Iowa Actuaries Club. Chris Conrad, MAAA, FSA SVL Interest Rate Modernization Work Group Thursday, February 25, 2016

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1 Iowa Actuaries Club Chris Conrad, MAAA, FSA SVL Interest Rate Modernization Work Group Thursday, February 25, 2016 Copyright Copyright 2015 by 2016 the American by the American Academy Academy of Actuaries. of Actuaries. All Rights All Reserved. Rights Reserved. May not May be not be reproduced reproduced without without express express permission. permission.

2 Request from VM-22 Subgroup Review the current methodology, and if appropriate, recommend changes to the current methodology for Standard Valuation Law (SVL). Copyright 2016 by the American Academy of Actuaries. All Rights Reserved. reproduced without express permission. May not be

3 Priority Areas for Research 1) Non-uniform liabilities: How to set rates with single premiums that are significantly non-uniform during the year, such as jumbo single premium group annuities 2) Interest rate basis: The source, credit quality, and margins for the interest rate 3) Minimum interest rate: What, if any, the minimum interest rate should be Copyright 2016 by the American Academy of Actuaries. All Rights Reserved. reproduced without express permission. May not be

4 Products in Scope Single Premium Group Annuities Single Premium Immediate Annuities Structured Settlements Deferred Income Annuities Copyright 2016 by the American Academy of Actuaries. All Rights Reserved. reproduced without express permission. May not be

5 Benefits of Proposal Addresses Non-uniformity Issues: Daily calculation for Increases Precision: More frequent quarterly calculations for non-jumbo single premium group annuities, matches the time period of business sold Aligns with VM-20: VM-20 interest rates, VM-20 defaults, VM-20 investment expenses Minimizes Changes: Rate continues to be set at Issue Change in Frequency of Updates Potential Mapping to Duration Buckets Copyright 2016 by the American Academy of Actuaries. All Rights Reserved. reproduced without express permission. May not be

6 Conceptual Proposal Definitions Jumbo Single Premium Group Annuity: Group/Institution Greater than $100 million in Initial Reserve Consolidate contracts issued to same party within three months Rationale: $100 million threshold meant to capture only truly jumbo annuities. Non-jumbo annuities:all annuities in scope not categorized as Jumbo Annuities Copyright 2016 by the American Academy of Actuaries. All Rights Reserved. reproduced without express permission. May not be

7 Conceptual Proposal Credit Quality: Approximate Industry Average Use NAIC bond distribution data by 19 rating classes. Same data used by C1 Academy Work Group Approximate Distribution: 45% BBB, 40% A, and 15% AA Rationale: Using industry average results in same reserves for multiple companies looking at the same liability. This also simplifies tax considerations by having the same result across companies. Using only public bond investment mix is more conservative than overall portfolio. Copyright 2016 by the American Academy of Actuaries. All Rights Reserved. reproduced without express permission. May not be

8 Conceptual Proposal Index: Same as VM-20, i.e., Treasuries + Avg. spreads from JP Morgan and B of A Rationale: Consistent with VM-20 Margins: Defaults: Use VM-20 Baseline Defaults CTE 70 Investment Expenses: Use 10bps from VM-20 Floor: No floor Rationale: In a negative rate environment, insurers would likely have to realize an economic cost since insurers are not likely to be able to hold large amounts of physical cash. Copyright 2016 by the American Academy of Actuaries. All Rights Reserved. reproduced without express permission. May not be

9 Conceptual Proposal Duration Buckets: Work Group examining possible methodologies Looking at 4-6 buckets Duration bucket determined by policy characteristics, including issue age & annuity form Copyright 2016 by the American Academy of Actuaries. All Rights Reserved. reproduced without express permission. May not be

10 Conceptual Proposal Jumbo Annuites: Daily, i.e., use interest rate from day of issue Rationale: More complex, but more precise. For large jumbo annuities, this additional complexity should not be too burdensome due to the small number of transactions. Possible logistical issues Non-Jumbo Annuities:Quarterly with no lag Balances accuracy and simplicity Consistent with VM-20 Frequency Rationale: improves the precision of the rates relative to current methodology Copyright 2016 by the American Academy of Actuaries. All Rights Reserved. reproduced without express permission. May not be

11 Comparison of Proposed Approach to Current Underlying assumption is that daily valuation rate is ideal Comparison of Current vs. Proposed Absolute Error in Basis Points Max Abs Error 80th % Abs Error Average Abs Error Current regs (annual) One qtr. avg. with one qtr. lag One qtr. avg. with no lag Absolute error is absolute value of difference between actual daily rate and applicable valuation rate Index Moody's Seasoned Baa Corporate Bond Yield (from St. Louis Fed website) Date Range: to Compiled by SVL Interest Rate Modernization Work Group from aforementioned sources Copyright 2016 by the American Academy of Actuaries. All Rights Reserved. reproduced without express permission. May not be

12 Comparison of Proposed Approach to Current Proposed Methodology vs. Current for Non-Jumbo Annuities Proposed Methodology Differences (Proposed - Current) WAL WAL Quarter Current* % 1.29% 2.15% 2.70% 3.06% 3.38% 3.76% -3.21% -2.35% -1.80% -1.44% -1.12% -0.74% % 1.21% 1.95% 2.47% 2.86% 3.25% 3.73% -2.79% -2.05% -1.53% -1.14% -0.75% -0.27% % 1.22% 2.05% 2.72% 3.19% 3.62% 4.24% -2.78% -1.95% -1.28% -0.81% -0.38% 0.24% % 1.49% 2.15% 2.77% 3.24% 3.66% 4.25% -2.51% -1.85% -1.23% -0.76% -0.34% 0.25% *from Towers Watson "Prescribed U.S. Statutory and Tax Interest Rates for the Valuation of Life Insurance and Annuity Products" October 2015 Copyright 2016 by the American Academy of Actuaries. All Rights Reserved. reproduced without express permission. May not be

13 Questions? Copyright Copyright 2015 by 2016 the American by the American Academy Academy of Actuaries. of Actuaries. All Rights All Reserved. Rights Reserved. 13

14 Non-Variable Annuity PBR Update Iowa Actuaries Club 2016 Education Day Drake University John Miller, FSA, MAAA American Equity Investment Life Insurance Company C-BoD American Equity Investment Life Insurance Company West Des Moines, IA For Agent Information Only. Not For Use For Solicitation Or Advertising To The Public 1

15 VM-22 Scope Non-Variable individual & group annuities Deferred annuities (e.g., fixed, indexed, twotiered, CD type, MVAs, Modified Guaranteed) Payout annuities (e.g., DIAs, SPIAs, Structured settlements, Charitable annuities) Deposit fund products (e.g., GICs, Synthetic GICs, Funding agreements, Terminated pension plans) C-BoD American Equity Investment Life Insurance Company West Des Moines, IA For Agent Information Only. Not For Use For Solicitation Or Advertising To The Public 2

16 ARWG: History 2013: The Initial VM-22 plan Not an annuity version of VM-20 Like the VM-21 (AG 43) framework: two parts A deterministic floor reserve ( CARVM-like ) A modeled reserve (model office projections) Consideration of a new approach -RSM KS field test C-BoD American Equity Investment Life Insurance Company West Des Moines, IA For Agent Information Only. Not For Use For Solicitation Or Advertising To The Public 3

17 ARWG: History - Goals Reserves are right sized Floor reserve does not overwhelm the modeled Vx Expands on elements found in AG 33, but less conservative Satisfies requirements for treatment as the Tax Reserve Modeled Vx based upon on small set of scenarios More manageable run times Key risks modeled stochastically - possibly RSM? Aggregate margin transparent margins C-BoD American Equity Investment Life Insurance Company West Des Moines, IA For Agent Information Only. Not For Use For Solicitation Or Advertising To The Public 4

18 ARWG: Proposed Minimum Reserve Minimum Reserve = Floor Reserve Amount + max {0, Modeled Reserve Floor Reserve Amount} where Floor Reserve Amount = S k Floor Reserve contract k and Floor Reserve contract k = max {FR1, FR2, FR3} C-BoD American Equity Investment Life Insurance Company West Des Moines, IA For Agent Information Only. Not For Use For Solicitation Or Advertising To The Public 5

19 ARWG: Proposed Floor Reserve Serves as a yardstick with which to establish a reasonable floor for the Minimum Reserve Serves as a possible model for the computation of tax reserves Not necessary that the Floor Reserve be an adequate reserve for each contract valued Not designed to reflect the differences in product design to the same degree as the Modeled Reserve C-BoD American Equity Investment Life Insurance Company West Des Moines, IA For Agent Information Only. Not For Use For Solicitation Or Advertising To The Public 6

20 ARWG: Listed Benefits Term that applies to certain elective benefits Listed Benefit Utilization Function Examples may ultimately include Guaranteed Lifetime Income Benefits (GLIBs) Annuitization within the annuitization tier of a two-tiered annuity C-BoD American Equity Investment Life Insurance Company West Des Moines, IA For Agent Information Only. Not For Use For Solicitation Or Advertising To The Public 7

21 ARWG: Floor Reserve 1 (FR1) Recall: Floor Reserve contract k = max {FR1, FR2, FR3} FR1 = normal CARVM with a couple of differences Assume Listed Benefits are terminated as of the valuation date Possibly use prescribed lapse rates adjusted for In-the-Moneyness(ITM-ness) of rich non-listed benefits, such as significant GMDBs C-BoD American Equity Investment Life Insurance Company West Des Moines, IA For Agent Information Only. Not For Use For Solicitation Or Advertising To The Public 8

22 ARWG: Floor Reserve 2 (FR2) Recall: CARVM = GPV{ all Integrated Benefit Streams} FR2 considers one of those Integrated Benefit Streams for each Listed Benefit Calculation Rules Each Listed Benefit is assumed to be elected eventually (unless death occurs first) (i.e., no other elective benefits in FR2) Each Listed Benefit is assumed to be elected according to a corresponding Listed Benefit Utilization Function (LBUF) If a single contract has multiple Listed Benefits, FR2 k shall be calculated for each Listed Benefit k (for k = 1 to n) ignoring all other Listed Benefits. Then FR2 = max {FR 1, FR 2,, FR n } C-BoD American Equity Investment Life Insurance Company West Des Moines, IA For Agent Information Only. Not For Use For Solicitation Or Advertising To The Public 9

23 ARWG: Floor Reserve 3 (FR3) FR3 is based on the amount available for the contractholder to withdraw from the contract as of the statement date C-BoD American Equity Investment Life Insurance Company West Des Moines, IA For Agent Information Only. Not For Use For Solicitation Or Advertising To The Public 10

24 ARWG: What s next? Re organize into smaller working teams Consider alternatives for the floor reserve Develop an AG 43 like stochastic approach for the modeled reserve Develop exclusion tests for products that don t need a modeled reserve Continue coordination with LATF C-BoD American Equity Investment Life Insurance Company West Des Moines, IA For Agent Information Only. Not For Use For Solicitation Or Advertising To The Public 11

25 LATF: VM 22 Subgroup NAIC: LATF perspectives LATF perspective on RSM Consider modifications to CARVM (AG33) Referred to as the Simplified Method Review valuation interest rate methodology Convergence C-BoD American Equity Investment Life Insurance Company West Des Moines, IA For Agent Information Only. Not For Use For Solicitation Or Advertising To The Public 12

26 ACLI: Fixed Annuity Reserves WG Workgroup monitoring VM-22 developments CARVM enhancements asked to study modifications to the current formulaic (AG 33) approach Valuation Interest Rate Modernization provided comments to the AAA Work Group Contacts: John Bruins (ACLI) or Mike Streck (Principal) C-BoD American Equity Investment Life Insurance Company West Des Moines, IA For Agent Information Only. Not For Use For Solicitation Or Advertising To The Public 13

27 ARWG: presentations & reports Report pdf _Presentation_to_LATF_ pdf 22_Methodology_Report_ pdf 22_Methodology_Update_ %20%282%29.pdf VM22_ pdf C-BoD American Equity Investment Life Insurance Company West Des Moines, IA For Agent Information Only. Not For Use For Solicitation Or Advertising To The Public 14