Session 88 PD, PBR: Practical Implementation and Governance Issues. Moderator: Helen Colterman, FSA, CERA, ACIA

Transcription

1 Session 88 PD, PBR: Practical Implementation and Governance Issues Moderator: Helen Colterman, FSA, CERA, ACIA Presenters: Paul M. Fischer, FSA, MAAA Carrie Lee Kelley, FSA, MAAA Christopher Almer Whitney, FSA, MAAA SOA Antitrust Disclaimer SOA Presentation Disclaimer

2 PBR: Practical Implementation and Governance Issues Society of Actuaries Annual Meeting, Las Vegas PAUL FISCHER, FSA, MAAA CARRIE KELLEY, FSA, MAAA CHRIS WHITNEY, FSA, MAAA October 25, 2016

3 Presentation Disclaimer Presentations are intended for educational purposes only and do not replace independent professional judgment. Statements of fact and opinions expressed are those of the participants individually and, unless expressly stated to the contrary, are not the opinion or position of the Society of Actuaries, its cosponsors or its committees. The Society of Actuaries does not endorse or approve, and assumes no responsibility for, the content, accuracy or completeness of the information presented. Attendees should note that the sessions are audio-recorded and may be published in various media, including print, audio and video formats without further notice. 2

4 PBR Practical Implementation and Governance Issues Society of Actuaries Annual Meeting Las Vegas October 25, 2016 Christopher Whitney, FSA, MAAA 2016 Oliver Wyman

5 Agenda 1 Background 2 Issues and Opportunities 3 Practical Implementation 4

6 Section 1 Background

7 Background Principles Based Reserves The reserve under PBR is calculated as the maximum of three components specified under VM-20 Reserve Methodology Calculation Assumptions Scenarios 1 Net Premium Reserve Formulaic reserve CRVM for products other than Term & ULSG Seriatim Prescribed None 2 Deterministic Reserve ( DR ) Present value of liability cash flows Grouped Prudent Single scenario 3 Stochastic Reserve( SR ) CTE(70) of starting assets plus the greatest present value of accumulated deficiencies Grouped Prudent Full scenario set from AAA ESG Only two of the three components of the PBR calculation are actually principles based 6

8 Background Assumptions Prudent Estimate Assumptions Anticipated Experience Margin Assumption Considerations Anticipated Experience Prudence Elements Mortality Mortality segments Applicable industry table Credibility of experience Linearly grades to an industry table starting in the last duration that sufficient experience exists Prescribed margins Separate margins for company and industry experience Excludes mortality improvement past the valuation date Policyholder behavior Dynamic assumptions Required sensitivities Credibility of experience Consistent with actuarial practice Based on available relevant experience Specific requirements on sensitivities and increase in policyholder efficiency over time Expenses Overhead allocation methodology Non-recurring expenses No future expense improvements Exclude corporate taxes Prudent assumption should be at the high end of the plausible range Company investment strategy Assets Asset segmentation PBR credit rating Anticipated investment expense Economic scenarios (prescribed) Margins embedded within prescribed default costs, interest rate scenarios and credit spreads 7

9 Background Principles Based Reserves are not new There are several actuarial calculations performed today that are principles based Purpose Description Applicable Products Notes Asset Adequacy Testing Life and annuity Used to test sufficiency of statutory reserves Statutory VA CARVM AG 38 Section 8D Variable annuity ULSG Requires the DR be calculated for certain ULSG contracts AG 48 Term, ULSG PBR calculation to determine a Primary Security Requirement US GAAP FAS 97 Annuity and UL Other Economic Reserves/Capital Life and annuity Used for company reporting and reserves held in financing arrangements Embedded Value Life and annuity Certain principles based calculations actually follow the same methodology prescribed under VM-20 8

10 Background Changing Regulation Historical regulatory activity is shown in the timeline below December 2012 First Exposure Draft June Amendments to VM-20 Clarified credibility approach Change in asset assumptions Guidance on NPR calculations SET ratio increased to 6% August Amendments to VM-20 Requires separation of Term and ULSG for aggregation Clarification of mortality assumption Elimination of PLT Profits from DR November Amendments to VM-20 Application of 2015VBT Updated mortality margins Updated SERT requirements April Amendments to VM-20 Application of 2017 CSO Since first exposed, 27 amendments have been made to VM-20. Additional amendments in 2017 and beyond are expected. 9

11 Section 2 Issues and Opportunities Term Case Study

12 Issues and Opportunities Term Case Study Term Case Study Examples in this section are based on cohort of new business with $50MM of first year premium and the following specifications Model 30 year projection horizon Reserve revalued annually DR scenario re-projected at each valuation date using AAA generator Assets solved for at each valuation date using direct iteration approach Best estimate assumptions Mortality follows 100% of 2015 VBT and is 30% credible Expenses, commissions and lapses set at industry averages Prudent estimate assumptions Mortality improved up to each valuation date at 1% per year 100% shock lapse at end of level term period Prudence margins added for expense and lapses NPR assumptions Mortality based on 2017 CSO Valuation interest rate of 4.5% Assumptions used and products modeled are for an illustrative term portfolio intended to be reasonably representative of products offered in the market today 11

13 Issues and Opportunities Term Case Study Formulaic Reserve Methodology - Term The minimum reserve under PBR is the NPR which is significantly lower than the pre-pbr minimum reserve Deficiency reserve The NPR methodology allows PLT profits to decrease the reserve, whereas the XXX reserve is the Max(Unitary, Segmented) and includes a deficiency component 12

14 Issues and Opportunities Term Case Study Liability Assumptions The impact on the DR of not assuming future mortality improvement up to the valuation date was examined Deterministic Reserves are reduced by as much as 30% if future mortality improvement is realized 13

15 Issues and Opportunities Term Case Study Aspects of Methodology The impact on the DR of three reinsurance modeling scenarios was examined Scenario 1: No increase in rates Scenario 2: 15% increase in rates Scenario 3: Reflect additional mortality in rates The modeling approach for non-guaranteed elements (including reinsurance) can have a significant impact on reserve amounts 14

16 Issues and Opportunities Term Case Study Economic Conditions The impact on the DR of a 100bps shift in the yield curve at projection year 5 was examined A 100bps shift in the yield curve had resulted in a 10% increase in reserves, despite Term being relatively insensitive to discount rates 15

17 PBR: Practical Implementation and Governance Issues Society of Actuaries Annual Meeting Las Vegas October 25, 2016 Paul Fischer, FSA, MAAA

18 Section 2 Issues and Opportunities Continued

19 Issues and Opportunities Formulaic Reserve Methodology - ULSG Below is a comparison of the minimum reserve under PBR (NPR) to the pre-pbr minimum (AG38) Net Premium Reserve Interpolation between 0 and NSP Uses ratio of Actual Shadow Value (ASG) to a Fully Funded Shadow Value (FFSG) AG38 (AXXX) Reserve Interpolation between a XXX reserve component and NSP Uses ratio of ASG to FFSG XXX reserve component based on shadow ( zero to zero premiums) NSP NSP NPR 0% 50% 100% ASG/FFSG XXX MP AG38 Reserve 0% 50% 100% ASG/FFSG 18

20 Issues and Opportunities Formulaic Reserve Methodology - ULSG The NPR is similar in many aspects to the AG38 reserve with several key differences Similarities Both reserves grade toward a Net Single Premium (NSP) as Actual Shadow Fund value (ASG) approaches the Fully Funded Shadow Fund value (FFSG) For paid-up policies, NPR = NSP No break from AG38 redundancy For non paid-up, NPR redundancy likely at older ages and higher durations, as actual shadow fund values approach fully funded values NPR has no XXX (Model 830) reserve component XXX component compels shadow designs with steep charge patterns because less steep patterns may increase basic reserves and produce deficiency reserves Differences NPR allows greater freedom in designing shadow rates than AG38 Relieves pressure to create steep charge patterns Excessive extended term less challenging under the NPR No deficiency reserves under NPR The NPR offers some relief to reserve redundancy of non-paid up policies Particularly at younger attained ages and earlier durations 19

21 Issues and Opportunities Formulaic Reserve Methodology - ULSG Influence of Shadow Rate Patterns on NPR s 20

22 Issues and Opportunities Product Development and Pricing Implementation Key Considerations Pricing Platforms Consistency with Valuation Aggregation Non Guaranteed Element Design Projections of assumption unlocking Anticipating economic scenario changes Sensitivity testing of Outer Loop assumptions ULSG NSP Dynamic lapse (shadow and AV dependencies) Methodologies and simplifications Future premium flow projections for DR, SR Aggregation rules Treatment of Riders and ancillary benefits Highest of NPR, DR and SR based on aggregation Actual cash flows different on aggregated vs. standalone basis Opportunistic portfolios and new products Profits-followed-by-losses structure could impact reserves Exacerbated by inner loop conservatism (e.g., non-improved mortality with margins) Lessened by aggregation Anti-selection opportunities due to rate structures may have consequences Are nominal Secondary Guarantees worth it? May improve illustrated guarantees with little risk, but Automatic disqualification for DET 21

23 Issues and Opportunities Implementation Issues Summary Management Expectations Product designs and prices Capital redundancy, financing and volatility Taxes and tax leveraging Systems Understanding scope of change Modernize or buy? Processes Mapping work flows Staffing, skill sets, re-organizations and re-alignments Assumptions New requirements and increased discipline Compliance Prescribed duties of management and the board Financial Reporting Significant changes in reporting, analysis and disclosures 22

24 PBR: Practical Implementation and Governance Issues SOA Annual Meeting Session 59PD Carrie Kelley, FSA, MAAA October 25, Willis Towers Watson. All rights reserved.

25 Section 3 Practical Implementation

26 Practical Implementation Governance Robust controls and documentation required since: With the implementation of PBR, projection models will produce financial statement figures Judgement is required in modeling and assumption of PBR Governance should be in place for the entire process Development Implementation Validation Approval Modification Larger companies may have governance frameworks in place to leverage 25

27 Practical Implementation Building Model Trust Insurance company models are being used for more purposes and models are more complex than ever Even slight modeling missteps can have an enormous impact on an insurance company s financials, risk management or decision-making The Solution: Model risk management (MRM) provides a structured, objective system for making sure models are reliable Risk Management, Monitoring & Reporting Risk Measurement (models, stress & scenario tests) 26

28 Practical Implementation Key Elements of Model Governance Strong governance is critical to effecting MRM Important elements of governance related to MRM include policies or best practices related to: Model development and implementation Testing Documentation Approvals Version and change control Access rights Validation Should be independent of model developer 27

29 Practical Implementation Development and Implementation MRM begins with model development and implementation. Ideally models are Created and updated by experienced developers and subject matter experts in a controlled environment Based on high quality and robust data, assumptions and methodologies A key control is model documentation which should be sufficiently detailed to describe: The purpose of the model How it will be used Data inputs to the model Model methodology and assumptions, including their rationale Risk Management, Monitoring & Reporting Risk Measurement (models, stress & scenario tests) Documentation also should detail the model s compliance with regulations or other standards, the testing performed and known model limitations 28

30 Practical Implementation Key Model Validation Principles 1. Model design and build need to be consistent with the model s intended purpose. 2. Ensure that model validation is an independent process. 3. Establish an owner of model validation. 4. Ensure appropriateness of established model governance. 5. Make model validation efforts proportional to evidenced areas of materiality and complexity. 6. Validate the model components. 7. Address limitations of model validation. 8. Document the model validation. Risk Management, Monitoring & Reporting Risk Measurement (models, stress & scenario tests) Source: The North American CRO Council 29

31 Practical Implementation Leveraging CFT and other Results CFT and other cash flow projections (e.g., GAAP loss recognition) results can be leveraged to understand impact prior to having a VM-20 model CFT results and sensitivities can be leveraged to understand the materiality of assumptions Results provide a framework to help understand implicit margins, but need to make sure what current assumptions represent Many models and methods from CFT will represent an appropriate starting place for VM-20 models, but adjustments will be necessary: Prudent estimate assumptions Level of granularity Assessment of any simplifications Feedback from an independent review of Actuarial Memorandums may provide insights on potential challenges with modeling product for VM-20 (e.g., large amounts of scenarios, availability of experience, etc.) 30

32 Practical Implementation Sensitivities Currently, CFT sensitivities show a range of moderately adverse scenarios This will still be important under VM-20 Smaller impact sensitivities may provide additional insight on how reserves may move from year to year General sensitivity runs will need to impact both cash flows and reserves now Will give an idea of the amount that would be necessary to cover changes in assumptions 31

33 Practical Implementation Management Education Management will need to be educated on the principles based reserve Education will need to cover a variety of topics: How PBR is different form previous frameworks Nature of additional actuarial judgement required How reserve levels might change Increased reserve volatility on earnings Impact of reserves on pricing Impact on earnings emergence How product offering may be altered in terms of price and type of products offered Discussion should focus on points that management will concerned with more on impact on business, less on details of the regulation. Discuss additional support or resources that may be required Implementation needs Governances needs Ongoing support Decisions that need to be made quickly (when to implement) 32

34 Practical Implementation PBR Waterfall Important to understand what drives changes in reserves When first implementing the VM-20 calculations, may be useful to have waterfall from current calculations (i.e., XXX to NPR or GAAP loss recognition testing to Deterministic Reserve) Waterfall would measure impact of incremental addition of VM-20 specifics: Changes to modeling methods for VM-20 Incremental changes to the assumptions Once implemented a roll-forward from the prior period is a good check when producing quarterly reserves to make sure that you can explain any changes in the reserves and serves as a check on results 33

35 Practical Implementation PBR Dashboard Guiding Principles The a PBR dashboard can provide a quick and concise summary of results to help key stakeholders understand reserves and their movement from period to period Less is more Use of graphics is effective Able to explain easily Easy to reproduce each reporting period Include roll-forwards from prior periods 34

36 Practical Implementation PBR Dashboard Example 400 Reserve Components by Product Product A Product B Aggregate NPR DR SR Final Reserve 35

37 Practical Implementation Conclusion Implementation will take time and presents a range of potential issues Even deferring companies should be taking actions now Determine the timing of implementation and order of implementations for products Robust governance frameworks will need to be considered Implementation of modeled reserves can leverage CFT models and results 36

38 Practical Implementation Questions? 37

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