Session 79 PD, Regulatory Update. Moderator: Francis de Regnaucourt, FSA, CERA, FCIA, MAAA

Transcription

1 Session 79 PD, Regulatory Update Moderator: Francis de Regnaucourt, FSA, CERA, FCIA, MAAA Presenters: Francis de Regnaucourt, FSA, CERA, FCIA, MAAA Marc-Andre Giguere, FSA, FCIA, MAAA Andrew G. Steenman, ASA, MAAA

2 Canadian Regulatory Update 2015 SOA Life & Annuity Symposium Session 79PD 05 May 2015

3 Areas to discuss Canadian reserves and changes IFRS Governance ORSA Three lines of defense Required capital Page 1 5 May 2015 Canadian Regulatory Update

4 Canadians have been doing principles-based reserves for over 20 years Canadian Asset Liability Method ( CALM ) Reserves calculated on a portfolio basis Determines the amount of assets required to support the liability cash flows Cash flows based on best estimate assumptions plus provisions for adverse deviations ( PfAD ) Uses company assets and investment policy (with certain constraints) Base plus prescribed scenarios Reserves set equal to the statement value of the assets supporting the liabilities Recognizes all profits at issue Can produce negative reserves Page 2 5 May 2015 Canadian Regulatory Update

5 Canadians have been doing principles-based reserves for over 20 years Policy Premium Method ( PPM ) Used for calculating seriatim reserves Present value of benefits and expenses minus present value of gross premiums Cash flows based on CALM best estimate assumptions and PfADs Discount rates are adjusted to match CALM reserves at portfolio level Page 3 5 May 2015 Canadian Regulatory Update

6 Recent new standards Prescribed Scenarios Revised prescribed scenarios Reduced from 9 to 8 More flexibility to recognize long term credit spreads Maximum net credit spreads Assume current spreads for five years, grading to ultimate next 25 years Ultimate maximum defined as the difference between asset s credit spread and asset depreciation assumption set at 80bps Ultimate reinvestment rates Sets maximum rates for short-term (1.4% to 10.0%) and long-term reinvestment rates (3.3% to 10.4%) Alternative assets Not to exceed amount required to support 20% of cash outflows for first 20 years and 75% thereafter Market Shift PfADs equal to a drop of 20% to 50% worst time Page 4 5 May 2015 Canadian Regulatory Update

7 Canada has adopted IFRS IFRS 9 effective 2018 IFRS 4 phase 2 maybe 2020? Timing difference will create the need for a temporary process between the two dates and could result in inefficient decisions Reserves are independent of Company held assets and investment policy Companies are still trying to influence decisions and process Page 5 5 May 2015 Canadian Regulatory Update

8 Risk management / Governance ORSA OSFI now requires companies to submit and ORSA report Trying not to regulate the process too much Expects companies to keep improving their process Views this as a way to educate the Board Recovery and Resolution Plans OSFI has required recovery plans from largest insurance companies (Resolution Plans to come?) Requires company to develop severe stress scenarios and document responses Page 6 5 May 2015 Canadian Regulatory Update

9 Three lines of defense Special requirements for the control functions Requires self-assessments and third-party assessments Criteria includes Mandate Organization structure Resources Policies, practices and methodologies Reporting Relationship with risk management and internal audit Senior management and board oversight Page 7 5 May 2015 Canadian Regulatory Update

10 Required capital Current capital framework ( MCCSR ) fairly similar to US Certain variance due to differences in actuarial reserves OSFI, AMF and Assuris have formed a committee to look at alternative framework Likely moving to a total asset requirement approach Page 8 5 May 2015 Canadian Regulatory Update

11 Regulatory Developments Francis de Regnaucourt New York, NY May 5, 2015

12 Regulation on Three Fronts U.S. State Regulation National Association of Insurance Commissioners (NAIC): Principle-Based Reserves (PBR) IUL (Indexed Universal Life) Illustrations Risk-Based Capital (RBC) asset overhaul International Regulation International Association of Insurance Supervisors (IAIS): Focused on Internationally Active Insurance Groups (IAIG) Working on International Capital Standards (ICS) Only the largest companies Federal Reserve System (Federal Reserve Banks, Financial Stability Oversight Council (FSOC)): Regulate only Systemically Important Financial Institutions (SIFI) Currently 31 Bank Holding Companies, 3 insurers*, and GE Capital Just starting on setting policy for insurers *One company appealing designation 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 10

13 Valuation Manual Sections under PBR VM-00 VM-01 VM-02 VM-05 VM-20 VM-21 VM-22 VM-25 VM-26 VM-30 VM-31 VM-50 VM-51 VM-A VM-C VM-G VM-M Introduction Definitions for Terms in Requirements Minimum Nonforfeiture Mortality and Interest NAIC Model Standard Valuation Law Requirements for Principle-Based Reserves for Life Products Requirements for Principle-Based Reserves for Variable Annuities Requirements for Principle-Based Reserves for Non-Variable Annuities (Under Development) Health Insurance Minimum Reserve Requirements Credit Life and Disability Reserve Requirements Actuarial Opinion and Memorandum Requirements PBR Report Requirements for Business Subject to a Principle-Based Reserve Valuation Experience Reporting Requirements Experience Reporting Formats APPM Sections (model regulations) Actuarial Guidelines Corporate Governance Requirements for Principle-Based Reserves Mortality Tables New sections to VM for PBR in bold above 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 11

14 VM-21 and VM-22: PBR for Variable and Non-variable Annuities Variable Annuities (VM-21) unchanged: Continue to use VACARVM with AG43 Non-variable Annuities Scope: Deferred Annuities, Deposit Funds Immediate Annuities, Structured Settlements Two-tiered Annuities Deposit Funds GICs, Stable Value Longevity Insurance Indexed Annuities Guaranteed Living Benefits on Annuity Products Contingent Deferred Annuities Modified Guaranteed Annuities Basic Structure (still under development): Higher of: Deterministic Reserve Two Modeled Reserve(s) 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 12

15 VM-22: Three Valuation Methods under Discussion Proposed Method Replicate VM-20 Representative Scenario Method Modernized Formulas Specifics Include formulaic floor, similar to AG 33 Develop stochastic exclusion test for non-variable annuities Stochastic reserve assumptions parallel VM-20, use economic scenario generator, and set reserve at CTE70 Use a small number of representative, deterministic scenarios to approximate stochastic results Base scenario, plus four alternative scenarios (+1, -1, +3, and -3 standard deviations) for each key product risk driver Keep current SVL framework Propose fixes to right-size reserves Advantages Internal consistency Most flexible with respect to new features Simplifies stochastic calculations Readily adaptable to product features Pragmatic Reduces work burden Disadvantages Greatest complexity Heavy work burden for small companies Needs validation Needs product-by-product assessment New products may require special study 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 13

16 VM-22: Examples of SVL Flaws and Potential Fixes Product Formula Flaws Potential Fixes Stable Value Liability discount rate capped at 105% of Treasury rates Give little or no credit for achieved spreads Asset valuation uses entire achieved spread, creating a large disconnect Academy proposed revision blend of Treasury rates and achieved rates Living Benefits on Indexed Annuities AG33 overestimates utilization of optional benefits (100% utilization at most expensive point) Year-of-issue liability valuation rates severely misprice options in the GLBs Allow more realistic utilization, especially where credible experience is available Develop simplified option pricing methods that better reflect real option prices Representative Scenario Method Immediate Annuities Liability discount rate based on moving average rate Pricing reflects spot rates, which can be volatile Exacerbated by jumbo transactions Refine valuation interest rate setting for large (>$500m) or unusual transactions (long or short durations) 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 14

17 VM-22: Previous Approach and Kansas Field Tests Kansas Field Tests Focused on Rich Living Benefits: Developed Representative Scenario Method Reserve = Highest of (CSV, FR1, FR2) Where: FR1: listed benefits terminated on valuation date, no more rider fees collected FR2: listed benefits are used according to utilization assumptions that reflect in-the-moneyness (ITM), rider fees collected Findings: Two companies participating: Company A has Cadillac benefits, high charges Company B has basic benefits, lower charges Company A reserves > CARVM Company B reserves ~ 85% of CARVM 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 15

18 Legislative Considerations Adoption Required by Super-Majority of States At least 42 states At least 75% of written premium New York publicly against PBR California not against, but wants more time Many smaller states concerned by work load on smaller companies Adoption is not assured Expected Implementation Date Current expectation is 2017, already postponed from 2016 Further delays are possible 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 16

19 IAIS framework Architecture of IAS international supervisory requirements Type of entity Legal Entity Group Internationally Active Insurance Group (IAIG) Global Systemically Important Insurer (G-SII) Supervisory requirements and actions First tier ICPs ICPs that apply only to legal entities ICPs that apply to legal entities and groups Second tier ComFrame ComFrame Third tier G-SII package G-SII package 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 17

20 International Capital Standards Previous Formula: BCR = α {β 1 (Trad Life) + β 2 (Trad Non-Life) + β 3 (Assets) + β 4 (ALM) + β 5 (Non-Trad Ins)} + γ (Non-Ins) Coefficients to be determined by field testing Complete Restart in Late 2014: Consultation Paper: 168 questions Summary of answers compiled in March 2015 Significant Area of Disagreement: Should capital be Market Consistent or GAAP with Adjustments Team USA generally favors GAAP with Adjustments Others generally do not Many favor Market Consistent, similar to Solvency II 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 18

21 Federal reserve approach to SIFIs Nothing declared yet, meetings with insurers actively under way. Supervisory Expectations and Range of Current Practice, issued August 2013 Focused on Bank Holding Companies Discusses what they look at to evaluate a BHC s capital adequacy process Identifies leading and lagging practices Articulates 7 principles of a sound capital adequacy process Actively researching insurance Concerned with captives (microsystems) Concerned with information lag Ramping up insurance staff 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 19

22 Seven principles of sound capital adequacy framework 1. Foundational risk management: Identification, measurement, assessment, and control of risks 2. Effective estimation of losses in different environments, across the entire BHC: How do the projected scenarios translate into losses? 3. Solid resource estimation capability: What is the projected available capital? 4. Sufficient capital adequacy impact assessment: What is the required capital position? Capital ratio? 5. Comprehensive capital policy: How does the BHC determine goals and appropriate levels (including composition of capital), make capital decisions, contingency plans? 6. Robust internal controls 7. Effective governance: Is the oversight effective? Similar set of principles for liquidity management; limited relevance to insurers KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 20

23 Federal Insurance Office Established by the Treasury under Dodd-Frank Federal Insurance Modernization Report, December 2013 Does not recommend state regulation be replaced by a Federal regulator Proposed two-pronged approach: Identified areas where Federal regulation is warranted (little relevance to life insurers) Propose short-term improvements to state regulation Role of the FIO: Monitor the insurance sector for the Treasury Be an advisory member of FSOC Represent the U.S. on insurance matters, including at IAIS Terrorism Risk Insurance Program Underserved communities Access to affordable non-health insurance 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 21

24 Questions

25 Session 79 PD: Regulatory Update Presented by Andrew Steenman 2015 SOA Life & Annuity Symposium May 5, 2015

26 Caveats and Limitations These slides have been prepared for presentation at the SOA s 2015 Life & Annuity Symposium for the educational use of meeting participants. There are no intended beneficiaries of this work. The material is intended to facilitate thoughtful discussion on the contained subjects by participants. This presentation may not be distributed, disclosed, copied or otherwise furnished to any party without our prior written consent. Any distribution of this presentation must be in its entirety. The presented information is intended to be valid as of the date it has been prepared. Its future validity depends on the further development of modeling practice, regulation, or standards of practice. This presentation is not intended to contain material that represents an actuarial opinion. The professionals responsible for preparing this report are members of the American Academy of Actuaries and meet the Qualification Standards of the American Academy of Actuaries. 24

27 Regulatory Update Agenda Fixed Annuity PBR / VM-22 Recent Developments Indexed Universal Life Illustrations Life Principles Based Reserves / VM-20 Rector Report / Actuarial Guideline VBT / 2017 CSO Life & Annuity Symposium: Session 79 PD Regulatory Update

28 VM-22 PBR for Fixed Annuities 2/24/2015 to 3/11/2015 updates and meetings from VM-22 subgroup Three approaches being considered, will ultimately recommend 1 to LATF. Goal of any approach is to right-size reserve levels. (1) Replicate VM-20 with formulaic floor (AG33 light?) and discounted cash flow method (stochastic only?, no single scenario deterministic?) Likely to be labeled as too complex, particularly for simple products (perhaps a tiered exclusion test solution like VM-20) Most similar to approaches for other lines, a known quantity Life & Annuity Symposium: Session 79 PD Regulatory Update

29 VM-22 PBR for Fixed Annuities (2/3) (2) Representative Scenario Method focus on key risk drivers for stochastic modeling, but in a limited scope by testing central estimates and distributions, weight scenarios by probability plus individual or aggregate margin As a new methodology, more testing needed to fine tune a procedure Intended to be less complex than a full stochastic calculation a la VM-20 or 21(AG43 ) (3) Modernize and correct current formulaic method such as by defining new methodology for features such as GLBs Can directly address issues and complaints about existing methods Requires assessment and agreement on current issues Life & Annuity Symposium: Session 79 PD Regulatory Update

30 VM-22 PBR for Fixed Annuities (3/3) Subgroup focusing on 4 initiatives Develop more definition of Representative Scenario Method Solicit feedback from public (You!) on all three methods Identify flaws in current methods Propose fixes for flaws in current methods Focus appears to be on RSM and CARVM before developing a full stochastic or VM-20 -like approach Evaluating the options is being based on: Prudent reserve levels Feasibility to implement Avoidance of unintended consequences Life & Annuity Symposium: Session 79 PD Regulatory Update

31 VM-22 ACLI Comments Letter dated February 27, 2015 Request continuance of formulaic approach where it works and new modeled approach only where necessary because of defined complex product features Fix formulaic as needed, but don t over complicate New business only Additional field testing once a method is identified to give adequate feedback on needs for re-pricing. KS is only proof of concept for RSM Life Consultants Forum

32 VM-22 ACLI Comments (cont d) Allow reserve levels to decrease from current levels Do not create disincentive for risk management such as reinsurance, ALM, or hedging Fixed Annuities are a more diverse range of products than life, so must consider if one-size standard can work Thorough documentation to help those who have not been part of the process to catch up Request careful consideration of modeling methods that are new or unproven Life Consultants Forum

33 IUL Illustration Regulation Actuarial Guideline YY most recent draft with edits exposed in March May be effective as early as September 1, 2015 Illustrated Scale uses a 65 year look back with 25 year periods If a Benchmark Index Account is available, apply current annual cap to past S&P performance S&P, 1 year point to point, 100% Participation, 0% floor, annual crediting, annual cap Illustrated credited rate calculated as an average of the average rate in series of 25 year periods If a product does not feature the Benchmark Index Account actuarial judgement necessary Disciplined Current Scale earned interest rate limitations 145% of net earned rate if using a hedging program 100% of net earned rate if NOT using a hedging program Life & Annuity Symposium: Session 79 PD Regulatory Update

34 PBR for Life Products / VM-20 What to know Adoption Status (as of late March) 25 of 42 necessary states, 40% of 75% necessary premium 11 more states with 27% of premium are in progress (various estimates) Effective Date estimated as 1/1/2017 Components Net Premium Reserve Deterministic Reserve Stochastic Reserve Deterministic Exclusion Test Stochastic Exclusion Test Life & Annuity Symposium: Session 79 PD Regulatory Update

35 Rector / Actuarial Guideline 48 NAIC hired Rector & Associates to make recommendations for improving uniformity and transparency in captive transactions as well as treatment under PBR The Rector Report (initial, final, and modified recommendations based on industry comments) became the basis for Actuarial Guideline 48 AG48 adopted in November 2014, effective 1/1/2015 Applies to Term and ULSG products subject to XXX/AXXX Sets a Required Level of Primary Security backed by certain assets Level is determined by the Actuarial Method which is VM Life & Annuity Symposium: Session 79 PD Regulatory Update

36 AG48 Compared to VM-20 AG48 eliminates the exclusion tests, term reserve is greater of NPR and DR, ULSG reserve is greater of those and SR AG48 overrides VM-20 language on reinsurance, until VM-20 is adopted Reinsurance cash flows not included in DR and SR, YRT or Coinsurance credit is calculated as ½ modal Cx or quota share percent, respectively VM-20 will not be retroactive, AG48 can apply retroactively to policies not previously part of a non-exempt reinsurance arrangement AG48 applies scalars derived from 2014 VBT / 2001 VBT that can reduce the NPR Life & Annuity Symposium: Session 79 PD Regulatory Update

37 Implementing AG48 or VM-20 for PD Must decide on level of sophistication and when to do it Do pricing models include standard logic for VM-20? Do we have to upgrade? How much more customization will we need? Setting of assumption PADs for Prudent Estimate Assumptions Can be similar to AG 38 8D analysis Mortality mapping to 2008 VBT tables Complex products requiring premium solves for NPR Similar to solve issues with 2001 CSO table Academy Scenario Generator Need for assets Possibly significant runtime on large inforce blocks or model offices Life & Annuity Symposium: Session 79 PD Regulatory Update

38 Implementing AG48 or VM-20 for PD Current Activity Inforce and flow business and Captives Inforce business not in Captives before effective date and open ended reinsurance arrangements Discussions with regulators Analysis for impact on new product designs, or need for re-design Discussed Activity Full valuation implementation, pilots Challenges VM-20 is still a moving target, what questions will turn up from AG48? Availability of asset data and mortality tables specified by VM-20 Personnel familiarity with Reg s & Models / building institutional knowledge Gathering experience data, having sufficient experience Life & Annuity Symposium: Session 79 PD Regulatory Update

39 2014 and 2017 VBT and CSO Tables 2014 VBT M/F Smk/NonSmk base tables released last summer RR Beta versions released more recently NS RR tables now extend down to 50% and up to 175% level New underwriting criteria scoring tool will be available 2014 CSO was targeted for summer 2015, now will be 2017 CSO table for use with VM-20 American Academy of Actuaries Life Experience Committee for more info NAIC considering request to project forward to create VBT 2017 to coincide with effective date of VM-20. Have agreed to roll to Life & Annuity Symposium: Session 79 PD Regulatory Update