidance Note: In determining reserves, one party to a reinsurance transaction may make use of reserve calculations of the other party. In this situation if the company chooses assumptions that differ from those used by the other party, the company must either rerun the reserve calculation or be prepared to demonstrate that appropriate adjustments to the other party s calculations have been made. 30 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

31 Making Use of Calculations of the Other Reinsurance Party (cont.) Mirror reserving not required in VM-20 ( 8.C.1) Will reinsurer provide reserves specific for a particular treaty? Reinsurer s model segments or unit of account may be treaty or group of similar treaties from multiple carriers Direct carrier s model segments or unit of account may be policy form or groups of policy forms that may or may not all be reinsured with same carrier 31 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

32 Making use of Calculations of the Other Reinsurance Party (cont.) What if same policy form and/or policy is split between multiple reinsurers? Unlikely assumptions will be the same for all parties What does demonstration to show adjustments to other parties calculations are appropriate look like? 32 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

33 Making Use of Data of the Other Reinsurance Party 9.A.6 - The company shall use its own experience, if relevant and credible, to establish an anticipated experience assumption for any risk factor To the extent that company experience is not available or credible: Company may use industry experience or May use other data to establish the anticipated experience assumption If other data used, make modifications as needed to reflect the circumstances of the company 33 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

34 Making Use of Data of the Other Reinsurance Party (cont.) 9.B.2. Requires that the greater the uncertainty in the anticipated experience assumption, the larger the required margin The company shall use a larger margin when: a. Experience data have less relevance or lower credibility b. Experience data is of lower quality e.g., incomplete, internally inconsistent, or not current c. There is doubt about the reliability of the anticipated experience assumption 34 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

35 Making Use of Data of the Other Reinsurance Party (cont.) 9.A.6.a. For risk factors (such as mortality) to which statistical credibility theory may be appropriately applied, the company shall establish anticipated experience assumptions for the risk factor by combining relevant company experience with industry experience data, tables, or other applicable data in a manner that is consistent with credibility theory and accepted actuarial practice 35 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

36 Making Use of Data of the Other Reinsurance Party Mortality 9.C.2 - For determining company experience mortality, company should first consider its actual experience Company may consider experience data from other sources, if available and appropriate Includes actual experience data of one or more mortality pools in which the policies participate under the term of a reinsurance agreement Data from other sources is appropriate if the source has underwriting and expected mortality experience characteristics that are similar to policies in the mortality segment 36 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

37 Making Use of Data of the Other Reinsurance Party Mortality (cont.) May be difficult to achieve requirements Structure of reinsurance agreement may necessitate differences in expected mortality (e.g., first dollar quota share vs excess of retention) Who has and what is burden to demonstrate mortality from data source based on: Similar underwriting? Similar expected mortality characteristics for the mortality segment? Will reinsurer share this? Can reinsurer share this? Even with similar underwriting requirements, rare expected mortality is same between companies 37 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

38 Making Use of Data of the Other Reinsurance Party Mortality (cont.) How is credibility determined for ceding companies mortality segment? Reinsurer often blends experience from various companies with different average sizes, age distributions, etc. how representative is this? Does reinsurer have consistent pool of experience over consistent period of time? 38 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

39 Making Use of Data of the Other Reinsurance Party Policyholder Behavior 9.A.6.b. - For risk factors that: Do not lend themselves to the use of statistical credibility theory Where statistical credibility theory could be applied but cannot be due to lack of industry data Company shall establish anticipated experience assumptions in a manner that is consistent with accepted actuarial practice and that reflects: Any available relevant company experience must first consider; Any available relevant industry experience; or Any other experience data that are available and relevant 39 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

40 Making Use of Data of the Other Reinsurance Party Policyholder Behavior Techniques listed for use of data other than relevant company experience include: Adopting standard assumptions published by professional, industry, or regulatory organizations; Applying factors to relevant industry experience tables or other relevant data; Blending any available relevant company experience with any available relevant industry experience and/or other applicable data Use weightings established in manner consistent with accepted actuarial practice; Reflects the risk characteristics of the underlying policies; and/or Reflects company practices 40 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

41 Making Use of Data of the Other Reinsurance Party Policyholder Behavior (cont.) Related to assumptions and margins on said assumptions for: Premium funding patterns; Premium payment patterns; Premium persistency, surrenders, withdrawals; and Allocations between available investment and crediting options, benefit utilization, and other option elections 41 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

42 Making Use of Data of the Other Reinsurance Party Policyholder Behavior (cont.) 9.D.1.c Absent directly applicable data: Use available data from any other block of business Similar to the block of business being valued; Similar block of business does not need to be directly written by the company If data from a similar block of business is used Adjust anticipated experience assumption to reflect material differences between the business being valued and the similar block of business Per 9.D.3.c For margins, must reflect the data uncertainty associated with using data from a similar but not identical block of business 42 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

43 Making Use of Data of the Other Reinsurance Party Policyholder Behavior (cont.) More likely that assuming company will utilize assumptions from ceding company than vice versa Reinsurers are more likely to rely on ceding company s funding/premium patterns and net amount at risk projections for universal life plans The party using other reinsurance party data needs to have enough information to support the comparison and differences between the similar and modeled block to adjust assumption and reflect in margins 43 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

44 Determining the Minimum Reserve and Reserve Credit (cont.) Post- and Pre-Reinsurance-Ceded Cash Flows Reflecting Counterparty Impairment Aggregation & Allocation Rules

45 References Section 8 of VM Pending Draft of PBR ASOP 45 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

46 VM-20 Minimum Reserve Aggregate Net of reinsurance Pre-PBR Commissioners Reserve Valuation Method (CRVM) reserves were per policy and were calculated on a before-reinsurance basis Content AADicke LLC. All rights reserved 46 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

47 VM-20 Minimum Reserve If agreement meets risk transfer criteria Include reinsurance cash flows in cash flow model for DR and SR [Section 8.C] ANPR = Aggregate NPR = NPR - (SSAP61 credits) Coinsurance: credit calculated like NPR for percentage coinsured Term: credit is one-year term mean reserve for net amount at risk See sections 2.B and 8.B Content AADicke LLC. All rights reserved 47 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

48 Reinsurance Cash Flows Assumptions and margins appropriate for the company [Section 8.C.1] No mirror reserving requirement Content AADicke LLC. All rights reserved 48 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

49 Risks Not Captured by Deterministic Assumptions For example, stop-loss Either Include in cash flow model, or Perform separate stochastic analysis Adjust prudent estimates or Make addition to Stochastic Reserve See Section 8.C.2 Content AADicke LLC. All rights reserved 49 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

50 Cash flows Reinsurance Ceded Reflect terms of reinsurance and other assumptions used for the policies E.g., mortality consistent with retained mortality If knowledge of reinsurer impairment, reflect in margins Look at ratings, RBC ratios, etc. Take account of security Content AADicke LLC. All rights reserved 50 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

51 Cash flows Reinsurance Assumed Reflect terms of reinsurance and experience for business segment Separate assumptions not required for each agreement If knowledge of impairment of ceding company, reflect in margins But if has right to terminate for non-payment, margin can be reduced Content AADicke LLC. All rights reserved 51 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

52 Section 2.G Permits approximations and simplifications Company must demonstrate reserve not understated Could be useful for immaterial blocks Content AADicke LLC. All rights reserved 52 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

53 Pre-PBR Reserves If Reinsurance Present Calculated policy-by-policy gross of reinsurance and summed (can do this because formulaic) Then reserve credit per SSAP 61 is subtracted Content AADicke LLC. All rights reserved 53 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

54 VM-20 Minimum Reserve Post-reinsurance-ceded by definition Modeled reserves (DR, SR) based on postreinsurance cash flows Economic and accounting effects are postreinsurance, so Content AADicke LLC. All rights reserved 54 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

55 Why Are Pre-Reinsurance Reserves Needed? Reporting requirement regulator concerns: Risk concentration Risk of counterparty impairment Risk of overestimating reinsurance recoverables Impact of transactions Collateral Actual financial consequences Content AADicke LLC. All rights reserved 55 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

56 Pre-Reinsurance Ceded DR and SR Redo the calculations of DR and SR, including exclusion tests, on a pre-reinsurance basis using methods and assumptions consistent with methods and assumptions used for (post-reinsurance) minimum reserve calculations Reflect company experience in the absence of reinsurance Reflect known differences Content AADicke LLC. All rights reserved 56 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

57 Pre-Reinsurance-Ceded DR and SR Starting assets Hypothetical portfolio Pending PBR ASOP Return on assets available at the time Return on retained policies Pro-rata slice of reinsurer assets backing ceded reserves Collar applies (see sections 8.D.2.c and 7.D.1.c) Content AADicke LLC. All rights reserved 57 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

58 Section 2.A Process Post-Reinsurance Separate calculations for Term, ULSG, Other SET not passed: MR = max(anpr, DR + DDPA, SR + DDPA) SET passed; DET not passed: MR = max(anpr, DR + DDPA) SET and DET passed (only for Other): MR = ANPR = NPR(i) - SSAP61 Reserve Credit DDPA is post-reinsurance-ceded Content AADicke LLC. All rights reserved 58 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

59 Section 2.A Process Pre-Reinsurance Separate calculations for Term, ULSG, Other Pre-reins SET not passed: PreReinsMR = max(prereinsanpr, PreReinsDR + DDPA, PreReinsSR + DDPA) Pre-reins SET passed; pre-reins DET not passed: PreReinsMR = max(prereinsanpr, PreReinsDR + DDPA) Pre-reins SET and pre-reins DET passed : PreReinsMR = PreReinsANPR = NPR(i) [no SSAP 61reserve credit] DDPA is pre-reinsurance-ceded Content AADicke LLC. All rights reserved 59 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

60 Section 2.A Is applied to ALL non-excluded policies Is applied separately post- and pre-reinsurance-ceded Sorts Term Group and ULSG Group into 2 subgroups each and Other Group into 3 subgroups: Group 1: Term did pass SET: MR = max(anpr, DR*) Group 2: Term did not pass SET: MR = max(anpr, DR*, SR*) Group 3: ULSG did pass SET: MR = max(anpr, DR*) Group 4: ULSG did not pass SET: MR = max(anpr, DR*, SR*) Group 5: Other did not fail either SET or DET: MR = ANPR Group 6: Other did pass SET; did not pass DET: MR = max(anpr, DR*) Group 7: Other did not pass SET: MR = max(anpr, DR*, SR*) DR* = DR + DDPA; SR* = SR + DDPA; DDPA is post- or pre-reinsurance-ceded Content AADicke LLC. All rights reserved 60 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

61 Section 2.A Aggregation Rules Possible combinations (a given policy may be in different groups post-reinsurance and prereinsurance): Term: ULSG: Other: ((1), (2)) = (ANPR, ANPR) ((3), (4)) = (ANPR, ANPR) ((5), (6), (7)) = (ANPR, ANPR, ANPR) (ANPR, DR*) (ANPR, DR*) (ANPR, ANPR, DR*) (ANPR, SR*) (ANPR, SR*) (ANPR, ANPR, SR*) (DR*, ANPR) (DR*, ANPR) (ANPR, DR*, ANPR) (DR*, DR*) (DR*,DR*) (ANPR, DR*, DR*) (DR*, SR*) (DR*, SR*) (ANPR, DR*, SR*) Content AADicke LLC. All rights reserved 61 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

62 Credit for Reinsurance Max (0, PreReinsMR PostReinsMR) Defined for all policies in the aggregate Content AADicke LLC. All rights reserved 62 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

63 Section 2.C Allocation (Post-Reinsurance) MR(i) = MR(Policy i s Group) * [NPR(i) RC(i)]/ [NPR(j) RC(j)] (Sum is over Policy i s Group (1), (2), (7)) Recall that the minimum reserve (MR) is post-reinsurance by definition. NPR(i) RC(i) is the allocation net premium reserve The MR being allocated is max(anpr, DR +DDPA) if Policy i is in Group (1), (3), (5) max(anpr, DR+DDPA, SR+DDPA) if Policy i is in Group (2), (4), (6) ANPR if Policy i is in Group (7) Content AADicke LLC. All rights reserved 63 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

64 Section 2.C Allocation (Pre-Reinsurance) MR(i) = MR(Policy i s Group) * [NPR(i)]/ [NPR(j)] (Sum is over Policy i s Group (1), (2), (7)) NPR(i) is the pre-reinsurance net premium reserve The MR being allocated is max(prereinsanpr, PreReinsDR +DDPA) if in Group (1), (3), (5) max(prereinsanpr, PreReinsDR+DDPA, PreReinsSR+DDPA) if in Group (2), (4), (6) PreReinsANPR if in Group (7) Content AADicke LLC. All rights reserved 64 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

65 Allocation Example #1 Two Blocks within Term or ULSG or Other Group E.g., 5 15 year term, year term Block 1: ANPR(1) = 100; ModRes(1)+DDPA(1) = 110: MR(1) = 110 Block 2: ANPR(2) = 100; ModRes(2)+DDPA(2) = 130: MR(2) = Combined: ANPR = 200; ModRes+DDPA = 240: MR = 240 Allocated: MR(1) = 120; MR(2) = 120 Content AADicke LLC. All rights reserved 65 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

66 Allocation Example #1 Coinsure 50% of a block of business: Block 1: ANPR (1) = 100; ModRes (1)+DDPA (1) = 110: MR (1) = 110 Block 2: ANPR (2) = 100; ModRes (2)+DDPA (2) = 130: MR (2) = 130 Combined: ANPR = 200; ModRes +DDPA = 240: MR = 240 Allocated: MR (1) = 120; MR (2) = 120 Block 1: ANPR(1) = 50; ModRes(1)+DDPA(1) = 55: MR(1) = 55 Block 2: ANPR(2) = 100; ModRes+DDPA(2) = 130: MR(2) =130 Combined: ANPR = 150; ModRes+DDPA(2) = 185: MR = 185 Allocated: MR(1) = 61.7; MR(2) = Reserve Credit: RC(1) = 58.3; RC(2) = -3.3; Total = = 55 Content AADicke LLC. All rights reserved 66 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

67 Allocation Example #2 Two Blocks within Term or ULSG or Other Group Block 1: ANPR(1) = 150; ModRes(1)+DDPA(1) = 110: MR(1) = 150 Block 2: ANPR(2) = 50; ModRes(2)+DDPA(2) = 130: MR(2) = *** Combined: ANPR = 200; ModRes+DDPA = 240: MR = 240 Allocated: MR(1) = 180; MR(2) = 60 Content AADicke LLC. All rights reserved 67 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

68 Allocation Example #2 Add reserves to a block with NPR > ModRes; increase risk offset Block 1: ANPR (1) = 150; ModRes (1)+DDPA (1) = 110: MR (1) = 150 Block 2: ANPR (2) = 50; ModRes (2)+DDPA (2) = 130: MR (2) = 130 Combined: ANPR = 200; ModRes +DDPA = 240: MR = 240 Allocated: MR (1) = 180; MR (2) = 60 Block 1: ANPR(1) = 200; ModRes(1)+DDPA(1) = 120: MR(1) = 200 Block 2: ANPR(2) = 50; ModRes(2)+DDPA(2) = 130: MR(2) = 130 Combined: ANPR = 250; ModRes+DDPA = 250: MR = 250 Allocated: MR(1) = 200; MR(2) = 50 Reserve change: Block 1: +20; Block 2: -10 Content AADicke LLC. All rights reserved 68 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

69 Implications Aggregation rules could have important effect on Minimum Reserve for company Transactions can have important effects on other blocks of business Be sure transaction calculations are broad enough Immediate effects on other blocks of business Longer term effects on pricing assumptions Be cautious about pricing to assumed aggregation advantages Current allocation procedures can result in surprising changes in allocated minimum reserves for product groups when transactions occur Because of aggregation and allocation procedures, reserve credit does not act like it did pre- PBR Alternative calculations may be needed for collateral Content AADicke LLC. All rights reserved 69 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

70 AG48 and Draft XXX/AXXX Reg Relationship to VM-20 Calculations

71 XXX/AXXX Captives Framework Codified initially in Actuarial Guideline 48 (AG48), which sets a minimum traditional-funding standard for XXX/AXXX business ceded to nonexempt re/insurers (captives and some regular re/insurers) To meet the standard, such funding must be in Primary Security, a subset of traditionally admitted assets, that is held as ModCo, funds-withheld, or in trust The Required Level of Primary Security is determined by an Actuarial Method based on VM-20 with modifications (see AG48 5.A) Under AG48, failure to meet the standard results in a qualified actuarial opinion and loss of a portion of the credit for reinsurance 71 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

72 XXX/AXXX Credit for Reinsurance Regulation NAIC is drafting an XXX/AXXX Credit for Reinsurance Model Regulation 1 that implements requirements similar to AG48, but not identical Once the new regulation is adopted by a state, AG48 would sunset in that state The model regulation is targeted for completion by the NAIC 2016 Summer meeting. State adoptions could begin in The formal title of the regulation is Model Regulation on Credit for Reinsurance of Life Insurance Policies Containing Nonlevel Gross Premiums, Nonlevel Gross Benefits and Universal Life With Secondary Guarantees. We use the shorter phrase for brevity on these slides. 72 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

73 Actuarial Method = Modified VM-20 For term insurance Max (Deterministic Reserve, tabular % of current NPR) No requirement to calculate a Stochastic Reserve No exclusion test to test out of calculating Deterministic Reserve For ULSG Max (Deterministic Rsv, Stochastic Rsv, tabular % of current NPR) No exclusion test to "test out" of calculating Deterministic or Stochastic Tabular % of current NPR is meant as proxy for NPR using 2017 CSO at operative date of PBR 73 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

74 Actuarial Method = Modified VM20 Other modifications in AG48 Asset spread and default tables adopted by December 31 apply to December 31 valuation Pre-PBR: Any other changes adopted by LATF as of Sept. 30 will apply to Dec. 31 valuation Post-PBR: Use the version of VM applicable to that valuation year Applied gross basis to the reserves ceded Specified credit if a portion of the risk is retained, or the risk ceded is net of (that is, after) reinsurance ceded to an exempt re/insurer See AG48 5.A.4 74 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

75 Draft Regulation Key differences in the current draft regulation as compared with AG48 Change in consequence for an unremediated shortfall in primary security. Proposal: Loss in full of the reserve credit Exemption for cessions to professional reinsurers Clarifications to the Actuarial Method to address special issues such as multiproduct treaties, treaties ceding only a portion of the risk under covered policies, and documentation of rationale and steps used to allocate Required Level of Primary Security to treaty Revisions to address the circumstance when PBR is formally operative, but an individual state has not yet adopted PBR 75 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

76 Draft Regulation Among those differences described as non-substantive References in AG48 to specific sections of the Valuation of Life Insurance Policies Model Regulation ( 6, 6.E, 6.F, 6.G, 7) are replaced in the draft Regulation by corresponding text definitions There is the possibility that the exemption for 6E (YRT reinsurance) may be removed a substantive change Grandfathering provisions are defined separately rather than within the definition of covered policies. 76 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

77 Questions? 77 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016

78 Case Study YRT Reinsurance 78 PBR Boot Camp: Basic Training and Beyond for PBR Implementation June 6-8, 2016