Session 10, Statutory Life and Annuity Valuation Issues. Moderator: Donna R Claire FSA, CERA, MAAA

Session 10, Statutory Life and Annuity Valuation Issues Moderator: Donna R Claire FSA, CERA, MAAA Presenters: Thomas A Campbell FSA, CERA, MAAA David E Neve FSA, CERA, MAAA

2015 Valuation Actuary Symposium 10 PD Statutory Life and Annuity Valuation Issues Donna R. Claire, MAAA, FSA, CERA David E. Neve, MAAA, FSA, CERA Thomas A. Campbell, MAAA, FSA, CERA Copyright 2015 by the American of Actuaries. Rights Reserved. Copyright 2015 by the American AcademyAcademy of Actuaries. All RightsAllReserved. 1

Life and Annuity Valuation Issues Statutory Reserves Risk-Based Capital and Solvency Actuarial Practice Issues Appointed Actuary and Opinion Topics Copyright 2015 by the American Academy of Actuaries. All Rights Reserved. 2

State of PBA Adoption Valuation Manual (VM) becomes operative on Jan.1 following: Standard Valuation Law (SVL) legislative enactment by at least 42 of the 55 jurisdictions and, SVL legislative enactment by states representing greater than 75% of direct premiums written as reported in 2008 annual statements Adoptions so far (as of 7/16/15): 34 states 55.7% of premiums Plan to adopt later 2015 or in 2016: 13 states 31.7% of premiums January 1, 2017 looks like the date!!!!!!! Copyright 2015 by the American Academy of Actuaries. All Rights Reserved. 4

PBR Implementation Plan NAIC Principle-based Reserve (PBR) Implementation Task Force Coordinate PBR initiatives with all NAIC technical groups, including Life Actuarial Task Force (LATF) and the Life Risk- Based Capital Working Group PBR Implementation Plan provides framework for implementation, questions and documentation of decisions made NAIC PBR Review Working Group PBR Blanks Reporting Subgroup PBR Review Procedures NAIC Resource Statistical Agent Framework PBR Company Outreach NAIC Valuation Analysis Working Group www.naic.org/committees_ex_pbr_imp_rev_wg.htm Copyright 2015 by the American Academy of Actuaries. All Rights Reserved. 5

Company Preparedness for PBR SOA survey on company preparedness (June 2014) 38 companies Focus was on mortality assumption The NAIC plans to conduct a survey on company preparedness late summer of 2015 Will cover governance process, development of assumptions, documentation of reserve calculations Goals: Help build the regulatory review process Document how companies plan to implement PBR Copyright 2015 by the American Academy of Actuaries. All Rights Reserved. 6

VM-20 Status: PBR for Life Products Modifications to VM-20 adopted by LATF this past year Small company exclusion Cash flow testing assumptions and models can be used for the stochastic exclusion test (SET) The SET pass ratio was increased from 4.5% to 6% Commercial Loan risk factors for prescribed default assumption Exposed Modifications Treatment of yearly renewable term (YRT) reinsurance in SET Use of 2015 Valuation Basic Table (VBT) and 2017 Commissioners Standard Ordinary (CSO) mortality tables Requirements for mortality credibility and prescribed mortality margins Outstanding issues Simplified treatment of pre-tax interest maintenance reserve (IMR) Aggregate Margin (to replace individual margins) Simplified mortality assumption calculation www.naic.org/documents/committees_a_latf_related_valuation_manual.pdf Copyright 2015 by the American Academy of Actuaries. All Rights Reserved. 7

VM-20 Reporting and Governance Requirements Reporting Requirements VM-31 reporting requirements for PBR calculations (also applies to Variable Annuities) Changes to Annual Statement Blank summary of proposed changes has been exposed for comment VM-20 Annual Statement Supplement - summary exposed for comment. Governance Requirements Appendix G of the Valuation Manual provides guidance on internal controls, validation of models, and review of model inputs and results. Also provides guidance regarding the specific responsibilities of the Board, Senior Management, the Appointed Actuary, and Qualified Actuaries involved in the calculation of PBR reserves Will become effective for all PBR reserve calculations when VM becomes effective (likely to be 1/1/17). Also applies to Variable Annuities www.naic.org/documents/committees_a_latf_related_valuation_manual.pdf www.naic.org/documents/committees_ex_pbr_imp_rev_wg_exposure_pbr_blanks_instructions.pdf www.naic.org/documents/committees_ex_pbr_imp_rev_wg_exposure_summary_of_changes.pdf Copyright 2015 by the American Academy of Actuaries. All Rights Reserved. 8

Actuarial Guideline 38 / Emerging Actuarial Issues Working Group Provides guidance for companies subject to AG38 Over 40 interpretations have been issued Interpretations issued this past year: Treatment of the VM-20 limit on asset returns De-linking of asset and liability models Reinsurance ceded reserve credit for YRT reinsurance Treatment of assets for assumed and ceded business Exposed interpretations: Section 8E ratio Treatment of IMR in Net Asset Earned Rates if the proposal to simplify pre-tax IMR in VM-20 is adopted www.naic.org/committees_e_emerging_actuarial_issues_wg.htm Copyright 2015 by the American Academy of Actuaries. All Rights Reserved. 9

PBA for Variable Annuities NAIC C-3 Phase II/AG 43 Subgroup Charges Evaluate the overall effectiveness of the methodology by conducting an in-depth analysis Make recommendations to LATF / Capital Adequacy TF Recent discussions Academy comment letters Link to PBR Implementation State of Ohio initiative Incorporated into NAIC VA Issues Working Group www.naic.org/committees_e_va_issues_wg.htm Copyright 2015 by the American Academy of Actuaries. All Rights Reserved. 10

Other VA and CDA Reserve Issues LATF Contingent Deferred Annuity (CDA) Subgroup Academy CDA Work Group Treatment under AG 43 (and C-3 Phase II) Exhibit 5 Interrogatories CDAs aren t in the scope of the Synthetic Guaranteed Income Contracts Model Regulation (#695) Academy Deposit Fund Subgroup June 15 report proposed changes to the Model clarifying this position www.naic.org/committees_a_latf_cdasg.htm www.actuary.org/category/site-section/public-policy/life/reports-to-naic Copyright 2015 by the American Academy of Actuaries. All Rights Reserved. 11

VM-22 Status: PBR for Non-Variable Annuities LATF VM-22 Subgroup Goal is to get VM-22 ready for operative date of the VM Possible approaches for Modeled Reserve Replicating VM-20 Using the Representative Scenario Method (RSM) Modernizing current formulas (e.g., AG 33 and 35) Academy Annuity Reserve Work Group (ARWG) Reviewing results of Kansas Field Test to develop recommendation for use of RSM for Modeled Reserve component Developed pros/cons paper (June 23) for RSM Looking at aggregate margin approaches for Modeled Reserve Making progress on Floor Reserve component www.actuary.org/files/arwg_rsm_report_latfvm22_062315.pdf Copyright 2015 by the American Academy of Actuaries. All Rights Reserved. 12

VM-22 Status: PBR for Non-Variable Annuities Representative Scenario Method used in the KS Field Test Identify key risk drivers (KRD) Determine distribution of assumptions values and generate scenarios for each of the KRD Combine results for each scenario using probability weights Add margins, presumably using an aggregate margin approach ARWG Floor Reserve = max (FR1, FR2 and FR3) FR1 uses AG33 and 35, ignoring impact of Listed Benefits FR2 reflects election of Listed Benefits, using defined utilization rates FR3 is the cash surrender value floor Copyright 2015 by the American Academy of Actuaries. All Rights Reserved. 13

Actuarial Guideline 33 Non-Elective Benefits Interaction of benefits under AG 33 could create issues For example, contingent waiver of surrender charges (waiver of SC) combined with a guaranteed lifetime income benefit (GLIB) Waiver of SC defined by AG 33 as a non-elective benefit If projected account value = 0, it doesn t make sense to assume policyholders elect when guaranteed payments remain Potential solutions Use incidence rates of 0 at end of SC period or when projected AV=0 Use incidence rate of 0 if any richer benefit available Refined incidence rates (qualifying vs. electing) Simplify ignore waiver of SC for contracts with GLIBs www.naic.org/committees_a_latf.htm Copyright 2015 by the American Academy of Actuaries. All Rights Reserved. 14

Payout Annuity Mortality Table The 2012 Individual Annuity Reserve (IAR) Table is effective when states adopt it Replaces a2000 Table Adopted by more than 26 states, so it is the tax basis Applies to Variable Annuity payouts Generational mortality table, so may require programming changes Can/should be used for asset adequacy testing New York requires a sensitivity test since 2013 Reserves are expected to increase using the 2012 IAR table Copyright 2015 by the American Academy of Actuaries. All Rights Reserved. 15

Life Mortality 2015 VBT and 2017 CSO being finalized Developed for use with PBR Can be used for asset adequacy testing for 2015 Underwriting Relative Risk (RR) tables also being developed Some comments: Overall mortality better, but smoker mortality worse Select periods vary by age www.soa.org/files/research/projects/2017-cso-impact.pdf Copyright 2015 by the American Academy of Actuaries. All Rights Reserved. 16

Experience Reporting Requirements New York/Kansas Departments are currently collecting mortality and lapse data Company data is confidential; aggregate data can be used for experience studies Being used in financial examinations More expansion in the future, e.g., to premium patterns Project will expand to be basis for the NAIC Statistical Agent process for PBR Expected to be expanded to cover Long-Term Care experience reporting requirements Copyright 2015 by the American Academy of Actuaries. All Rights Reserved. 17

Captives Under AG 48 The NAIC PBR Implementation Task Force hired Rector & Associates to develop a recommendations on the use of captives for AXXX/XXX reserve financing Recommendations adopted by the NAIC late in December of 2014 Goal: to increase disclosure and create greater uniformity between states. The new requirements will apply to new captives formed after 1/1/15 and new blocks of business added to existing captives after 1/1/15. Existing captives are grandfathered In effect, defines the Economic Reserve to be a modified VM-20 reserve Impact on RBC requirements: RBC penalty for non-compliance RBC shortfall C1 charge on non-traditional assets Companies are still utilizing AXXX/XXX captives under the new rules www.naic.org/documents/committees_ex_pbr_implementati on_tf_related_actuarial_guideline_ag48.pdf Copyright 2015 by the American Academy of Actuaries. All Rights Reserved. 18

VA Captives The NAIC has formed a Variable Annuities Issues Working Group, chaired by Nick Gerhart of Iowa). Charge: Oversee the NAIC s efforts to study and address, as appropriate, regulatory issues resulting in variable annuity captive reinsurance transactions Little activity to date First public call was held on August 7 Oliver Wyman has been hired to research issues related to VA captives Expect initial report from OW in early September. Public meeting of the VA WG will be held in Chicago on September 10 to discuss the results of the OW report www.naic.org/committees_e_va_issues_wg.htm Copyright 2015 by the American Academy of Actuaries. All Rights Reserved. 19

C-3 Phase I Changes 2014 C-3 Phase 1 informational filing requirement 34 companies less than expected More analysis of results are needed Informational requirement for 2015 was not renewed Some members of NAIC Life RBC WG want to move forward with a proposal to update C3P1 Academy C3WG recommends VM-20 economic scenario generator or company scenarios meeting calibration criteria Treatment of Indexed Annuities still an open issue Add to revised C3P1 or add to C3P2? www.naic.org/committees_e_capad_lrbc.htm Copyright 2015 by the American Academy of Actuaries. All Rights Reserved. 21

AVR Treatment in RBC In 2014, the NAIC Life RBC WG updated the treatment of the Asset Valuation Reserve (AVR) Total Adjusted Capital (TAC) should exclude any AVR used to establish adequacy reserves Clarified AVR treatment for C3P1 and C3P2 Don t include existing AVR assets in C3P1 or C3P2 modeling, unless excluded from TAC as required above Did RBC Instruction correctly extend this treatment to C3P1? In December 2014, NAIC Life RBC WG clarified that the instructions do require this treatment for both C3P1 and C3P2 Copyright 2015 by the American Academy of Actuaries. All Rights Reserved. 22

RBC for Operational Risk NAIC Operational Risk (E) Subgroup Recommending a new C-5 RBC charge NAIC has approved a 2015 field test for 2015 RBC filing Life company charges are a bit different than health or P&C companies No decision yet on credit for the current C-4 component covering operational risk Additional analysis expected in 2015 and 2016 before final factors and methodologies are considered www.naic.org/documents/committees_e_capad_op_risk_sg_ex posure_oper_risk_factor_proposal.pdf Copyright 2015 by the American Academy of Actuaries. All Rights Reserved. 23

RBC C-1 Factors Corporate Bonds Work continues on possible changes to C-1 bond factors: Higher C-1 factors reflecting updated assumptions Increasing the number of bond classes from 6 to 14 Applies to all bonds (including privates, munis and sovereigns) Nothing is final yet; earliest effective date is 12/31/2016 Expect the proposal to be exposed for comment at August NAIC meeting Under current proposal, most companies will likely see an increase in their C1 bond charges If the NAIC adopts the 14 factors, many parts of the NAIC reporting process will need to change, extending the implementation timeline. Copyright 2015 by the American Academy of Actuaries. All Rights Reserved. 24

RBC C-1 Factors Other Assets Proposal to lower Investment Real Estate charge from 15% to 8.5% Unaffiliated common stock - decision made by IRBC to continue current 30% factor with the same Beta adjustment (not adopted yet) Changes to derivatives under consideration to reflect changes to trading activity and margin requirements under Dodd Frank Act Structured securities (i.e., Residential Mortgage-backed Securities (RMBS), Commercal Mortgage-backed Securities (CMBS)) procedures implemented in 2009-10 will be reviewed for consistency Commercial Mortgages updated in 2013, but the modeling will be reviewed for consistency with the C-1 corporate bond review Schedule BA Assets* under review * Other Long-Term Invested Assets Copyright 2015 by the American Academy of Actuaries. All Rights Reserved. 25

Own Risk and Solvency Assessment ORSA is an internal process to assess the adequacy of its risk management and solvency positions under normal and severe stress scenarios. An ORSA will require insurers to analyze all reasonably foreseeable and relevant material risks (i.e., underwriting, credit, market, operational, liquidity risks, etc.) that could have an impact on an insurer s ability to meet its policyholder obligations. (NAIC/Center for Insurance Policy and Research (CIPR)) NAIC just released results of 2014 pilot study; 31 states have adopted ORSA Model Act, 6 have it under consideration. Required by NAIC 1/1/15 if company has more than $500 million in premiums, or insurer group has more than $1 billion; many states are asking companies for their ORSA on examination, no matter what size www.naic.org/committees_e_orsa_wg.htm www.naic.org/documents/committees_e_isftf_group_solvency_related_orsa_feedback_pilot_project.pdf Copyright 2015 by the American Academy of Actuaries. All Rights Reserved. 26

Stress Testing NAIC Subgroup formed by Life RBC WG Evaluate RBC in light of PBR Consider a total balance sheet approach Delays due to Life RBC WG work on treatment of life captives and change in WG leadership Subgroup exposed draft RBC instructions for a possible field test Stress testing methodology for RBC, using Representative Scenario Method Based on approach being considered for VM-22 Use instructions for a field test, as early as 2016 Many concerns raised about this direction; future direction unclear at this point www.naic.org/committees_e_capad_lrbc_stress_sg.htm Copyright 2015 by the American Academy of Actuaries. All Rights Reserved. 27

Actuarial Standards Board Activities ASOP Exposure Drafts Final revisions being made to Principle-Based Reserve ASOP Second exposure on Modeling ASOP Discussion draft on Capital Adequacy Assessment for Insurers Possible updates ASOP No. 21, Responding to or Assisting Auditors or Examiners in Connection with Financial Statements for All Practice Areas ASOP No. 23, Data Quality Proposal for Life Insurance and Annuity Pricing ASOP Updates to the website www.actuarialstandardsboard.org Copyright 2015 by the American Academy of Actuaries. All Rights Reserved. 29

Life Practice Notes VM-20 Addresses requirements for calculating minimum valuation statutory reserves for life insurance products under VM-20 Exposure Draft (Feb 2014) is on Academy site Asset Adequacy Analysis Update to the PN that was completed in 2004 Based on survey of companies (190 responded) Exposure Draft (August 2014) is on Academy site www.actuary.org/category/site-section/public-policy/life/practice-notes Copyright 2015 by the American Academy of Actuaries. All Rights Reserved. 30

Qualifications/Certification Academy is in the process of developing an on-line attestation for compliance of the requirements for signing Annual Statements http://www.actuary.org/content/invitation-comment-academy s-draftattestation TRACE can be used to track your CE https://www.mytrace.org/cpd/update_cpd_info_e.cfm There is e-learning available on the Code of Professional Conduct http://www.actuary.org/content/actuarial-elearning-center Library of Professionalism webinars can be found on the Academy website. There is a greatly expanded and recently revised FAQs on Qualification Standards which can also be found on the Academy website. Updates to Applicability Guidelines Copyright 2015 by the American Academy of Actuaries. All Rights Reserved. 31

Streamlining Actuarial Reporting NAIC Project Single submission of up to 19 standalone reports Improving communication of information by avoiding repetition of data and facilitating data capture Summary-Level Reports and electronic links Involves 10 companies and 7 states Two Phases Phase 1 review reports and design Template Phase 2 field test and modify the Template Recommendation to LATF in 2016 Copyright 2015 by the American Academy of Actuaries. All Rights Reserved. 33

Life & Health Valuation Law Manual Gives summary of each state s valuation requirements Provides one-source reference for applicable actuarial guidelines and NAIC model regulations www.actuary.org/content/2015-life-health-valuation-law-manual Copyright 2015 by the American Academy of Actuaries. All Rights Reserved. 34

Indexed UL Illustrations New Guideline (AG49) was adopted in June 2015 Provides uniform guidance for illustrations on Indexed UL policies: Limits the illustrated crediting rate earned interest rate shown in an illustration Limits the policy loan (PL) leverage shown in an illustration Requires additional consumer information in the illustration Is the outcome of a compromise from intense discussions within the industry Effective Dates Limits on crediting rate and earned rate: new business sold on 9/1/15 and later Add l disclosure and limits on PL leverage: new business sold 3/1/15 and later Possible Future Developments Further refinements to AG49 Expanding scope to non-iul products Changes to UL Model Regulation http://www.naic.org/documents/committees_a_150513_draft_actuarial_guideline.pdf Copyright 2015 by the American Academy of Actuaries. All Rights Reserved. 35

Generally Recognized Expense Table (GRET) SOA survey found GRET is used by 31% of companies participating in the survey on at least some of their products LATF exposed the 2015 Table at the August 2014 NAIC meeting Major changes from prior years Approved late in 2014 Expect vote to expose 2016 table at August 2015 NAIC meeting. www.naic.org/documents/committees_a_latf_exposures_gret_2015.pdf Copyright 2015 by the American Academy of Actuaries. All Rights Reserved. 36

State Requirements/Differences Need to follow state requirements; some states will accept state of domicile Can file separate opinions/memoranda in separate states (state of domicile filed with NAIC) California and New York have holiday letters Alaska also has specific requirements to file UL with secondary guarantee memo In 2014 Kansas requested certain Universal Life with Secondary Guarantees (ULSG) information Copyright 2015 by the American Academy of Actuaries. All Rights Reserved. 37

NY Special Considerations Letter Reminder on ULSG reserve requirements In 2013, asset adequacy testing requirements replaced sensitivity tests Required maximums on asset spreads Specified assumptions regarding lapses Required stand-alone testing for long term care (LTC), long term disability (LTD) insurance, health insurance, life insurance, and annuities. Look for www.dfs.ny.gov/insurance/life/reserve/spec_con_2015.pdf later this year Copyright 2015 by the American Academy of Actuaries. All Rights Reserved. 38

American Academy of Actuaries Life & Health Qualifications Seminar Requirements to sign statutory opinions Applicable economic, regulatory, and legal environments The identification, evaluation and management of risk Basic Education requirements Under SOA 2000-2006 syllabus, must pass this course in order to be qualified as having basic education to sign Annual Statements For latest SOA syllabus, depends on track Is a good overview of appointed actuary work www.actuary.org/content/2015-life-and-health-qualifications-seminar Copyright 2015 by the American Academy of Actuaries. All Rights Reserved. 39