Session 189 PD - Impact of PBR on Financial Reinsurance. Moderator: Dale J. Mensik

Transcription

1 Session 189 PD - Impact of PBR on Financial Reinsurance Moderator: Dale J. Mensik Presenters: Lonny D. Meewes, FSA, MAAA Chris Whitney, FSA, MAAA Rebecca Marie Wilczak, FSA, CERA, MAAA SOA Antitrust Compliance Guidelines SOA Presentation Disclaimer

2 Impact of PBR on Financial Reinsurance Society of Actuaries Annual Meeting Boston October 18, 2017 Chris Whitney, FSA, MAAA 2017 Oliver Wyman

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4 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

5 Agenda 1 Background 2 Case study 3 Conclusion 2017 Oliver Wyman 3

6 Background Section 8 of VM-20 pertains to the impact of reinsurance on the components of reserves under PBR Component Considerations in determining reinsurance impact Maximum Net premium reserve Deterministic and stochastic reserve No change as compared to pre-pbr Coinsurance: The NPR is reduced by the percentage coinsured Yearly Renewable Term (YRT): The NPR is reduced by the unearned cost of insurance that is reinsured Requires two separate calculations, pre- and post-reinsurance Exclusion testing, if elected, must be performed on a pre- and postreinsurance basis Final PBR reserve The starting asset collar applies to pre-reinsurance reserves Credit = MMMMMM NNNNNN GGGGGGGGGG, DDDD GGGGGGGGGG, SSSS GGGGGGGGGG MMMMMM NNNNNN NNNNNN, DDDD NNNNNN, SSSS NNNNNN The reserve credit for reinsurance under PBR is significantly different from the formulaic approach that insurers have become accustomed to 2017 Oliver Wyman 4

7 Background Several sources of guidance exist for the modeling of reinsurance cash flows. The guidance is non-prescriptive and takes the form of considerations and required disclosures. Source Guidance The actuary should assume that the counterparty is likely to act efficiently VM-20 The assumptions used may differ between the ceding and assuming company Additional (outside the cash flow model) stochastic analysis may be required for certain types of reinsurance (i.e. stop-loss) Considerations are similar to those for liability modeling VM-31 PBR ASOP AAA Practice note Requires a description of assumptions and methodology used to model reinsurance cash flows Recommends consistency between reinsurance assumptions and other assumptions Margins should consider the guarantees in the arrangements, past practices of the reinsurer and how the company might respond to different actions the reinsurer could take States that some actuaries will assume less than 100% selection against the company Recommends analyzing the financial impact on the reinsurer and assuming more selection if the financial impact is significant 2017 Oliver Wyman 5

8 Case study A cohort of new business with $50MM of first year premium consisting of 10-, 20- and 30-year term products was projected for 30 years Model 30 year projection horizon Reserve revalued annually Best estimate assumptions Mortality follows 100% of 2015 VBT Mortality experience is 30% credible with 10 years of sufficient data Expenses, commissions and lapses set at industry averages Prudent estimate assumptions Mortality is improved up to each valuation date at 1% per year 100% shock lapse at end of level term period Reserve assumptions NPR uses the 2017 CSO and a valuation interest rate of 4.5% XXX uses the 2001 CSO and a valuation interest rate of 3.5% DR scenarios are re-generated at each valuation date Starting assets at each valuation date use the direct iteration approach The cohort is assumed to pass the Stochastic Exclusion Test (SET) Assumptions used and products modeled are for an illustrative term portfolio intended to be reasonably representative of products offered in the market today 2017 Oliver Wyman 6

9 Case study Projected reserves for this cohort of new business are shown below. Mezzanine and senior financing amounts are shown in the shaded regions. 250 XXX 200 AG 48 Economic Reserve ($MM) Duration (Years) There is a significant excess in both XXX and AG 48 amounts over the economic reserve. The AG 48 amount is the reserve once PBR is adopted Oliver Wyman 7

10 Case study Projected reserves for this cohort of new business are shown below. Mezzanine and senior financing amounts are shown in the shaded regions. 250 PBR 200 Economic Reserve ($MM) Duration (Years) There is a significant excess in both XXX and AG 48 amounts over the economic reserve. The AG 48 amount is the reserve once PBR is adopted Oliver Wyman 8

11 Case study The gross NPR and DR for this cohort of new business are shown below 200 Gross NPR Gross DR 150 Reserve ($MM) Duration (Years) The DR starts much higher than the NPR, but the gap closes over time, partially because mortality improvement to date is reflected at future valuation dates 2017 Oliver Wyman 9

12 Case study A 50 percent first dollar YRT reinsurance arrangement with the current premium scale set equal to 100 percent of the best estimate mortality assumption was modeled 200 Net DR: YRT Scenario 1 Net DR: YRT Scenario Net DR: YRT Scenario 3 Net NPR Reserve ($MM) Duration (Years) YRT Scenario 1: No change in rates YRT Scenario 2: Change rates to eliminate any gain/loss from reinsurance YRT Scenario 3: Increase rates by 15% 2017 Oliver Wyman 10

13 Case study The difference in net reserves under the YRT scenarios modeled is driven by the level of margin in the VM-20 mortality assumption The result below is for 35-year-old male, preferred non-tobacco, time 1 valuation 9 100% Mortality Rate per thousand % 60% 40% 20% Excess of VM-20 over Best Estimate (%) Duration (Years) 0% VM-20/Best Est Best Est Mortality VM-20 Mortality The mortality assumption under VM-20 contains no future mortality improvement and is based on a company-specific prudent assumption grading to a prudent industry table when sufficient data no longer exists 2017 Oliver Wyman 11

14 Conclusion Key takeaways 1 The assumptions used to model reserves and AG 48 amounts under VM-20 are critical 2 Complex financial structures will require complex models 3 Some carriers will pursue financing transactions as long as a redundancy in reserves exists 4 Implications of potential regulatory changes should be considered 2017 Oliver Wyman 12

15 Impact of PBR on Financial Reinsurance Rebecca Wilczak FSA, CERA, MAAA Society of Actuaries Annual Meeting Boston, October 18, 2017

16 Insurer Capital Structure Economic vs. Regulatory Economic Balance Sheet Economic Capital Best Estimate Liability Potential financing amount Assets company would hold absent any regulatory conservatism Regulatory Balance Sheet Capital and Surplus Conservatism in Statutory Reserves Best Estimate Liability 1 Impact of PBR on Financial Reinsurance

17 Financial Reinsurance Pricing Relative to Alternatives - Financing Expense + Debt-levels Equity-levels Pricing levels can be inside of debt-levels to wider than equity-levels and anywhere in between 2 Impact of PBR on Financial Reinsurance

18 Captive Insurer Capital Structure Pre-AG48 Captive Captive Balance Sheet Capital and Surplus Backed by alternative assets Excess Reserves Statutory Reserve Funded by ceding company Economic Reserve (Best Estimate Liability) 3 Impact of PBR on Financial Reinsurance

19 Benefits of Financing Lever Returns without Financial Leverage Before Financing After Financing Total Capital $400 Financing $0 Net Capital $400 Total Capital $400 Financing ($250) Net Capital $150 Income $50 Financing Cost $0 Adjusted Income $50 Income $50 Financing Cost ($18) Adjusted Income $32 ROC 13% ROC 21% 4 Impact of PBR on Financial Reinsurance

20 Captive Reserve Financing Structure Life Co Coinsurance Captive Risk Transfer Agreement Reinsurer 5 Impact of PBR on Financial Reinsurance

21 Reserve Financing Solutions Pre-AG48/PBR Front-End (Coinsurance to Captive) Back End (Alternative Assets) Non-Recourse Notes (Securitization) Traditional LCs and Asset Transactions (Bilateral Credit) Life Co Coinsurance Captive Reinsurer Structured Notes Structured Credit Structured Reinsurance 6 Impact of PBR on Financial Reinsurance

22 Captive Insurer Capital Structure In an AG48 World Captive Liabilities and Surplus Capital and Surplus Backed by alternative asset Senior Financing under AG48 Backed by Primary Security assets Mezzanine Financing Modified VM-20 Reserve A/XXX Reserve Economic Reserve (Best Estimate Liability) 7 Impact of PBR on Financial Reinsurance

23 Captive Insurer Capital Structure In a PBR World Captive Liabilities and Surplus Capital and Surplus Backed by Primary Security assets Mezzanine Financing VM-20 Reserve Economic Reserve (Best Estimate Liability) 8 Impact of PBR on Financial Reinsurance

24 Reserve Levels under AXXX vs. PBR vs. Economic 1,400,000,000 1,200,000,000 1,000,000, ,000, ,000,000 AXXX Reserve PBR Reserve Economic Reserve 400,000, ,000, / / / / / / / / / / Impact of PBR on Financial Reinsurance

25 Reserve Financing under PBR Key Terms Cash Coinsurance Life Co Captive Reinsurer Surplus Note Reinsurer buys a surplus note issued by the captive with a principal amount equal to the excess of the PBR Reserve over the Economic Reserve Non-recourse or limited-recourse cash financing for portion of conservatism in PBR reserve The surplus note has a maturity date but payments are subject to regulatory approval The ceding company or holding company may provide limited-recourse to refinance at maturity Reinsurer bears insurance and investment risk in excess of mutually agreed level of conservatism 10 Impact of PBR on Financial Reinsurance

26 Key Points Reserve financing can help insurers boost their return on capital and provide a wider variety of products to more consumers For some products, the Principles-based Reserve is larger than the XXX/AXXX reserve Even if not, there may still be reserves in excess of the best estimate liability to finance Reserve financing will still be necessary for some types of policies at some companies, especially secondary guarantee UL Reinsurers and other parties can still provide financing with Primary Security assets in place of alternative assets 12 Title of presentation

27 Disclaimer This presentation does not address the investment objectives or financial situation of any particular person or legal entity. Investors should seek independent professional advice and perform their own analysis regarding the appropriateness of investing in any of our securities. While Hannover Re has endeavoured to include in this presentation information it believes to be reliable, complete and up-to-date, the company does not make any representation or warranty, express or implied, as to the accuracy, completeness or updated status of such information. Some of the statements in this presentation may be forward-looking statements or statements of future expectations based on currently available information. Such statements naturally are subject to risks and uncertainties. Factors such as the development of general economic conditions, future market conditions, unusual catastrophic loss events, changes in the capital markets and other circumstances may cause the actual events or results to be materially different from those anticipated by such statements. This presentation serves information purposes only and does not constitute or form part of an offer or solicitation to acquire, subscribe to or dispose of, any of the securities of Hannover Re. Hannover Rück SE. All rights reserved. Hannover Re is the registered service mark of Hannover Rück SE. 11 Impact of PBR on Financial Reinsurance