NAIC Update Southeastern Actuaries Conference June 20, 2014 Clearwater, FL

Transcription

1 NAIC Update Southeastern Actuaries Conference June 20, 2014 Clearwater, FL John MacBain, FSA, MAAA Actuarial Resources Corporation of GA 1 SO MUCH TO DO, SO LITTLE TIME. 1. Principle-Based Reserves (PBR) Life (VM-20) 2. Principle-Based Reserves (PBR) Annuities (VM-22) 3. Actuarial Guideline 38 (AG38) 4. Captive Reinsurers 5. Actuarial Guideline 43 (AG43) VM Long Term care (LTC) 2 1

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3 Status Requires adoption of revised SNL and SVL Effective when 42 states adopt and written premiums > 75% Currently: 17 states (18 by year end) and 28% of written premium No NY or CA 5 Current Exposed Amendment Proposal Forms (APFs) (to 12/2/12 version) Small Company Exemption (In addition to SET and DET) Company must meet three criteria: I. TAC 450% ACL II. < $300 MM of OL premium ($600 MM for co. group) III. Any ULSG policy sold/assumed must use non-material secondary guarantee (NMSG) NMSG must be 20 yrs thru IA 60 and PV of required premiums must be NLPs on VBT and maximum valuation interest basis AAA is recommending changes to approach to include within the SET/DET; not a new exemption; eliminates criteria i. and ii. 6 3

4 Pre-Tax IMR (PIMR) Modifies VM-20: changes the handling of the PIMR in the DR and SR Modifies NAER calculation to exclude impact of PIMR Both net investment earnings and asset base are adjusted Reduces/increases final modeled DR by positive/negative PIMR Reduces/increases final CTE 70 reserve by positive/negative PIMR 7 Treatment of Due Premiums Expected to be received in cash in DR/SR reserve calculations Understates the DR and SR DPA must be added to the DR and SR (along with the deferred premium asset) before comparing to the NPR in the final minimum reserve amount LATF adopted 6/5/14 8 4

5 Other Elements of VM-20 Under Discussion By LATF, AAA & Others VM-20 Mortality Tables Current industry basic tables referenced in VM-20 are 2008 VBTs, including Primary, Limited Underwriting and RR Tables Work on 2014 VBT Tables expected to be completed late this year Experience , updated to 2014; NS/SM/USM/RR (ANB/ALB); select period varies by IA/gender; observable/prospective periods Until recently, work on 2014 CSO Tables held up due to margins (individual vs. aggregate, see next slide); LATF gave guidance VM-20 currently envisions individual PBR mortality margins 9 Other Elements of VM-20 Under Discussion By LATF, AAA & Others Individual vs. Aggregate Margins in VM-20 Prudent Estimate Assumptions Highly contentious issue; VM-20 incorporates individual margins First raised in conjunction with AAA ARWG VM-22 efforts Individual margins will not be needed if aggregate approach used LATF guidance is for now to proceed to determine appropriateness of VM-20 margins for 2014 VBT; i.e. not aggregate margin LATF Aggregate Margin Subgroup report of ultimately considered two aggregate margin approaches: 1) Cost of Capital method, and 2) Confidence Interval Method; recommended Cost of Capital 10 5

6 Other Elements of VM-20 Under Discussion By LATF, AAA & Others Exemption for industrial life Mortgage default costs Modify SERT threshold from 4.5% to 6% Direct Iteration Method (DIT) for DR calculation Changes to AOMR/AM (consistent with other practices, consistent info presentation, include links in AM, etc.) Experience reporting Principal-Based Reserves Annuities (VM-22) LATF requested AAA ARWG work to develop a PBR approach (VM-22) for non-variable annuities Introduces concept of listed benefits LATF VM-22(A) Subgroup working to perform a field test to assess the practicality of the ARWG proposal ARWG proposed reserve = Max [Floor Reserve, Modeled Reserve] Floor Reserve = Max [CSV, Alpha, Beta] Alpha CARVM-like; GPV calculation assuming listed benefits terminate on valuation date 12 6

7 2. Principle-Based Reserves Annuities (VM-22) Beta Present Value calculation assuming utilization rates for listed benefits Parameters on Beta utilization rates: none before 60, smooth around key retirement ages, zero utilization when not in the money Modeled Reserve Current (Best) Estimate Reserve (CER) + Aggregate Margin (AM) Uses Representative Scenario methodology (RSM) Assigns scenarios for each key risk and assigns probability for each scenario Note use of aggregate vs. individual margins Actuarial Guideline 38 (AG38) Additional Sections 8D and 8E added in 2012 Section 8D Applies to ULSG benefits issued 7/1/2005 thru 12/31/2012: i. With or without a shadow account, and ii. Having multiple sets of charges or credits that may apply in any policy year Establishes minimum gross statutory reserve level for the block regardless of reserve determined under other Sections of AG

8 3. Actuarial Guideline 38 (AG38) Minimum total gross reserve is gross premium reserve using VM-20 Deterministic Reserve assumptions except: i. Initial asset portfolio returns limited to A-rated corporate ii. Reinvestment asset net return limited to lesser of Moody s seasoned corporate bond average or 7% If reserve held on 12/31/2011 basis is less than this gross premium reserve, company must hold excess as additional reserve Company must submit an annual Actuarial Memorandum documenting assumptions and methodologies used in calculating the gross premium reserve to NAIC Financial Analysis Working Group (FAWG) for independent review Actuarial Guideline 38 (AG38) Section 8E Clarifies Model 830 (Regulation XXX) reserving approach for all ULSG benefits issued 1/1/2013 and later Defines two methodologies for determining the schedule of minimum gross premiums for reserve purposes Method I: Specifies the specific schedule of minimum gross premiums for three safe harbor designs In addition, to be Method I all SG credits (including conditionally guaranteed credits) must not exceed the Index + 3% 16 8

9 3. Actuarial Guideline 38 (AG38) Index is Moody s composite yield on seasoned corporate bonds All designs not meeting Method I requirements are to use Method II approach to determine the schedule of minimum gross premiums Under Method II, schedule of minimum gross premiums is one that: i. Keeps policy in force over life of SG period, and ii. Produces the greatest deficiency reserve at issue Once schedule of minimum gross premiums are established, ULSG reserve procedure is articulated in steps 2-9 of Section 8E Actuarial Guideline 38 (AG38) Company must submit a signed Actuarial opinion and Company Representation when ULSG benefit is filed or changed stating: i. ULSG benefit meets the appropriate design Method (I or II) ii. ULSG benefit credits do not exceed Index + 3% iii. Schedule of minimum gross premiums under chosen Deign are not inconsistent with those expected to apply under the policy An Emerging Actuarial Issues Working Group (EAIWG) was established under FAWG to develop interpretations on actuarial issues with respect to both Section 8D and 8E EAIWG has issued 30+ formal Interpretations to date; a number of others have been exposed for discussion 18 9

10 4. Captive Reinsurer Issues Captive have been used for many years for many reasons Recently concerns have been raised regarding captive use to cede redundant reserves (excess of statutory over economic reserve) Particularly ULSG and term alleged statutory reserve redundancies Concern regarding assets backing these redundant reserves and the guarantor backing these assets Captive laws permit non-admitted assets (LOCs, securitization, etc.) Redundant reserve assumptions not subject to regulatory guidance Captive Reinsurer Issues Companies can finance these low risk reserves with less costly forms (LOCs, parental guarantees); more affordable coverage to consumer Economic reserve set to withstand moderately adverse conditions Captive regulator reviews all aspects of the transaction NAIC Commissioned Rector and Associates to develop recommendations for reserve financing reinsurance transactions Insurer reduces mandatory statutory reserves by supporting a portion of those reserves with other than traditional admitted assets Rector Report, version 2, issued 2/17/

11 4. Captive Reinsurer Issues Rector Report recommendations are related to assets backing reserves, not to appropriate statutory reserve levels Proposes an actuarial method to establish a primary asset level VM-20, with slight modifications, is proposed as the appropriate actuarial method Ceding company gets credit for reinsurance only if it retains primary assets in an amount at least equal to the primary asset level Remainder of reinsurance credit supported by any other assets approved by regulators Primary assets: cash, SVO-listed assets, LOCs certain circumstances Captive Reinsurer Issues Other assets: left to discretion of regulators/ceding company with FAWG oversight Changes to VM-20 were mortality tables, interest rate generator (MRP), and to Net premium Reserve Input has been received from AAA and industry on these recommended modifications Rector Report also proposed two alternatives for implementing the proposed captive framework: Alternative A, via reinsurance Alternative B, the Direct Insurer Level 22 11

12 5. Actuarial Guideline 43 (AG43) VM-21 NAIC C3 Phase II/AG43 Subgroup Short term issues relate to reserves, i.e. AG43 items Review ITM definition used for standard scenario lapse rates Update AG43 calibration criteria to reflect recent market volatility Similarly, change standard scenario to reflect 20% market drop Change standard scenario lapse assumption for VAGLBs other than GMABs to appropriately reflect dynamic p/h behavior risk AAA is weighing in on all of these issues plus implementation structure issues Long Term Care Insurance (LTCI) Revisions to Model 631- Long Term Care Insurance Model Regulation Generally apply to only new LTCI issues Adopted by NAIC (B) Committee on June 10 Requires: maximum aggregate 10% lifetime claims, annual rate certification of continued rate sufficiency, detailed AM supporting certification, greater of original LR or 58% required in 58%/85% test Contingent benefit on lapse required on more situations Retroactive change: Additional disclosures required in premium increase notice 24 12

13 6. Long Term Care Insurance (LTCI) LTCI Model Bulletin Adopted December 2013 Major elements: i. DOI s/insurers together review reasonableness of assumptions ii. iii. Present/accumulated values to use maximum valuation rate Contingent benefit on lapse for pre-rate stability policies iv. Pre-rate stability policies: 1) 60% or original LT LR to rates in effect; 2) 80% LR for any rate increase after effective date Additional items being considered include an Optional Rate Review Process and Annual Rate Certification process 25 13