Session 163 PD - Current COI Increases: What's It All About? Moderator: Larry N. Stern, FSA, MAAA

Transcription

1 Session 163 PD - Current COI Increases: What's It All About? Moderator: Larry N. Stern, FSA, MAAA Presenters: Charles Platt Steven Sklaver Larry N. Stern, FSA, MAAA SOA Antitrust Compliance Guidelines SOA Presentation Disclaimer

2 2017 SOA Annual Meeting & Exhibit Session 163: Current COI Increases: What s It All About? Charles C. Platt, WilmerHale Defendant Steven G. Sklaver, Susman Godfrey Plaintiff Larry N. Stern, Canterbury Consulting, LLC Actuarial Expert October 18, 2017

3 SOCIETY OF ACTUARIES Antitrust Compliance Guidelines Active participation in the Society of Actuaries is an important aspect of membership. While the positive contributions of professional societies and associations are well-recognized and encouraged, association activities are vulnerable to close antitrust scrutiny. By their very nature, associations bring together industry competitors and other market participants. The United States antitrust laws aim to protect consumers by preserving the free economy and prohibiting anti-competitive business practices; they promote competition. There are both state and federal antitrust laws, although state antitrust laws closely follow federal law. The Sherman Act, is the primary U.S. antitrust law pertaining to association activities. The Sherman Act prohibits every contract, combination or conspiracy that places an unreasonable restraint on trade. There are, however, some activities that are illegal under all circumstances, such as price fixing, market allocation and collusive bidding. There is no safe harbor under the antitrust law for professional association activities. Therefore, association meeting participants should refrain from discussing any activity that could potentially be construed as having an anti-competitive effect. Discussions relating to product or service pricing, market allocations, membership restrictions, product standardization or other conditions on trade could arguably be perceived as a restraint on trade and may expose the SOA and its members to antitrust enforcement procedures. While participating in all SOA in person meetings, webinars, teleconferences or side discussions, you should avoid discussing competitively sensitive information with competitors and follow these guidelines: Do not discuss prices for services or products or anything else that might affect prices Do not discuss what you or other entities plan to do in a particular geographic or product markets or with particular customers. Do not speak on behalf of the SOA or any of its committees unless specifically authorized to do so. Do leave a meeting where any anticompetitive pricing or market allocation discussion occurs. Do alert SOA staff and/or legal counsel to any concerning discussions Do consult with legal counsel before raising any matter or making a statement that may involve competitively sensitive information. Adherence to these guidelines involves not only avoidance of antitrust violations, but avoidance of behavior which might be so construed. These guidelines only provide an overview of prohibited activities. SOA legal counsel reviews meeting agenda and materials as deemed appropriate and any discussion that departs from the formal agenda should be scrutinized carefully. Antitrust compliance is everyone s responsibility; however, please seek legal counsel if you have any questions or concerns. 2

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. 3

5 COI Increase Litigation - Actuarial Perspective

6 Words count Policy form What factors specified 1980s, 1990s, 2000s Prospective Will not distribute past gains or recoup past losses Company (re)determination policy Define class? ASOP 2, 23, 41 Annual statement interrogatories Current and in-force illustrations supported by current experience? 5

7 Experience studies Does experience warrant change in COI up or down? What are expectations of future experience? 6

8 Industry experience Mortality Steady decline over past years; will it continue? With/without mortality improvement factor 1980s pricing now approx 60% 1990s pricing now approx 72% 2000s pricing now approx 75% continued 7

9 Industry experience Investment income/credited rates Pricing bps Continued declining investment earned rates o New money credited rates 1980s mid 1990s o Portfolio credited rates mid 1990s 2000s Because of minimum legacy guarantees (3% or 4%) now negative spreads continued 8

10 Industry experience Premium payment assumptions Priced with level payments (like WL) Actual experience is first year dump in followed by lower than expected premium payments in renewal years Life settlement investors want to pay minimum to maintain coverage 9

11 Current litigation Companies use COI increases to maintain profitability when forced to credit (high) minimum contractual guaranteed interest rates Can companies increase COI rates in order to make up for negative spreads? Companies not reducing COI rates when COIs tied only to mortality experience 10

12 Meet the professionals who argue for their perspective sides Steven G. Sklaver, Susman Godfrey for the Plaintiff Charles C. Platt, WilmerHale for the Defendant 11

13 COI Increase Litigation - Plaintiff Perspective

14 AXA COI: Contract Language

15 AXA COI: Contract Language

16 AXA COI: Contract Language Changes in... cost of insurance deductions... will be on a basis that is equitable to all policyholders of a given class, and will be determined based on reasonable assumptions as to... mortality [and] investment income...

17 AXA COI Litigation: Unredacted Complaint

18 AXA COI Litigation: Unredacted Complaint

19 AXA COI Litigation: Unredacted Complaint

20 JP COI: Contract Language

21 Aetna COI: Contract Language

22 VOYA & LLANY COI: VOYA v. Lincoln

23 VOYA & LLANY COI: Definition of Class

24 VOYA & LLANY COI: Original Pricing v. Redetermination

25 John Hancock COI: Contract Language

26 COI Increase Litigation - Defendant Perspective

27 Plaintiffs Different Legal Theories Claims based on policy terms exhaustive or illustrative? Claims despite policy terms unfair benefit for company. Claims that stated reasons for COI increases at odds with evidence. Claims based on an implied covenant of good faith. Deceptive trade practice and fraud claims. Unfair discrimination claims. Claims based on a transfer of policies to another company. 26

28 Why All These Theories? If policy terms clear, why isn t plain meaning dispositive? Why need to litigate all these other theories of liability? Are these really breach of contract claims? Haven t the parties performed for many years according to a common understanding of the policy language? Haven t policyholders received the essence of their bargain? Will these cases require proof of some other violation of law? 27

29 Basic Contract Law Principles Basic contract law principle: what was intent of the parties, in light of the contract as a whole? Is there a discernible intent of policyholders how many reviewed COI terms? Intent of regulators who reviewed and approved the policy terms on behalf of policyholders? Intent of insurance companies for non-guaranteed elements? Performance according to a common understanding for many years? Basic contract law principle: Did the policyholders receive the benefit of their bargain in policies with COI provisions? 28

30 Essential Bargain Pool of policyholders receive protection against mortality risk, and pay costs within a certain range to support those benefits. Risk of an increase in costs associated with mortality protection over time is part of the actuarial analysis on which policies are based. That actuarial analysis contemplates that there are a broad range of expenses associated with mortality protection. Actuarial analysis contemplates that adjustments to COI charges could be necessary to recover from policyholders the costs incurred to serve them. Adjustments would be at Companies discretion, subject to certain guarantees, so long as they were actuarially supported. 29

31 Essential Bargain Regulators approved issuance of polices based on expectations that Companies would adequately recover costs to pay death benefits. Regulators approved issuance of policies based on actuarial analysis that adjustments to COI charges could be necessary to recover from policyholders the costs incurred to serve them. Performance on policies has been consistent for several decades based on these expectations. Bargain could not have been a policy structured to not recover costs. 30

32 Lawsuits Want To Change The Bargain Revise the non-guaranteed COI term to make it a guarantee, regardless of the actuarial support for COI rates. Re-allocate the risks of cost increases to insurance company. Revise the COI term to narrowly-defined expenses Ignore that policies were not: Designed from an actuarial perspective to cover expenses based on a narrow definition of future mortality experience, Priced based on the expectations that the pool of policyholders would receive the benefits of mortality protection without covering the wide range of costs associated with that protection. 31

33 Class Certification Issues A policyholder s understanding of the COI terms can create individualized issues. Policies are purchased and used for different needs and objectives, which create individualized issues regarding the nature of the bargain. Plaintiffs different theories of liability can create individualized issues. The regulatory review and approval processes in different states can create individualized issues. 32

34 Conclusions 33

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