Session 51 PD, VM31 - PBR Actuarial Report - Which ASOPs Matter? Moderator: Leonard Mangini, FSA, FALU, FRM, MAAA

SOA Antitrust Disclaimer SOA Presentation Disclaimer Session 51 PD, VM31 - PBR Actuarial Report - Which ASOPs Matter? Moderator: Leonard Mangini, FSA, FALU, FRM, MAAA Presenters: Kerry A. Krantz, FSA, MAAA Leonard Mangini, FSA, FALU, FRM, MAAA Kevin Piotrowski, FSA, CERA, MAAA

2017 Life & Annuity Symposium Session 51: VM-31 PBR Actuarial Report Which ASOPs Matter? Tuesday, May 9, 2017

Session 51: VM-31 PBR Actuarial Report Which ASOPs Matter? Tuesday, May 9, 2017 Kerry Krantz, FSA, MAAA Valuation Actuary, Florida Office of Insurance Regulation Leonard Mangini, FSA, FRM, MAAA President, Mangini Actuarial and Risk Advisory LLC Kevin Piotrowski, FSA, CERA, MAAA Manager, Ernst & Young LLP

SOCIETY OF ACTUARIES Antitrust Notice for Meetings Active participation in the Society of Actuaries is an important aspect of membership. However, any Society activity that arguably could be perceived as a restraint of trade exposes the SOA and its members to antitrust risk. Accordingly, meeting participants should refrain from any discussion which may provide the basis for an inference that they agreed to take any action relating to prices, services, production, allocation of markets or any other matter having a market effect. These discussions should be avoided both at official SOA meetings and informal gatherings and activities. In addition, meeting participants should be sensitive to other matters that may raise particular antitrust concern: membership restrictions, codes of ethics or other forms of self-regulation, product standardization or certification. The following are guidelines that should be followed at all SOA meetings, informal gatherings and activities: DON T discuss your own, your firm s, or others prices or fees for service, or anything that might affect prices or fees, such as costs, discounts, terms of sale, or profit margins. DON T stay at a meeting where any such price talk occurs. DON T make public announcements or statements about your own or your firm s prices or fees, or those of competitors, at any SOA meeting or activity. DON T talk about what other entities or their members or employees plan to do in particular geographic or product markets or with particular customers. DON T speak or act on behalf of the SOA or any of its committees unless specifically authorized to do so. DO alert SOA staff or legal counsel about any concerns regarding proposed statements to be made by the association on behalf of a committee or section. DO consult with your own legal counsel or the SOA before raising any matter or making any statement that you think may involve competitively sensitive information. DO be alert to improper activities, and don t participate if you think something is improper. If you have specific questions, seek guidance from your own legal counsel or from the SOA s Executive Director or legal counsel. 3

Presentation Disclaimer Presentations are intended for educational purposes only and do not replace independent professional judgment. Statements of fact and opinions expressed are those of the participants individually and, unless expressly stated to the contrary, are not the opinion or position of the Society of Actuaries, its cosponsors or its committees. The Society of Actuaries does not endorse or approve, and assumes no responsibility for, the content, accuracy or completeness of the information presented. Attendees should note that the sessions are audio-recorded and may be published in various media, including print, audio and video formats without further notice. 4

Liability Disclaimer, Copyright, Use of Slides Although we ve attempted to capture the letter and spirit of the Valuation Manual, Code of Conduct, ASOPs, and Qualification standards faithfully- you have a personal professional duty to familiarize yourself with the original source material and apply professional judgment as to its specific application to your own work and those working under your direction as you perform covered Actuarial Services. The nature of your work, and other professional designations you hold, may require you to be bound by additional professional requirements from other organizations as well. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, legal, tax, or other professional advice, nor is it an Actuarial Opinion by Leonard Mangini, Kerry Krantz, Kevin Piotrowski, or their respective firms or employers: Mangini Actuarial and Risk Advisory LLC, Florida Office of Insurance Regulation, or Ernst & Young LLP. Please refer to your advisors for specific advice. The views expressed by the presenters are not necessarily those of Mangini Actuarial and Risk Advisory LLC, Florida Office of Insurance Regulation, or Ernst & Young LLP. Any U.S. tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Much of the original source material on VM-20/PBR and Professionalism is copyrighted material of the American Academy of Actuaries, Society of Actuaries, or National Association of Insurance Commissioners. This presentation paraphrases these for educational purposes to capture the intent of the regulations and standards of practice or results of SOA research, and every attempt has been made to identify and cite original sources, where applicable. These slides may NOT be copied, redistributed, or otherwise furnished to any party without prior written consent of Mangini Actuarial and Risk Advisory LLC or Ernst & Young LLP other than as required to comply withan audit of the attendee s annual CPD compliance. 5

Biographies- Leonard Mangini Leonard Mangini, FSA, FRM, FALU, CLU, MAAA President and Managing Member, Mangini Actuarial and Risk Advisory LLC Mr. Mangini brings clients over 27 years of life, annuity, and health insurance and reinsurance expertise, holding senior Pricing, Financial, Risk Management, and Reinsurance-related roles at Manulife, ACE, AXA, and USLIFE. Leonard has also assisted clients with Financial Reporting, Risk Management, Underwriting, Product Development, Reinsurance, M&A, and Market Conduct issues as a consultant with E&Y, Milliman, and now his own actuarial and risk advisory practice. Prior to forming Mangini Actuarial and Risk Advisory LLC, Leonard was SVP and Deputy Global Chief Actuary at Manulife where he supervised Principle-Based valuation assumption and margin setting, explained Principle-Based earnings to stake-holders, and supervised Principle-Based valuation governance in an ORSA environment for 19 business units in the US, Canada, and Asia. In previous reinsurance roles, Leonard has served as an internal Board member, President, Chief Actuary, Chief Pricing Officer, and Chief Risk Officer, including green-fielding a US life reinsurer. He previously served as Chair of the SOA Financial Reporting Section Council, is an elected Member of the Joint Risk Management Section Council, and is a Friend of the Product Development Section. Leonard is a Member of the Academy s PBR Life Reserve Work Group and the Academy s Committee on Professional Responsibility, and serves as Chair of the SOA Oversight Group on PBR Earnings Attribution. Leonard is a Fellow of the Society of Actuaries (FSA), Certified Financial Risk Manager (FRM), Fellow of the Academy of Life Underwriting (FALU), and Member of the Academy of Actuaries (MAAA), qualifiedto sign Statements of Actuarial Opinion (PSAOs). 6

Biographies- Kerry Krantz Kerry Krantz, FSA, MAAA Life & Health Actuary, Florida Office of Insurance Regulation Mr. Krantz has completed more than thirty-three years as a Fellow of the Society of Actuaries. He worked mostly at insurance companies prior to 1995, when he became the Life & Health solvency actuary at the Florida Department of Insurance, and is now a Life & Health Actuary at the Florida Office of Insurance Regulation. Kerry reviews Life, Annuity, and Health insurance reserves, actuarial reports, and risk-based-capital filings. He is an interested regulator on the Life Actuarial Task Force (LATF) and other NAIC conference calls, is the Vice-Chair of the Life RBC and Chair of of its stress-testing sub-group and has a strong interest in PBR Implementation. Mr. Krantz is a former SOA Financial Reporting Section Council Member, serving one year as Council Secretary, and is currently the Section s Web Coordinator. He participates on various Academy of Actuary conference calls. He formerly served as Chair of the SOA Computer Science (now Technology) Section s organizing committee and was its first Chair. SOA Session 51 VM-31: PBR Actuarial Report- Which ASOPs Matter May 9, 2017 7

Biographies- Kevin Piotrowski Kevin Piotrowski, FSA, CERA, MAAA Manager, Insurance and Actuarial Advisory Services, Ernst & Young LLP Mr. Piotrowski is a Manager in the Insurance and Actuarial Advisory Services practice of Ernst & Young LLP s Financial Services Office. He is based in New York and has 7+ years of consulting experience. He serves as an advisor to large insurance companies and is focused on Financial Reporting. Kevin previously worked for Willis Towers Watson in a similar role. Throughout his career, Kevin has focused his time on various aspects of insurance including assumption setting, valuation, reinsurance reporting and capital management. Additionally he has been involved in large scale model validation projects as well as Actuarial Transformation. Recently, Mr. Piotrowski has focused his efforts on Principles Based Reserves - managing review of both AG-48 and VM-20 implementations at various companies. He has written articles around PBR implementation and is involved in the SOA s effort to provide more depth/breadth around Principles Based Reserves. Kevin is a Fellow of the Society of Actuaries (FSA), a Chartered Enterprise Risk Analyst (CERA) and a Member of the American Academy of Actuaries (MAAA) 8

Agenda General Overview VM-G VM-50/51 PBR blanks VM-31 Which ASOPS Matter?- An Interactive Discussion Resources Ask the Regulator- An Interactive Discussion Open Forum for Additional Questions 9

VM-G VM-G, the governance section of the NAIC Valuation Manual, contains specific roles for three distinct groups of people: Qualified Actuary (oversight of calculations) Board of Directors (oversight of the process) VM-G Senior Management (oversight of valuation and controls) 10

VM-50/51 VM 50 defines the requirement pursuant to section 13 of the NAIC Standard Valuation Law for submission and analysis of insurer data: A Company shall submit mortality, morbidity, policyholder behavior, or expense experience and other data as prescribed in the valuation manual Company experience requirements Roles/Responsibilities Data quality for Insurers and Statistical Agents Reports available from Statistical Agents VM-51 Experience reporting format 11

PBR Supplement and Blanks Part 1 Focus is on PBR reporting Prior year and current year reserves - and inforce statistics Sections A, B and C based on which reserves are calculated for which products Part 2 (section 1) Three year transition period Prior year and current year reserves (gross/net) and inforce statistics Part 2 (section 2) Small company exemption How the small company exemption was obtained 12

VM-31 Establishment of minimum reporting requirements for policies subject to Standard Valuation Law 3.C.2 Product grouping 3.C.3 & 4 Annual Statement 3.C.5 3.C.6 3.C.7 3.C.8 3.C.9 3.C.10 Section 3C (Overview) Risk Data, assumptions, methodology Assumptions Asset Risk management Materiality limit Section 3D (Details) 3.D.1 Assumptions 3.D.2 Cash flow model 3.D.3 Mortality assumptions 3.D.4 Policyholder behaviour 3.D.5 Expense 3.D.6 Asset 3.D.7 Revenue-sharing (Par?) 3.D.8 Reinsurance 3.D.9 Non-guaranteed element 3.D.10 Deterministic / Stochastic Exclusion Test 3.D.11 Others 3.D.12 Certifications 13

Table of Contents Introduction Outline of VM-31 Report Required Elements Parts 1 and 2 of Reserve Supplement Description of Material Risks and Reliances Valuation Assumptions and Margins Assets, Hedging PBR Life Report PBR Actuarial Report Requirements for VA Contracts 14

From Front to Back of VM-31 http://www.naic.org/documents/cmte_a_latf_related_val_adopted_160829_with_changes.pdf Section 2: General Requirements A.... The PBR Actuarial Report must include documentation and disclosure sufficient for another actuary qualified in the same practice area to evaluate the work. Compare this to Section 3.2 of ASOP 41 in slide 11. B. The PBR Actuarial Report must include descriptions of all material decisions made and information used by the company in complying with the minimum reserve requirements and must comply with the minimum documentation and reporting requirements set forth in Section 3. Compare this to Section 4.1 of ASOP 2 communication with regard to Nonguaranteed elements. D. The company shall retain on file, for at least seven years from the date of filing, sufficient documentation so that it will be possible to determine the procedures followed, the analyses performed, the bases for assumptions and the results obtained in a principle-based valuation. 15

VM31 PBR Actuarial Report Which ASOPs Matter?! 16

Code of Conduct 17

Code of Professional Conduct Link: https://www.actuary.org/files/code_of_conduct.8_1.pdf An Actuary must be familiar with and keep current with, not only the Code, but also applicable Law and rules of Professional Conduct for the jurisdiction in which the Actuary renders Actuarial Services. Where requirements of Law conflict with the Code, the requirements of Law shall take precedence : so revised SVL and Valuation Manual take precedence! Precept 3: ANNOTATION 3-1. It is the professional responsibility of an Actuary to observe applicable standards of practice that have been promulgated by a Recognized Actuarial Organization for the jurisdictions in which the Actuary renders Actuarial Services, and to keep current regarding changes in these standards. ANNOTATION 3-2. Where a question arises with regard to the applicability of a standard of practice, or where no applicable standard exists, an Actuary shall utilize professional judgment, taking into account generally accepted actuarial principles and practices. ANNOTATION 3-3. When an Actuary uses procedures that depart materially from those set forth in an applicable standard of practice, the Actuary must be prepared to justify the use of such procedures. 18

Actuarial Standard of Practice 1 19

Actuarial Standard of Practice 1 Always start at the beginning Introductory ASOP Defines: Must - no reasonable alternative to practice mentioned: failure to follow guidance= Deviation from Accepted Practice Discipline Should - normally appropriate practice : failure to follow is a deviation MUST be documented and explained May - what would be considered reasonable and appropriate in many circumstances : Actuary can use their judgment if decide to vary VM-31 Section 2. General Requirements: B. The PBR Actuarial Report must include descriptions of all material decisions made The word material appears 13 times in VM-31 20

Actuarial Standard of Practice 23 21

Actuarial Standard of Practice 23 Data Quality Applies to any actuary using data clearly when preparing/reviewing PBR Report ASOP recently revised: Defines appropriate data as data suitable for intended purpose. Requires disclosure if regulation/ other circumstances require use of unsuitable data Data now defined to include data mathematically derived from other data Actuarial Services provided on or after July 1, 2017 that create data relied on or used by others MUST apply data quality ASOP 23 as if they were the end users! Requires actuaries using data to document limitations and impact of uncertainty or bias in data on actuarial work product Qualified Actuary charged with verifying appropriateness of assumptions has responsibility of determining if underlying data on which these are based are appropriate as well Strengthens ASOPs 21, 22 comments that AA, auditors/examiners are end users of data VM requires uncertainty reflected in larger margins and NOT in assumptions themselves SOA Session 51 2017 AA Dicke LLC and Mangini Actuarial and Risk Advisory LLC May 9, 2017 22

Actuarial Standard of Practice 41 23

Actuarial Standard of Practice 41 Actuarial Communications Key Changes in 2010 from previous ASOP 41 relevant to PBR: Section 3.2 In the actuarial report, Actuary should state actuarial findings and identify methods, procedures, assumptions, and data used by Actuary with sufficient clarity that another actuary qualified in the same practice area could make an objective appraisal of the reasonableness of the actuary s work as presented in the actuarial report. Section 3.4.4: Actuary is responsible for all actuarial assumptions and methods utilized in producing actuarial communication, unless the actuary discloses otherwise If Management or Board dictates an assumption then Qualified Actuary must disclose who set assumption and if they agree/disagree Section 3.7 Responsibility to Other Users Section 4.2 Certain Assumptions or Methods Prescribed by Law ASOP 41 applies to ALL actuaries and to all communications (including oral) so actuaries other than the Qualified Actuary should take note of the requirements 24

Actuarial Standard of Practice 41 Required Disclosures include but are not limited to: Names of those responsible for material assumptions and methods Any Conflicts of Interest Material Differences from previous actuarial findings SOA Session 51 2017 AA Dicke LLC and Mangini Actuarial and Risk Advisory LLC May 9, 2017 25

Exposed Actuarial Standards of Practice 26

Ask the Regulator 27

Resources 28

VM-20 Practice Note Exposure Draft* http://actuary.org/files/vm-20_practice_note_exposure_draft_2-24-14.pdf Q2.1: Which Actuarial Standards of Practice (ASOPs) would apply to the actuary when performing tasks in conjunction with determining VM-20? * Thanks to Cande Olson, member of ASB, for this reference 29

Actuarial Standard of Practice No. XX Principle-Based Reserves for Life Products Technically Pending Draft [June 2015] ASB approved so will become effective with 12/31/2017 reporting Still being updated to match ongoing revisions to Valuation Manual Section 3. Analysis of Issues and Recommended Practices Section 3.7 Documentation Actuary should create records and other appropriate documentation supporting valuation Actuary should include rationale for all significant decisions made and information used by Insurer in complying with the minimum reserve requirements. 30

ASB Website The Actuarial Standards Board has tools you can use ASB home page- news in chronological order Current Applicability Guidelines- type this and file will download http://www.actuary.org/files/applicability_guidelines.xls 31

March/April 2017 Contingencies Article PBR: Who, What, and How?- Pages 38-45 http://www.contingenciesonline.com/contingenciesonline/march_april_2017?lm=1488349305000&pg=40#pg40 Observations made by authors Arnold Dicke and Leonard Mangini NOT official position of Academy of Actuaries or SOA NOT guidance- complying with Code and ASOPs is your job! Discusses: Role of Qualified Actuary and to whom they may owe responsibility Potentially Relevant ASOPs Helpful Guidance Notes and Academy and NAIC Resources SOA Session 51 2017 AA Dicke LLC and Mangini Actuarial and Risk Advisory LLC May 9, 2017 32

Leonard Mangini, FSA, FRM, FALU, MAAA President, Mangini Actuarial and Risk Advisory LLC leonard@manginiactuarial.com (516) 418-2549 Kerry Krantz, FSA, MAAA Life & Health Actuary, Florida Office of Insurance Regulation kerry.krantz@floir.com (850) 413-5038 Kevin Piotrowski, FSA, CERA, MAAA Manager, Ernst & Young LLP Kevin.Piotrowski@ey.com (212) 773-1509 33