Session 36 OF, Ask the Experts: An Open Discussion on Practical PBR Implications for Pricing and Product Actuaries

Transcription

1 Session 36 OF, Ask the Experts: An Open Discussion on Practical PBR Implications for Pricing and Product Actuaries Moderator: Leonard Mangini, FSA, MAAA Presenters: Timothy C. Cardinal, FSA, CERA, MAAA Leonard Mangini, FSA, MAAA Donna Christine Megregian, FSA, MAAA Kristin R. Norberg, ASA, MAAA

2 Session 36: Ask The Experts Practical PBR Implications For Pricing and Product Actuaries Monday, May 16, 2016

3 Session 36: Ask The Experts Practical PBR Implications for Pricing and Product Actuaries Monday, May 16, 2016 Tim Cardinal, FSA, CERA, MAAA Principal, Actuarial Compass LLC Leonard Mangini, FSA, FRM, MAAA President, Mangini Actuarial and Risk Advisory LLC Donna Megregian, FSA, MAAA Vice President & Actuary, RGA Kristin Norberg, ASA, MAAA Manager, Ernst & Young LLP

4 Anti Trust Notice Active participation in professional meetings is an important aspect of professional education. However, any activity that arguably could be perceived as a restraint of trade exposes professional actuarial societies and their members to antitrust risk. Accordingly, meeting participants should refrain from any discussion which may provide the basis for an inference that they agreed to take any action relating to prices, services, production, allocation of markets or any other matter having a market effect. These discussions should be avoided both at official meetings and informal gatherings and activities. In addition, meeting participants should be sensitive to other matters that may raise particular antitrust concern: membership restrictions, codes of ethics or other forms of self regulation, product standardization or certification. The following are guidelines the SOA has promulgated as a model of what should be followed at all professional actuarial meetings, informal gatherings and activities: DON T discuss your own, your firm s, or others prices or fees for service, or anything that might affect prices or fees, such as costs, discounts, terms of sale, or profit margins and DON T stay at a meeting where any such price talk occurs. DON T make public announcements or statements about your own or your firm s pricesorfees,orthoseofcompetitors, at any professional actuarial society meeting or activity. DON T talk about what other entities or their members or employees plan to do in particular geographic or product markets or with particular customers. DO consult with your own legal counsel, the Society of Actuaries, or other professional actuarial society before raising any matter or making any statement that you think may involve competitively sensitive information. DO be alert to improper activities, and don t participate if you think something is improper. If you have specific questions, seek guidance from your own legal counsel. Source: Society of Actuaries Meeting Anti Trust Notice 3

5 Liability Disclaimer, Copyright, Use of Slides Although we ve attempted to capture the letter and spirit of the Valuation Manual, Code of Conduct, ASOPs, and Qualification standards faithfully you have a personal professional duty to familiarize yourself with the original source material and apply professional judgment as to its specific application to your own work and those working under your direction as you perform covered Actuarial Services. The nature of your work, and other professional designations you hold, may require you to be bound by additional professional requirements from other organizations as well. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, legal, tax, or other professional advice, nor is it an Actuarial Opinion by Tim Cardinal, Leonard Mangini, Donna Megregian, Kristin Norberg, or their respective firms: Actuarial Compass LLC, Mangini Actuarial and Risk Advisory LLC, RGA, or Ernst & Young LLP. Please refer to your advisors for specific advice. The views expressed by the presenters are not necessarily those of Actuarial Compass LLC, Mangini Actuarial and Risk Advisory LLC, RGA, or Ernst & Young LLP. Any U.S. tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Much of the original source material on VM 20/PBR and Professionalism is copyrighted material of the American Academy of Actuaries, Society of Actuaries, or National Association of Insurance Commissioners. This presentation paraphrases these for educational purposes to capture the intent of the regulations and standards of practice or results of SOA research, and every attempt has been made to identify and cite original sources. These slides may NOT be copied, redistributed, or otherwise furnished to any party without prior written consent of Actuarial Compass LLC, Mangini Actuarial and Risk Advisory LLC, RGA,orErnst&YoungLLPother than as required to comply with an audit of the attendee s annual CPE compliance. 4

6 Tim Cardinal, FSA, CERA, MAAA Principal, Actuarial Compass LLC Biographies Tim Cardinal Mr. Cardinal has 25 years of experience in the life insurance industry. Tim was a 2014 SOA Volunteer of the Year recipient, was the Exam Chair of the Advance Corporate Finance and ERM Exam from and has been on the ERM Curriculum Committee since 2011; is on the Small Company Section Council on the Modeling Section Council (and newsletter co editor); Project Oversight Group Chair of a LIMRA SOA VAGLB study; is a frequent industry presenter and author writing the CFE/SDM Case Study, ERM Case Study Financial Statements; and has served on numerous other industry committees such as the Modeling Task Force of the Actuarial Standards Board. For19years,TimwasanExecutiveOfficerwithamid size insurer and was head of the actuarial financial reporting and corporate actuarial departments and risk management department. He has extensive experience ranging from being responsible for 50+ quarter end financial closes and business forecasts to strategic planning to risk management to asset adequacy analysis to actuarial system conversions to company reorganizations (mutual holding company structures) to forming subsidiaries and captives to GAAP implementations to acquisitions and establishing PGAAP opening balance sheets to Product Development. SOA Session 36 Ask the Experts: Practical PBR Implications for Pricing and Product Actuaries May 17,

7 Biographies Leonard Mangini LeonardMangini,FSA,FRM,FALU,CLU,MAAA President and Managing Member, Mangini Actuarial and Risk Advisory LLC Mr. Mangini brings clients over 26 years of life insurance and reinsurance expertise, holding senior Financial, Risk Management, Reinsurance and Product related roles at Manulife, ACE, AXA, and USLIFE. Leonard has also assisted clients with Financial Reporting, Risk Management, Underwriting, Product Development, Reinsurance, M&A, and Market Conduct issues as a consultant with Ernst & Young, Milliman, and now his own actuarial and risk advisory practice. Prior to forming Mangini Actuarial and Risk Advisory LLC, Leonard was SVP and Deputy Global Corporate Chief Actuary at Manulife. This role included supervising Principle Based valuation assumption and margin setting, explaining Principle Based earnings to stake holders, supervising Principle Based valuation governance in an ORSA environment for 19 business units in the US, Canada, and Asia and serving on Global Product Risk and Global ALM Committees. In previous reinsurance roles, Leonard has served as an internal Board member, President, Chief Actuary, Chief Pricing Officer, and Chief Risk Officer, including green fielding a US life reinsurer. Mr. Mangini is currently Chair of the SOA Financial Reporting Section Council, a Member of the Academy s PBR Life Reserve Work Group, and Member of the Academy s Middle Market Research Group. Leonard is a Fellow of the Society of Actuaries (FSA), Certified Financial Risk Manager (FRM), Fellow of the Academy of Life Underwriting (FALU), and Member of the Academy of Actuaries (MAAA), qualified to sign Statements of Actuarial Opinion (PSAOs). SOA Session 36 Ask the Experts: Practical PBR Implications for Pricing and Product Actuaries May 17,

8 Biographies Donna Megregian Donna Megregian, FSA, MAAA Vice President and Actuary RGA US Mortality Markets Ms. Megregian is Vice President and Actuary with RGA. Her current role involves managing actuarial services in RGA s US mortality markets, including product development, competitive intelligence, and benchmarking. Prior to joining RGA in December 2013, Donna worked for Milliman in the Indianapolis office providing product development, pricing, and modeling. She previously worked for Lincoln Financial, Zurich Life, and CNO in the Product Development and Cash Flow Testing areas. Donna is Chair of the American Academy of Actuaries Life Illustration Work Group and a Member of the Academy s Non Guaranteed Element Work Group. She is Chair of the Product Track for the Life and Annuity Symposium, a Planning Committee Member of the SOA Annual Meeting and the Underwriting Issues and Innovations Seminar, and an active SOA researcher, speaker, and article writer. Donna is a Fellow of the Society of Actuaries (FSA), and a Member of the American Academy of Actuaries (MAAA). SOA Session 36 Ask the Experts: Practical PBR Implications for Pricing and Product Actuaries May 17,

9 Biographies Kristin Norberg Kristin Norberg, ASA, MAAA Manager, Insurance and Actuarial Advisory Services Ernst & Young LLP Ms. Norberg is a Manager and Actuary in the Washington, DC office of Ernst & Young LLP, where she advises clients on actuarial, tax, regulatory and systems aspects of life, annuity, health, and property/casualty insurance products. Kristin focuses on tax reserves for life insurance companies and also works with product tax compliance issues, captive reinsurance, mergers and acquisitions, and tax and regulatory issues for innovative life and annuity products. Kristin previously worked for the Sammons Financial Group member companies, providing actuarial guidance to the Product Implementation, Policy Administration, and Policyholder Tax Compliance functions. Ms. Norberg is a former member of the SOA Taxation Section Council, an author and Editorial Board Member for the Section s newsletter Taxing Times, and a frequent presenter at actuarial and tax conferences. KristinisanAssociateoftheSocietyofActuaries(ASA),andaMemberoftheAmerican Academy of Actuaries (MAAA) SOA Session 36 Ask the Experts: Practical PBR Implications for Pricing and Product Actuaries May 17,

10 Audience Polling We ll be asking you some questions using the polling devices There are 10 choices on the keypads 1/A, 2/B, 3/C, and so on through 9/I, 0/J so we ll label our available replies that way to help you pick your answers Some of our questions will be pick as many as apply so we ll show you how to select 2 or more responses for these We ll jump in now with a warm up question to test the devices! SOA Session 36 Ask the Experts: Practical PBR Implications for Pricing and Product Actuaries May 17, 2016

11 Audience Response System Keypad Enter your response when you see the answer now button A light on the keypad will indicate your response was recorded You may change your answer while polling is open No need to hit go Answer Now

12 Polling Question 0 Testing Multiple Responses Which of the following adjectives would describe actuaries? (Choose as many as apply) A. Brilliant B. Extraordinarily Witty C. Less Socially Adept then Accountants D. More Socially Adept then Accountants E. I m a consultant, how would you like me to describe you...? F. Don t quit your day job.let s get serious please 33% 24% 21% 18% 3% 30% Please select the appropriate keys now A. B. C. D. E. F. 11

13 Polling Question 1 Who s Attending? What type of organization do you represent? Please choose ALL that apply to your firm A. Mutual Company B. Stock Company C. Fraternal Company D. Reinsurer E. Small Company < $300M Exhibit 1 Premium in 2016 F. Larger Company > $300M Exhibit 1 Premium in 2016 G. US Parent/No IFRS Reporting H. Foreign Parent IFRS Reporting already I. Consultant/Software Vendor/Investment Bank/Service Provider J. Regulator/Industry Analyst/Rating Agency/Other Stakeholder 27% 22% 22% 15% 15% 12% 12% 7% 2% 0% A. B. C. D. E. F. G. H. I. J. 12

14 Polling Question 2 Personal PBR Experience How Much Do YOU know about PBR? Please choose ALL that apply to you personally A. What s PBR? That s why I came to this 2016 LAS Session! 25% B. I ve read the PBR ASOP and/or the exposed ASOP on Modeling C. I ve read part of the 392 page Valuation Manual (VM) my head hurts! 20% 23% 23% D. I ve read the SOA PBR Implementation Guide or Academy Practice Note E. I m on the PBR Implementation/Modeling team for my organization 10% 8% 8% F. Guru I have one of the Lead PBR Roles within my organization G. Extreme Athlete I follow PBR Amendments (APFs), LATF calls A. B. C. D. E. F. G. 13

15 Polling Question 3 Company PBR Awareness How Much Does your ORGANIZATION know about PBR? Please choose ALL that apply to your employer A. Not Much they sent me here or I came on my own to start learning B. Narrow/Minimal Chief Actuary (CA) or CRO occasionally follow C. Wider/Minimal A few people other than CA/CRO are following it too D. Narrow/Modest A PBR Team has been set up and been given roles E. Narrow/Thorough Board/Senior Management (SM) are also involved F. Wider/Modest to Deep Pricing and Valuation PBR teams are modeling G. We re ready for a 1/1/2017 operative date, isn t everyone? H. I actually don t know! 10% 14% 21% 28% 21% A. B. C. D. E. F. G. H. 0% 3% 7% 14

16 Polling Question 4 Perceived Impact of PBR? Which of the following are probably true? Please choose ALL that apply based on YOUR current perception A. PBR Reserves for Term look like XXX, just lower right? 38% B. PBR Reserves for UL SG to age 121 are higher right? C. Lower Reserves are Great! D. Term Premiums will go down and Term profits will go up E. Very few will be ready at 1/1/17 and there s no first mover advantages 24% 27% F. Pricing, Valuation, Reinsurance, and ERM can still be relatively distinct 11% 16% G. Documentation won t be impacted much H. Governance won t be impacted much I. Good Questions! How should I know?...you re the Experts! 3% 5% 3% 3% A. B. C. D. E. F. G. H. I. 15

17 Polling Question 5 PBR Implementation Plan How would your organization handle a 1/1/2017 operative date? Please choose ALL that apply to your firm A. Implementing PBR for Term Right Away B. Delaying PBR for Term C. Implementing PBR for UL Right Away D. Delaying PBR for UL E. Taking the Single State or Small Company Exemption F. Haven t Decided Yet or Simply Don t Know G. Implement/Delay decision, based in part, on IRS clarifying Tax Reserves H. We Aren t Ready Yet Too Much Work to Do Hence the Delay I. It s Too Expensive to Implement Quickly Hence the Delay 30% 8% 11% 24% 5% A. B. C. D. E. F. G. H. I. 30% 24% 11% 0% 16

18 Polling Question 6 PBR Modeling Has your Company done a FULL inner/outer loop PBR reserve projection? (NO shortcuts, static assumptions, simplifications, etc.) 83% Please choose ALL that apply to your firm A. No B. Yes Term C. Yes Simple UL D. Yes Simple ULSG E. Yes Complex ULSG F. All of these I thought I said in Question 3 Isn t Everyone Ready? G. I don t know! 13% 0% 0% 3% 0% 3% A. B. C. D. E. F. G. 17

19 Questions for Discussion 1 Is PBR Here? Who determines what substantially similar means? How will I know if PBR holds in my state? 2016 Life and Annuity Symposium Session 36 Mangini Actuarial and Risk Advisory LLC May 16, 2016

20 Questions for Discussion 2 Non Uniform State Adoption What reserve is calculated in states that have not adopted PBR or have modified versions of PBR [NY, MI]? SOA Session 36 Ask the Experts: Practical PBR Implications for Pricing and Product Actuaries May 17, 2016

21 Questions for Discussion 3 Reinsurance Mirror Reserves? Does a Reinsurer need to follow the Direct writer in applying the 3 year transition rules? What are the implications if one of the parties is already on PBR and the other one is not? SOA Session 36 Ask the Experts: Practical PBR Implications for Pricing and Product Actuaries May 17, 2016

22 Questions for Discussion 4 Reinsurance Modeled? What should an actuary for a Direct writer consider when including the impact of future YRT reinsurance premiums? Should they be modeled values? Scenario Dependent? SOA Session 36 Ask the Experts: Practical PBR Implications for Pricing and Product Actuaries May 17, 2016

23 Questions for Discussion 5 Small But Growing Companies What happens if a Company initially meets the Small Company exemption criteria, but later (say, for example in 2025) grows above the premium threshold? What if a Company initially meets the Small Company exemption criteria, temporarily exceeds it say for a year then drops back down under the threshold and stays there? SOA Session 36 Ask the Experts: Practical PBR Implications for Pricing and Product Actuaries May 17, 2016

24 Questions for Discussion 6 Temporarily Impaired Small Company What happens if a Company initially meets the Small Company exemption criteria, in one year fails (say due to RBC criteria), but then recovers and satisfies all the criteria again for all other years? Suppose the failed year is 2019 (i.e. during the transition period)? Suppose the failed year is 2022 (i.e. after the transition period)? SOA Session 36 Ask the Experts: Practical PBR Implications for Pricing and Product Actuaries May 17, 2016

25 Questions for Discussion 7 Taxes and PBR Where do the key challenges arise in fitting PBR into current tax law? SOA Session 36 Ask the Experts: Practical PBR Implications for Pricing and Product Actuaries May 17, 2016

26 Requirements in the 1984 Act By contract IRC 807(d)(1). In general....[t]he amount of the life insurance reserves for any contract shall be the greater of (A) the net surrender value of such contract, or (B) [the federally prescribed reserve under IRC 807(d)(2)]. In no event shall the reserve... for any contract as of any time exceed the amount which would be taken into account with respect to such contract as of such time in determining statutory reserves... All IRC references are to the Internal Revenue Code of 1986, as amended Life and Annuity Symposium Session 36 Ernst & Young LLP May 16,

27 Requirements in the 1984 Act Method IRC 807(d)(3)(B)(i). The term "CRVM" means the Commissioners' Reserve Valuation Method prescribed by the National Association of Insurance Commissioners which is in effect on the date of the issuance of the contract. IRC 807(d)(3)(C). Nothing in any reserve method described under this paragraph shall permit any increase in the reserve because the net premium (computed on the basis of assumptions required under this subsection) exceeds the actual premiums or other consideration charged for the benefit. [i.e., no deficiency reserves] Also generally no deduction for reserves attributable to deferred and uncollected premiums; see IRC 811(c) and 807(d)(6) 2016 Life and Annuity Symposium Session 36 Ernst & Young LLP May 16,

28 Requirements in the 1984 Act Assumptions IRC 807(d)(4)(B)(i). The term "prevailing State assumed interest rate" means, with respect to any contract, the highest assumed interest rate permitted to be used in computing life insurance reserves for insurance contracts or annuity contracts (as the case may be) under the insurance laws of at least 26 States. (ii). The [PSAIR]... shall be determined as of the beginning of the calendar year in which the contract was issued. IRC 807(d)(5)(A). The term "prevailing commissioners' standard tables" means, with respect to any contract, the most recent commissioners' standard tables prescribed by the National Association of Insurance Commissioners which are permitted to be used in computing reserves for that type of contract under the insurance laws of at least 26 States when the contract was issued Life and Annuity Symposium Session 36 Ernst & Young LLP May 16,

29 Questions for Discussion 8 Taxes How is the industry approaching the IRS on guidance related to PBR? 2016 Life and Annuity Symposium Session 36 Ernst & Young LLP May 16, 2016

30 IRS Priority Guidance Plans Priority Guidance Plan since : Guidance clarifying whether the Conditional Tail Expectation Amount computed under AG 43 should be taken into account for purposes of the Reserve Ratio Test under 816(a) and the Statutory Reserve Cap under 807(d)(6). Changed for at urging of ACLI: Guidance under 807 and 816 regarding the determination of life insurance reserves for life insurance and annuity contracts using principles based methodologies, including stochastic reserves based on conditional tail expectation. ACLI is educating IRS on PBR, organizing the issues into three categories for guidance: Product qualification issues Reserve transition issues Substantive reserve issues 2016 Life and Annuity Symposium Session 36 Ernst & Young LLP May 16,

31 Questions for Discussion 9 Taxes Will the 3 Year Transition Apply to Tax Reserves? Will the Small Company Exemption apply to Tax Reserves? SOA Session 36 Ask the Experts: Practical PBR Implications for Pricing and Product Actuaries May 17, 2016

32 Questions for Discussion 10 Reserve Patterns PBR Reserves for Term look like XXX, just lower right? SOA Session 36 Actuarial Compass LLC May 17, 2016

33 Questions for Discussion 11 Reserve Levels Lower reserves are great, they increase profits right? SOA Session 36 Actuarial Compass LLC May 17, 2016

34 Tim Cardinal, FSA, CERA, MAAA Principal, Actuarial Compass LLC (513) Leonard Mangini, FSA, FRM, FALU, MAAA President, Mangini Actuarial and Risk Advisory LLC (516) Donna Megregian, FSA, FRM, FALU, MAAA Vice President and Actuary, RGA (636) Kristin Norberg, ASA, MAAA Manager, Ernst & Young LLP (202)