Session 127 PD, Life and Annuity In-Force Management Moderator: David J. Weinsier, FSA, MAAA Presenters: Jennifer L. McGinnis, FSA, CERA, MAAA Brock E. Robbins, FSA, FCIA, MAAA David J. Weinsier, FSA, MAAA
Life and Annuity In Force Management 2015 SOA Annual Meeting Session 127 PD Jennie McGinnis, FSA, MAAA, CERA Jennifer_McGinnis@SwissRe.com
In Force Options Management Who has options? Policyholde rs Insurance companies Reinsurance companies What options are available? Contractual Non-contractual 2015 SOA Annual Meeting Session 127 J. McGinnis 2
Creation of Swiss Re s Liability Management Team Strong commitment from top leaders Recognizes the importance of new business and in force management Key prioritie s Better understand the performance of our business Proactively manage our in force business to improve our financial pe rformance and create new opportunities with our clients Recruited staff to improve the quality of our data, models and assumptions 2015 SOA Annual Meeting Session 127 J. McGinnis 3
In Force Management Liability Manage me nt Capital Management As se t Management PLT YRT CORE 2015 SOA Annual Meeting Session 127 J. McGinnis 4
Post Level Term (PLT) Management The 2013 SOA survey shows only a few companies vary assumptions by the primary driver premium jump ratio Swiss Re s experience, affirmed by the SOA survey Actively managing PLT business since 2010, supporting more than 50 imple me ntations At least 25 companies have implemented a PLT management program Programs exist to address in force, new business, or both The number of companies interested in evaluating their options is growing Conside rations for imple me ntation Cross functional te ams Re source allocation Communication 2015 SOA Annual Meeting Session 127 J. McGinnis 5
Performance Management Monitor Data & Adminis tration Mode ls & Trends Investigate Contractual Te rms Action 2015 SOA Annual Meeting Session 127 J. McGinnis 6
Examples of CORE activities Consolidating historical financial re ports Ensuring appropriate administration Responding to recapture requests Managing non-guaranteed elements Testing long term assumptions Exploring bi-lateral liability portfolio management with our clients 2015 SOA Annual Meeting Session 127 J. McGinnis 7
Legal notice 2015 Swiss Re. All rights reserved. You are not permitted to create any modifications or derivative works of this presentation or to use it for commercial or other public purposes without the prior written permission of Swiss Re. The information and opinions contained in the presentation are provided as at the date of the presentation and are subject to change without notice. Although the information used was taken from reliable sources, Swiss Re does not accept any responsibility for the accuracy or comprehensiveness of the details given. All liability for the accuracy and completeness thereof or for any damage or loss resulting from the use of the information contained in this presentation is expressly excluded. Under no circumstances shall Swiss Re or its Group companies be liable for any financial or consequential loss relating to this presentation. 2015 SOA Annual Meeting Session 127 J. McGinnis 8
Life and Annuity Inforce Management October 13, 2015 David J. Weinsier, FSA, MAAA Session 127 PD 2015 SOA Annual Meeting Oliver Wyman
What is Inforce Management? I. Commercial levers Customer base leverage Retention and extension Contract terms optimization II. Operational levers Cost optimization Cost variabilization Claims management III. Financial levers ALM and investment strategy Risk transfer IV. Spin-off / run-off / exit Internal separation Transaction Risk margin optimization Accounting restructuring Oliver Wyman 1
The traditional approach to ULSG policyholder behavior modeling can result in a misaligned picture of the performance and risks of the business The traditional approach assumes a single premium pattern and voluntary surrender rates that do not vary by funding cohort Underestimates SG risks Inadvertent drifts in mix of business Poor model fit Shortcomings of traditional approach No reflection of dynamic policyholder behavior Based on an SOA study 1, only 50% of companies reflect multiple premium patterns in their inforce models 1 Report on Premium Persistency Assumptions Study of Flexible Premium Universal Life Products Oliver Wyman 2
Benchmarking the range of current practices for ULSG inforce modeling Traditional Practice Single premium pattern Surrender assumption does not vary by premium pattern or fundedness Dynamic formula based only on in-the-moneyness Emerging practice 3-5 premium patterns modeled Surrender and premium suspension assumptions based on refined experience studies and vary by premium cohort Dynamic adjustment for inthe-money policies and imminent lapsers Best Practice Premium buckets defined by both fundedness and premium pattern (typically 5+ buckets) Policyholder behavior assumptions reflect additional predictive modeling factors Bifurcate fund lapses into shock lapse and catch-up premium (with antiselection) Cease future premiums if policy reaches paid-up status Oliver Wyman 3
A refined experience study will reveal behavior differences across a set of funding cohorts Illustrative example 2% Single premium 4% Level pay Aggregate Assumption 3.25% 1% 0% Min pay Imminent lapser An aggregate surrender assumption will force the model to lapse off less profitable cohorts faster than experience suggests Elimination of the subsidization impact of applying an aggregate surrender assumption across funding cohorts will result in a more reliable risk/return profile Oliver Wyman 4
Model validation, analytics, and dashboards form the building blocks for making strategic decisions through informed management actions Dashboards Management Information Management-level presentation of results and Key Performance Indicators (KPIs) that explain business drivers and variances Meaningful Investigations Actuarial Analytics Reports and metrics used to explain results and confirm their reasonableness Model Integrity Model Validation High quality models with robust change control and documentation Oliver Wyman 5
A robust model validation exercise ( gap analysis ) can consist of five major elements 1 Planning 2 Model Methodology 3 Model Outputs Model Governance and Controls 4 5 Documentation Gain an understanding of the model Establish goals Develop model validation roadmap Ensure effective challenge Model architecture Plan mapping Model point construction Product features Assumptions Outside-the-model adjustments Static validation Dynamic validation Trend analysis Parallel testing Sample policy audit Secure model structure Data input and adjustment approvals Change management Cross-functional coordination Model validation report Gap tracker Summary of model history Enhanced model documentation Recommendations for remediation Model validation helps gives comfort that models and resulting outputs can be relied upon to support inforce management decisions Oliver Wyman 6
Model remediation Insurers are forced to balance the benefits of model refinement against several obstacles 1 2 3 4 Data availability and credibility Model run time Resources/ model maintenance Software limitations/ coding complexity Oliver Wyman 7
SOA 2015 Annual Meeting & Exhibit Session 127 PD: Life and Annuity Inforce Management Brock Robbins, FSA, MAAA October 13, 2015
Inforce Management Longevity Risk Transfer Impacts/Supports All of the Financial Levers ALM and investment strategy Risk transfer Risk margin optimization Accounting restructuring Portfolio Risk-Return Profile optimization under Solvency II and Other Economically-Based Accounting Regimes Diversification impacts mix of life, annuity, LTC Risk margin optimization Accounting restructuring 2
Longevity Risk from a Direct Writer Perspective Risk annuitant mortality better than expected causing Slow bleed to earnings and/or Potential shock to Balance Sheet if unlock valuation assumptions Rising Issues Mortality improvement at older ages accelerating New improvement scales for Annuities published in 2012 Scale G2 replaces Scale G New improvement scales for pensions published in 2014 Adopting 2 dimensional approach practiced in Europe Canada: CPM-B replaces age based Scale AA U.S.: model MP-20141 will replace Scale AA and interim Scale BB 3
Pros and Cons of Managing Longevity Risk Pros Lack of Expertise Longevity Risk is longdated Cons No NAIC RBC C2 Requirements (U.S.) Low exposure Act as mortality hedge 4
Longevity Risk Management Approaches Self-Insure Buy-Out / sale Buy-In / Coinsurance Immediate Deferred income Longevity Swap / Longevity Reinsurance Capital Markets 5
Male Mortality Improvement History versus Pricing 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% G AA Canada (CANSIM 01-10) US (HMD 98-07) 0.5% 0.0% 65 70 75 80 85 90 Population mortality improvement for males 65+ significantly higher than the G and AA scales 6
Male Mortality Improvement Annuity Pricing 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% G G2 Canada (CANSIM 01-10) US (HMD 98-07) 0.5% 0.0% 65 70 75 80 85 90 Population mortality improvement for males 65+ significantly higher than the G and G2 scales 7
Male Mortality Improvement Pension Valuation (Canada) 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 65 70 75 80 85 90 AA CPM-B (C/QPP 2007) CPM-B (2014) CPM-B (2027+) Canada (CANSIM 01-10) Canada male mortality improvement higher than the US Significantly higher than the AA scale, and the CPM-B ultimate scale 8
Male Mortality Improvement Pension Valuation (U.S.) 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% AA MP-2014 (SSA 2007) MP-2014 (2014) MP-2014 (2030+) US (HMD 98-07) 0.0% 65 70 75 80 85 90 Male population mortality improvement higher than the AA scale at age 65+ Reflected in the MP-2014 scale 9
Female Mortality Improvement History versus Pricing 2.5% 2.0% 1.5% 1.0% G-50% AA Canada (CANSIM 01-10) US (HMD 98-07) 0.5% 0.0% 65 70 75 80 85 90 Population mortality improvement for females 65+ significantly higher than G-50% and AA scales 10
Female Mortality Improvement Annuity Pricing 2.5% 2.0% 1.5% 1.0% 0.5% G-50% G2 Canada (CANSIM 01-10) US (HMD 98-07) 0.0% 65 70 75 80 85 90 Population mortality improvement for females 65+ significantly higher than G-50% and G2 scales 11
Female Mortality Improvement Pension Valuation (Canada) 2.5% 2.0% 1.5% 1.0% 0.5% AA CPM-B (C/QPP 2007) CPM-B (2014) CPM-B (2030+) Canada (CANSIM 01-10) 0.0% 65 70 75 80 85 90 Canadian female mortality improvement slightly higher than the US Significantly higher than the AA and CPM-B ultimate scales 12
Female Mortality Improvement Pension Valuation (U.S.) 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% AA MP-2014 (SSA 2007) MP-2014 (2014) MP-2014 (2027+) US (HMD 98-07) 0.0% 65 70 75 80 85 90 Female population mortality improvement higher than AA scale at age 65+ Reflected in the MP-2014 scale 13
Cost of longevity risk example Scenario: Annuity pricing basis for 2012 = generationally improved Annuity 2000 Table with periodic improvement {modified Scale G - 100% Males, 50% Females} MALE FEMALE Actual Experience: 65 75 85 65 75 85 A2000 Table w/ Scale G 100.0% 100.0% 100.0% 103.7% 104.7% 105.6% IAM2012 w/ Scale G2 104.1% 104.7% 98.8% 103.3% 105.7% 106.1% A2000 + U.S. avg (99 07) 105.3% 106.2% 106.7% 103.5% 104.3% 105.5% A2000+Canada Avg (99-07) 104.5% 104.7% 102.9% 103.0% 103.9% 102.8% 14
Recent Deal Activity Sales ($000,000) 2Q 2015 YOY % Change YTD YTD % Change Single Premium Products Buy-outs $3828.4 729.6% $4718.0 606.2% Buy-ins 0 N/A 0 N/A Total $3828.4 591.8% $4718.0 520.8% Terminal Funding $165.1 (2.1)% $330.4 2.4% Insured/Guaranteed LDI $0.8 N.A $0.8 NA Group Annuity Risk Transfer $3994.2 453.2% $5049.2 366.4% Source: LIMRA International 15
Buy-Out Sales by Quarter, Q1 2012-Q2 2015 40,000 35,000 34,582 30,000 25,000 20,000 15,000 10,000 6,940 5,000 0 238 527 657 Q1 2012 Q2 2012 Q3 2012 Q4 2012 273 573 591 Q1 2013 Q2 2013 Q3 2013 2,406 Q4 2013 207 437 886 Q1 2014 Q2 2014 Q3 2014 Q4 2014 890 Q1 2015 3,828 Q2 2015 Driven by Q4 seasonality more deals closed before EOY 2012 s sales driven by two jumbo buy-outs (GM, Verizon) Source: LIMRA International 16
Solvency II The Three Pillars Solvency II Pillar 1 Quantitative Requirements Basics for calculating technical provisions Minimum Capital Requirement Solvency Capital Requirement Investment Rules Pillar 2 Qualitative Requirements Internal Controls and Risk Management Regulatory Review and Processes Pillar 3 Market Conduct Disclosure Transparency 17
Solvency II QIS Time QIS = Quantitative Impact Study Series of Studies from the European Insurance and Occupational Pension Authority (EIOPA) to Assess Impacts of Solvency II Requirements under Different Scenarios QIS Version Year Goal QIS1 2005 Prudence of Current Technical Provisions; Test Gen I Calculations QIS2 2006 Assess Restatement of Asset/Liability Valuations QIS3 2007 Assess Changes in Valuation Approach Suggested by QIS2 QIS4 2008 Assess Carrier MCR, SCR Effects Due to Additional Valuation Refinements QIS5 2010 Evaluation of Risk-Free Rates 18
Why Should Solvency II Be Important in US? Cross-Border Ownership US insurers owned by European insurers US insurers with European operations US insurers with some risk exposure to Europe Equivalence Official Reciprocity from European Union for Carriers in Equivalent Regulatory Regimes May be factored favorably into a Solvency II-regulated market s supervisory review of a carrier at the group level US pursuing equivalence Switzerland deemed equivalent Other markets pursuing equivalence Australia* Bermuda* Brazil* Canada* Chile Hong Kong Israel Mexico Singapore South Africa USA* * Deemed equivalent for group capital purposes only, 10-year mandatory review; for Bermuda, only for reinsurers, no captives Source: EIOPA 19