07 Premium Deficiency Reserves - Hunt

7/25/2019 07 Premium Deficiency Reserves - Hunt

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Milliman USA

Deficiency ReservesDeficiency Reserves

The IdeaThe Idea

Present Value of Net PremiumsPresent Value of Net Premiums

minusminus

Present Value of Gross PremiumsPresent Value of Gross Premiums


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Milliman USA

Deficiency ReservesDeficiency Reserves

The Current RealityThe Current RealityMinimum Reserve =Minimum Reserve =

Present Value of BenefitsPresent Value of Benefits

minusminusPresent Value of Lesser of GrossPresent Value of Lesser of Gross

Premium or Net PremiumPremium or Net Premium


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Milliman USA

( )

= +++++

M

txMM

txtxtx

M

txMDef

x aaat

......

PAPAGPV

Deficiency Reserves ExpressedDeficiency Reserves ExpressedAlgebraically . . .Algebraically . . .


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Milliman USA

Comparison of DeficiencyComparison of DeficiencyReserve and Basic ReserveReserve and Basic Reserve

PatternPattern

20 Year Level Term Policy20 Year Level Term Policy

0

5

10

15

20

0 2 4 6 8 10 12 14 16 18 20

Basic Reserves Deficiency Reserves


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Milliman USA


PatternPattern

Whole Life PolicyWhole Life Policy

0

200

400600

800

1000

0 10 20 30 40 50 60



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Milliman USA


PatternPattern

Whole Life PolicyWhole Life Policy (first 10 years)(first 10 years)

0

50

100

150

0 2 4 6 8 10



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Milliman USA

Term InsuranceTerm Insurance -- XXXXXX

Deficiency Reserves =Deficiency Reserves =

Quantity AQuantity AMinusMinus

Basic ReserveBasic Reserve


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Milliman USA

Deficiency Reserve Mortality

Can be modified by:

80 CSO 10-Year select factors

XXX select factors

X% of the XXX select factors Any other table of select

factors adopted by the NAIC


10/19

Milliman USA

X Factor RestrictionsX Factor Restrictions

Can vary by any factor thatCan vary by any factor thataffects mortalityaffects mortality

Cannot be less than 20%Cannot be less than 20%

Cannot decrease by policy yearCannot decrease by policy year


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Milliman USA

More X Factor RestrictionsMore X Factor Restrictions PV death benefits using XPV death benefits using X

factors PV death benefitsfactors PV death benefitsusing anticipated mortalityusing anticipated mortality

Mortality rates with X factorsMortality rates with X factorsanticipated mortality rates inanticipated mortality rates in

each of the next 5 yearseach of the next 5 years Must meet requirements atMust meet requirements at

each valuation dateeach valuation date


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Milliman USA

More X Factor RestrictionsMore X Factor Restrictions

May be decreased at futureMay be decreased at futurevaluation dates if expectedvaluation dates if expected

mortality decreasesmortality decreases Must provide Actuarial OpinionMust provide Actuarial Opinion

and Memorandum if < 100%and Memorandum if < 100%


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Milliman USA

Impact of Select Factors onImpact of Select Factors on

Deficiency ReservesDeficiency Reserves20 Year Level Term Policy20 Year Level Term Policy

0

510

15

20

0 2 4 6 8 10 12 14 16 18 20


10 Yr Select XXX Select


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Milliman USA

More Guidance. . .More Guidance. . .

Academy Practice Note for XXXAcademy Practice Note for XXX

Actuarial Standard of PracticeActuarial Standard of Practice#40#40

Academy Practice Note forAcademy Practice Note forASOP#40ASOP#40


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Milliman USA

XXX ExemptionsXXX Exemptions

XXX defines exemptions to itsXXX defines exemptions to itssegmentation methodology for YRTsegmentation methodology for YRTreinsurance, and Attainedreinsurance, and Attained--ageage--basedbased

YRT policies.YRT policies.

In these exemptions, deficiencyIn these exemptions, deficiencyreserves are required using thereserves are required using theclassic definition.classic definition.


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Milliman USA

Universal LifeUniversal Life

Alternative Minimum ReservesAlternative Minimum ReservesIf GMP < Valuation Net PremiumIf GMP < Valuation Net Premium

Then the Minimum Reserve isThen the Minimum Reserve is

calculated using by replacing thecalculated using by replacing thevaluation net premium with the GMPvaluation net premium with the GMP


17/19

Milliman USA

Product FeaturesProduct Features

Common with AMRsCommon with AMRs

NoNo--load products, if theload products, if theguaranteed cost bases areguaranteed cost bases are

similar to the valuation basissimilar to the valuation basis GuaranteedGuaranteed COIsCOIs < Valuation< Valuation qsqs

Guaranteed Interest > ValuationGuaranteed Interest > Valuation Any feature that tends toAny feature that tends to

lower the GMPlower the GMP


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Milliman USA

2001 CSO Table2001 CSO Table Can use select rates in 1Can use select rates in 1stst

segmentsegment

Can multiply select rates by XCan multiply select rates by Xfactors in 1factors in 1stst segmentsegment

X factors have sameX factors have same

restrictions as beforerestrictions as before

Different mortality can be usedDifferent mortality can be used

for basic and deficiencyfor basic and deficiencyreservesreserves


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07 Premium Deficiency Reserves - Hunt