Session 20 WS, Life Illustrations. Moderator: Donna Christine Megregian, FSA, MAAA

Transcription

1 Session 20 WS, Life Illustrations Moderator: Donna Christine Megregian, FSA, MAAA Presenters: Joseph Kordovi, FSA Donna Christine Megregian, FSA, MAAA Linda Rodway, FSA, MAAA

2 Session 20: Life Illustrations 2015 Life and Annuity Symposium Workshop

3 Workshop Leaders Donna Megregian, FSA, MAAA Joe Kordovi, FSA, MAAA Linda Rodway, FSA, MAAA

4 Presenter Disclaimer Presentation not endorsed by SOA, AAA, Pacific Life or RGA Presentation solely the opinions of the presenters

5 Workshop Format What this is Open discussion of issues Active way to engage others to assist with problems/issues/concerns Interactive practice notes session Not recorded You get out of it what you put in!!! If there is something you want to discuss, please ask! Polling will be part of this

6 How do you fit in the following demographic? 1. Illustration actuary 2. Not illustration actuary but work with/familiar with testing requirements 3. Pricing actuary that does illustration testing on new business 4. No direct work with illustration testing, but looking for refresher/professionalism 5. Wait, what session is this again?

7 What do you want to talk about? 1. IUL Illustration Actuarial Guideline Update 2. Inforce Testing Issues 3. Illustrating guarantees only for inforce products 4. GRET and other expense issues 5. Modeling inforce/acquired blocks 6. Assumption development 7. Other

8 What do you want to talk about? 1. IUL Illustration Actuarial Guideline Update 2. Inforce Testing Issues 3. Illustrating guarantees only for inforce products 4. GRET and other expense issues 5. Modeling inforce/acquired blocks 6. Assumption development 7. Other

9 Inforce Testing Issues 1. We struggle to pass the self support test We struggle to pass the lapse support test 3. We are passing the tests, but I am concerned with the near future 4. We are not experiencing trouble passing the self or lapse support tests and do not anticipate trouble in the near future

10 Do you have illustrated products that are no longer showing nonguaranteed elements? 1. Yes, we have products that are either no longer illustrating or are only showing guaranteed 2. No, all our products are illustrating something more favorable than the guarantees 3. Not sure

11 Questions? Additional questions for practice notes Submit to Thank you for attending! Please fill out evaluation forms.

12 Actuarial Guideline YY The Application Of The Life Illustrations Model Regulation To Policies With Index based Interest May 4,

13 Polling Question What has been your level of involvement in this IUL debate? 1. Very active and engaged, highly participatory 2. Watching closely, keeping up to date 3. Moderately watching, trying to keep up 4. Cursory watching, mildly interested 5. Don t know, don t care, don t have IUL

14 History The IUL Task Force was commissioned by the ACLI Life Insurance Committee since existing regulatory requirements, which were drafted prior to the development of indexed UL, may not provide appropriate guidance to the increasing number of companies participating in the Indexed UL market. The task force was charged with making any recommendations it felt appropriate pertaining to applicable indexed UL product illustration regulatory requirements, including the NAIC Illustration Regulation and its associated Actuarial Standard of Practice that are applicable to the product. The NAIC, through LATF, exposed the ACLI Actuarial Guideline and received input from various interested parties. Based on feedback received, LATF then issued a new set of objectives. 13

15 ACLI Task Force Goals Create more consistency in illustrated rates; Ensure consumer awareness of variability of returns through additional required disclosures; Promote uniformity and expediency in having recommendations becoming applicable; Complement existing regulations/standards/guidelines; and Be adaptable to product differentiation, future new product development and future economic scenarios. 14

16 NAIC Objectives Establish a methodology for setting the maximum illustrated rate that LATF agrees is clear, understandable, and actuarially sound. Restrict a carrier s ability to offer an index explicitly designed to create an advantageous maximum illustrated rate. Address leveraged loans to better help consumers understand the risks involved. Clarify the responsibility of the Illustration Actuary with respect to IUL Illustrations, along with areas that are unique and currently not well defined within Indexed UL. 15

17 After Much Lobbying, Education, Conference Calls, Blood, Sweat, Tears, and. Compromise, A New Regulation Was Born Actuarial Guideline YY. May the Task Force be with you!

18 Highlights of the Guideline 17

19 Benchmark Index Account (Section 3b) S&P500 Index / Annual Point to Point 0% floor / 100% participation rate Company s current annual cap. Reasoning Caps the illustrated rate to the most recognized, stable and liquid market. Eliminates aggressive index picking. Results in consistent maximum rates for similar index designs and parameters. Allows different caps to illustrate at different rates. Result Carriers will not gain any illustration rate benefit from creative index designs. Unique index accounts can be marketed separately from the illustration projections. May encourage carriers to find ways to maximize their caps; for example, more active resetting of caps. 18

20 Lookback Methodology (Section 4a,b) The average of all 25 year Compound Annual Growth Rates (CAGR) over the previous 65 years. Reasoning Understandable. 25 years years encompasses a long enough period of projection tied to long term nature of life insurance products. 65 years was the result of compromise to obtain a maximum illustration rate below 7% for the average IUL. Consistent with Indexed Annuity illustration regulations. Consistent with current practice. Result Average brings in a level of conservatism. Provides year over year stability of illustration rates. Eliminates aggressive lookback calculations. 19

21 Alternative Index Designs (Section 4c) For other Index Accounts using other equity, bond, and/or commodity indexes and/or using other crediting methods, the illustration actuary shall use actuarial judgment to determine the maximum credited rate for the currently payable illustrated scale. The determination shall reflect the fundamental characteristics of the Index Account and the parameters shall have the appropriate relationship to the expected risk and return of the Benchmark Index Account. In no event shall the credited rate for the currently payable illustrated scale exceed the rate calculated in using the Benchmark Index Account. Reasoning It is inappropriate to use equity based historical returns for non equity indexes. Historical lookback methodologies may not be appropriate for non equity indexes (e.g. historical yields on a fixed income index are heavily influenced by a declining interest rate environment that cannot be replicated given today s low yield environment). Illustration rates must reflect non point to point crediting methods that dampen expected returns. Result Illustration rates will be curtailed significantly for non equity linked indexes. Simpler index account structures may take hold if the more exotic designs do not give an illustration benefit. Carriers will work harder to market the benefits on their index account designs outside of the illustration. 20

22 Limits on Actuarial Assumptions (Section 5) The Illustration Actuary must limit the assumption for the equity returns used in assessing the company s ability to support all non guaranteed elements of the illustration. The assumed earned interest rate from a hedging program shall not exceed 145% of the annual net investment earnings rate of the general account assets allocated to support the policy. Reasoning Reduces potential for aggressive design; for example, using more recent experience to justify higher hedge profits leading to a higher investment return assumption which could then be translated into a bonus that results in an effective illustrated rate that exceeds the 65 year lookback maximum. Bonuses will still be possible but will be tested for supportability, with other policy benefits, using the guardrails in this section that limit the investment return assumption for index hedging. The 145% is somewhat arbitrary and the result of compromise. Result Limits designs that generate higher caps through policy or asset based charges. Limits designs supported through future equity return assumptions. 21

23 Polling Question Do you interpret Section 5 as a secondary guardrail to the maximum illustrated rate? 1. Yes 2. No 3. Not sure

24 Polling Question Today, when doing your DCS testing on IUL products, do you 1. Assume a profit from index hedges and index credits to the policy 2. Ensure your product can afford the cost of hedging 3. Other 4. Not sure

25 Polling Question Does the new guideline affect your previous answer? 1. Yes 2. No 3. No Sure

26 Index Loans (Section 6) Illustrated rate credited to the loan balance shall not exceed the illustrated loan charge by more than 100 basis points. Reasoning Index loans may have two moving parts depending on the product design: the index return and the loan rate. Variable loan rates are at historical lows and paired with a historical credited rate which results in arbitrage benefits that are higher than can be reasonable expected long term. The impact of small changes in index loan arbitrage can have magnified impacts on policy performance. Result Improves industry s ability to set more reasonable client expectations and reduces risk of client dissatisfaction. 25

27 Additional Disclosure (Section 7) 1. Basic illustration ledger must show an alternate projection with: The index return capped at the fixed rate, and Zero loan arbitrage 2. A table showing the minimum and maximum of all lookback rates calculated. 3. For each index account illustrated, a table showing actual historical index changes and corresponding hypothetical interest rates using current index parameters for the most recent 20 year period. Reasoning Highlights the impact of lower index returns on policy performance. Highlights that actual returns will vary year by year between the cap and the floor. Result Additional disclosure further lengthen already long illustrations. Better managed client expectations. 26

28 Effective Date This Actuarial Guideline shall be effective as follows: Sections 4 and 5 shall be effective for all new business and in force life insurance illustrations on policies sold on or after September 1, Includes the maximum illustration rate using the BIA and the limits on the illustration actuary assumptions using the 145%. Sections 6 and 7 shall be effective for all new business and in force life insurance illustrations on policies sold on or after March 1, Includes the maximum rates for policy loans and the disclosures including the alternate scale. Grandfathered Regulation YY will not apply to in force illustration for policies that were sold prior to September 1, 2015 will be grandfathered. 27

29 Polling Question Overall, how favorably do you view this guideline? 1. Extremely favorably 2. Very favorably 3. Moderately favorably 4. Less favorably 5. Not favorably at all

30 Session 20: Life Illustrations 2015 Life and Annuity Symposium Workshop