Session 39 PD, Non-Variable Annuity PBR Update. Moderator: James W. Lamson, FSA, MAAA

Transcription

1 Session 39 PD, Non-Variable Annuity PBR Update Moderator: James W. Lamson, FSA, MAAA Presenters: Corinne R. Jacobson, FSA, MAAA James W. Lamson, FSA, MAAA Michael C. Ward, FSA, MAAA

2 PD 39: Non-Variable Annuity PBR Update Jim Lamson, FSA, MAAA Actuarial Resources Corporation Corinne Jacobson, FSA, MAAA Midland National Life Mike Ward, FSA, MAAA Life of the Southwest

3 Order of Presentations Corinne: Overall direction of Annuity Reserves Work Group (ARWG) of American Academy of Actuaries Products in Scope & Overall Framework Mike: Key Risk Drivers & Representative Scenarios Modeled Reserve & Aggregate Reserve Margin Jim: Floor Reserve Definition and Components & Listed Benefits Calculation of Reserve for GLIBs & Utilization Rates August 25, 2014 PD 39 - Non-Variable Annuity PBR Update - Valuation Actuary Symposium 2

4 PD 39: Non-Variable Annuity PBR Update Corinne Jacobson, FSA, MAAA Midland National Life

5 ARWG Direction ARWG presented report at LATF s March 1, 2012 meeting Very last paragraph of ARWG report stated Finally, the ARWG wishes to point out that all of the issues identified in this document are best addressed by a principle-based approach to the valuation of non-variable annuities In achieving that end, the ARWG restates its willingness to assist LATF in its efforts to move expeditiously toward such a valuation approach. LATF accepted ARWG s offer August 25, 2014 PD 39 - Non-Variable Annuity PBR Update - Valuation Actuary Symposium 4

6 ARWG Direction May 1, 2013: Direction Decided for VM-22 Not simply an annuity version of VM-20; don t simply expand scope of VM-21 (a.k.a., VACARVM, AG43) Retain concept of a deterministic reserve (based on a set of prescribed assumptions) and another modeled reserve based on current assumptions New paradigm for the Modeled Reserve KS State Insurance Dept volunteered to conduct field test August 25, 2014 PD 39 - Non-Variable Annuity PBR Update - Valuation Actuary Symposium 5

7 Products within VM-22 Scope Non-variable individual and group annuities Deferred annuities Payout annuities Deposit fund products August 25, 2014 PD 39 - Non-Variable Annuity PBR Update - Valuation Actuary Symposium 6

8 Products within VM-22 Scope Payout Annuities Longevity Insurance Structured Settlement Annuities Traditional Deferred Annuities Two-tiered Annuities Market Value Adjusted Annuities Equity Indexed Annuities Bond Indexed Annuities Modified Guaranteed Annuities CD Annuities Gen Acct Bond Allocated Annuities Multi-bucket Annuities Directed Annuities Charitable Annuities Interest Indexed Annuities GICs Synthetic GICs Funding Agreements Terminated Pension Plan Annuities Qualified Plans (e.g., 401(k)) Life & Annuity Combinations & Annuity Riders August 25, 2014 PD 39 - Non-Variable Annuity PBR Update - Valuation Actuary Symposium 7

9 Working Definition of Minimum Reserve Equals the Nonforfeiture Value (NFV) and the sum of: A. The excess, if any, of the Floor Reserve over the NFV; and B. The excess, if any, of the Modeled Reserve over the excess, if any, of the Floor Reserve over the NFV August 25, 2014 PD 39 - Non-Variable Annuity PBR Update - Valuation Actuary Symposium 8

10 Working Definition of Minimum Reserve In other words, Minimum Reserve = max {NFV, FR, MR} where FR = Floor Reserve MR = Modeled Reserve August 25, 2014 PD 39 - Non-Variable Annuity PBR Update - Valuation Actuary Symposium 9

11 Goals of VM-22: General Right-size reserves Recognize current and future product features Increase auditability of reserves Produce meaningful results that can be used by Management August 25, 2014 PD 39 - Non-Variable Annuity PBR Update - Valuation Actuary Symposium 10

12 Goals of VM-22: Floor Reserve Design the Floor Reserve such that in most cases, it is less than current CARVM it serves as the Tax Reserve it is conservative but does not overshadow the Modeled Reserve August 25, 2014 PD 39 - Non-Variable Annuity PBR Update - Valuation Actuary Symposium 11

13 Goals of VM-22: Modeled Reserve Run limited number of scenarios Test more risks than just interest rate and equity risks Add conservatism on an aggregate basis, rather than including individual margins on each assumption August 25, 2014 PD 39 - Non-Variable Annuity PBR Update - Valuation Actuary Symposium 12

14 PD 39: Non-Variable Annuity PBR Update Michael Ward, MAAA, FSA Life Insurance Company of the Southwest a Member of The National Life Group

15 The Modeled Reserve Reprise: Where does the Modeled Reserve Fit? pol Minimum = NFV + A + B, where Reserve pols 0 A = max Floor - NFV Reserve pols pol pols pol 0 B = max Modeled Reserve - NFV pol + A pols August 25, PD 39 - Non-Variable Annuity PBR Update - Valuation Actuary Symposium

16 Representative Scenarios Method Description of the Approach: Generalized, Multi-Risk Model separated into Model Segments Blocks of business with similar risk profiles for both liabilities & assets Each Model Segment Reflects its Key Risk Drivers Modeled Reserve Reserve as if all KRDs were modeled stochastically But more practical to calculate & easier to audit August 25, 2014 PD 39 - Non-Variable Annuity PBR Update - Valuation Actuary Symposium 15

17 Reserve Paradigm Modeled Reserve = Current Estimate Reserve + Aggregate Reserve Margin August 25, 2014 PD 39 - Non-Variable Annuity PBR Update - Valuation Actuary Symposium 16

18 The Actuary Must Be Professional Expertise & Professionalism of the Actuary is Crucial in Identification of the KRDs for each Model Segment Quantification of Current Estimate Assumptions Estimated Probability Distribution Points for the KRDs August 25, 2014 PD 39 - Non-Variable Annuity PBR Update - Valuation Actuary Symposium 17

19 Current Estimate Reserve Seven Steps to determining the Current Estimate Reserve 1. Identify Model Segments 2. Identify Current Estimate Assumptions 3. Identify KRDs 4. Generate 5 Representative Scenarios for each Model Segment: Anticipated; +/-1 std. dev.; +/-3 std. dev. 5. Determine cash flows for each scenario for each Model Segment Central estimate is weighted average by scenario probabilities 6. Aggregate the Scenario Reserves using KRD probabilities Weighted by the range of scenarios within that KRD 7. Aggregate the KRD reserves August 25, 2014 PD 39 - Non-Variable Annuity PBR Update - Valuation Actuary Symposium 18

20 Aggregate Reserve Margin ARM uses Cost of Capital Approach 1. Determine KRD Total Capital Amt for each Key Risk, Model Segment, year For each KRD, the excess of the greatest scenario reserve over the central estimate Add capital across all risk drivers using RBC-style square root formula to reflect noncorrelation 2. Identify Spread Over Treasuries = CoC risk-free rate 3. Identify FIT factor, i.e., 35% 4. COC factor: SOT CoCf = 6% now 1 - FITf 5. ARM for a Model Segment = Sum of (PV for each year s TCA) x CoCF 6. ARM = Sum over all Model Segments of ARM for those Model Segments August 25, 2014 PD 39 - Non-Variable Annuity PBR Update - Valuation Actuary Symposium 19

21 Test of Adequacy of Aggregate Margin Test of adequacy of the Aggregate Margin required Actuary shall: a. Identify the higher Scenario Reserve for the 1-Std Dev Scenario for each KRD b. Calculate the excess of Current Estimate Reserve over a. c. Calculate the Alternative Modeled Reserve = CER + b. less Covariance Adjustment d. If AMR > 1.02 x (CER + AMR), then Modeled Reserve = AMR e. Else, Modeled Reserve = (CER + AMR) August 25, 2014 PD 39 - Non-Variable Annuity PBR Update - Valuation Actuary Symposium 20

22 Material Risks not Modeled If the Actuary cannot reflect a material risk properly, then the Actuary shall make the following adjustments: a. Estimate the financial impact of the omitted risk; adjust the CER to reflect the impact b. Determine the degree of uncertainty in the estimate in a.; adjust the ARM for the uncertainty c. Modeled Reserve recalculated to reflect adjustments in a. & b. August 25, 2014 PD 39 - Non-Variable Annuity PBR Update - Valuation Actuary Symposium 21

23 PD 39: Non-Variable Annuity PBR Update Jim Lamson, FSA, MAAA Actuarial Resources Corporation

24 Agenda Purpose of the Floor Reserve Reserve Components: FR 1 and FR 2 Listed Benefits Calculation Details of FR 2 Effect of In-The-Moneyness on Assumed GLIB Utilization Impact of Joint GLIB Withdrawal Options Joint vs. Single Life Contract Ownership August 25, 2014 PD 39 - Non-Variable Annuity PBR Update - Valuation Actuary Symposium 23

25 Kansas Field Test & Coordination with PD 60 Kansas Insurance Department is funding a practical test ( Field Test ) of proposals outlined in this PD 39 presentation ARWG has worked closely with Field Test team This session provides basic update of ARWG developments and progress towards drafting of VM-22 PD 60 provides more details of methods and progress and initial Field Test results Tuesday at 10:00 Overlap between sessions intended to be minimal August 25, 2014 PD 39 - Non-Variable Annuity PBR Update - Valuation Actuary Symposium 24

26 Purposes of Floor Reserve Minimum Reserve Serve as possible model for computation of the Tax Reserve Preferable to avoid proliferation of reserve types (i.e. not 3 reserves as under VM-20) Calculation assumptions for tax reserves locked in at issue Yardstick for measuring effectiveness of the Modeled Reserve Does not need to be adequate by itself August 25, 2014 PD 39 - Non-Variable Annuity PBR Update - Valuation Actuary Symposium 25

27 Purposes of Floor Reserve Does not need to reflect product design features to same extent as Modeled Reserve Will reflect changes in mortality and Listed Benefit utilization assumptions post-issue That is, not locked in at issue LATF and the NAIC could decide to change Tax Reserve uses assumptions frozen at issue ARWG will likely suggest modifications as necessary to prevent Floor Reserve dominance over Modeled Reserve August 25, 2014 PD 39 - Non-Variable Annuity PBR Update - Valuation Actuary Symposium 26

28 Intended Relationship to Modeled Reserve and Nonforfeiture Value Never less than the Nonforfeiture Value (seriatim comparison) Widespread belief that Modeled Reserve likely to be more appropriate than Floor Reserve Thus, adjustments to be made to Floor Reserve to prevent dominance over Modeled Reserve if possible Field Test helping to identify need for this August 25, 2014 PD 39 - Non-Variable Annuity PBR Update - Valuation Actuary Symposium 27

29 Floor Reserve Utilizes Concept of Listed Benefits Essential features of a Listed Benefit Policyholder option to elect benefit over a number of years Size of the benefit dependent on some value other than the Account Value Listed Benefits to be listed in VM-22 (maintained by the NAIC) Utilization rates for Listed Benefits needed to properly value the contract Currently, the only Listed Benefits are Guaranteed Lifetime Income Benefits and Annuitization Tier in a Two-Tiered Annuity August 25, 2014 PD 39 - Non-Variable Annuity PBR Update - Valuation Actuary Symposium 28

30 Components of Floor Reserve Floor Reserve = max {Nonforfeiture Value, FR 1, FR 2 } FR 1 is currently designed as CARVM reserve ignoring Listed Benefits FR 2 is reserve for Listed Benefits Net Result is that Floor Reserve would be: Current CARVM for products without Listed Benefits Takeaway is that PBR could only result in reserve increase for products w/o Listed Benefits Less than current CARVM for products with Listed Benefits August 25, 2014 PD 39 - Non-Variable Annuity PBR Update - Valuation Actuary Symposium 29

31 FR 1 Reserve Component FR1 is the CARVM reserve ignoring all Listed Benefits Greatest Present Value Issue Year & Plan Type valuation interest rates Computed assuming any charges and benefits for Listed Benefits cease on the valuation date Projected non-listed benefits (e.g. cash values) are thus higher than otherwise August 25, 2014 PD 39 - Non-Variable Annuity PBR Update - Valuation Actuary Symposium 30

32 FR 2 Component Only applies to products with Listed Benefits n i Reserve for all n Listed Benefits: FR max { FR } where 2 2 i 1 Each corresponding to Listed Benefit i is the FR 2 reserve computed by ignoring all other Listed Benefits Assumes the Listed Benefit is the only elective benefit & will eventually be elected unless death or other non-elective benefit occurs first Computed using issue year Plan Type A rates with guarantee duration measured from issue date to benefit election date August 25, 2014 PD 39 - Non-Variable Annuity PBR Update - Valuation Actuary Symposium 31

33 FR2 (continued) Contrasts with CARVM s GPV injects expected utilization instead of considering all possible Integrated Benefit Streams Computed as the PV of a single Integrated Benefit Stream of Listed Benefits Provides easy proof for tax reserve being AG 33 as FR 2 is one of AG33 s currently computed Integrated Benefit Streams August 25, 2014 PD 39 - Non-Variable Annuity PBR Update - Valuation Actuary Symposium 32

34 Basic Smoothed Utilization Rates for GLIBs & Two-Tiered Annuities Rates shown are percent of remaining lives Separate rates for Qualified and Non-Qualified Business Due to Required Minimum Distributions Tax-Qualified Non-Qualified Attained Age Rate Attained Age Rate Attained Age Rate Attained Age Rate Attained Age Rate Attained Age % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % August 25, 2014 PD 39 - Non-Variable Annuity PBR Update - Valuation Actuary Symposium 33 Rate

35 FR 2 Present Value of GLIB Benefit Stream: Joint vs. Single Life Withdrawals Considers the value of joint vs. single life GLIB withdrawal guarantees Guaranteed withdrawal rates (i.e. payout rates) in contract generally grouped by attained age and stated separately for single life / joint lives Rates in current products often not actuarially equivalent, generally making the joint guaranteed withdrawal a better deal August 25, 2014 PD 39 - Non-Variable Annuity PBR Update - Valuation Actuary Symposium 34

36 Reserve Treatment Depends on Status of Policy Ownership If single life ownership, use single life mortality during deferred phase If joint ownership, last-to-die mortality during deferred phase Actual second annuitant s age and gender used if available Otherwise assume opposite gender with male 2 years older than female Test if PV of joint withdrawal stream > PV of single withdrawal stream Joint withdrawal stream may be ignored if joint life substantially actuarially equivalent to single life. Otherwise blend them using a prescribed table. August 25, 2014 PD 39 - Non-Variable Annuity PBR Update - Valuation Actuary Symposium 35

37 Placeholder Slide for Post-LATF Meeting Update Summer LATF Meeting will be August 14-15, 2014 Slides will be added to this presentation as necessary to provide an update from the meeting August 25, 2014 PD 39 - Non-Variable Annuity PBR Update - Valuation Actuary Symposium 36

38 Questions