Comfortable with your Reserves? Session 9: February 27, 2006 Session Producer: Mark Press, FSA, MAAA Gen Re LifeHealth

Comfortable with your Reserves?


Session 9: February 27, 2006Session Producer:

Mark Press, FSA, MAAA

Gen Re LifeHealth

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PanelistsPanelists

• Judy Hanna, ASA, MAAA Consulting Actuary, Ernst & Young

• Allen Schmitz, FSA, MAAAConsulting Actuary, Milliman

• Mark Press, FSA, MAAA Actuary, Gen Re LifeHealth

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Long Term Care Active & Disabled Life GAAP Considerations

February 27, 2006

Judith Hanna, ASA, MAAA

Ernst & Young, LLP

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AgendaAgenda

• Active Life Reserves (“ALR”) and Deferred Acquisition Costs (“DAC”)

• Recoverability and Loss Recognition Testing

• Prospective Unlocking

• Disabled Life Reserves

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Active Life Reserves and

Deferred Acquisition Costs

Active Life Reserves and

Deferred Acquisition Costs

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LTC Classification: FAS 60

Long Duration Contracts

LTC Classification: FAS 60

Long Duration Contracts

• Provides insurance protection over an extended period

• The contract generally is not subject to unilateral changes by the insurer

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ALR & DAC AssumptionsALR & DAC

AssumptionsAssumptions needed for:• morbidity • salvage• investment earnings• termination• mortality• deferrable and maintenance expenses

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ALR & DAC AssumptionsALR & DAC

Assumptions

• Assumptions must be consistent with experience at the time policies are issued*

• Assumptions must contain mild provision for adverse deviation

• Assumptions must be “locked-in” at issue*

* more on prospective unlocking later

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ALR Benefit ReservesBenefit Net Premium

ALR Benefit ReservesBenefit Net Premium

= The portion of gross premiums required to provide for all benefits (including inflation options and surrender benefits) and maintenance expenses

Year 1 Year 5

Gross Premium (annual) 1,000 650

PV Benefits & Maintenance Expenses/PV Premiums (at issue) = 4,847 / 6,606 = 73.4%

x Gross Premium = Net Premium 734 477

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ALR Benefit ReservesProspective View

ALR Benefit ReservesProspective View

Year 1

Year 5

PV of benefits & maintenance expenses

4,777 4,120

- PV of net premiums (4,360)

(2,980)

= Benefit Reserve 417 1,140

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DACDAC

• Represents unamortized balance of deferrable acquisition expenses

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DACDAC Amortization Rate

DACDAC Amortization Rate

= The percentage of gross premiums (calculated at issue) required to provide for deferred policy acquisition expenses

PV of Deferrable Expenses 1,300PV of Gross Premiums 6,606Amortization Rate 19.7%

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DACDAC Expense Charge

DACDAC Expense Charge

= The portion of gross premiums required to provide for deferrable acquisition expenses

Year 1 Year 5DAC Amortization Rate 19.7% 19.7%x Gross Premium 1,000 650= Expense charge 197 128

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DACRollforward View

DACRollforward View

Year 1Year 5

Beginning DAC 0 882

+ Deferrable expense 1,300 0

- DAC expense charge (197) (128)

+ Interest accrual 66 45

= Ending DAC 1,169 799

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Recoverability and Loss Recognition

Testing

Recoverability and Loss Recognition

Testing

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Recoverability Testing

Recoverability Testing

• Testing is performed on current year’s issues

• Is the block of business profitable enough to recover deferrable expenses?

• Deferrable costs are limited by– PV of premiums less benefits and

maintenance expenses• Non-recoverable costs may not be

deferred, even if product eventually becomes more profitable

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Loss Recognition Testing

Loss Recognition Testing

• Can think of it as recoverability testing after issue

• Basic principle: probable future losses must be anticipated – PV future GAAP profits may not be negative

• Need to decide on what defines a block of business to be tested. Multiple years’ issues, products, etc. can be aggregated

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Loss Recognition and Recoverability Assumptions

Loss Recognition and Recoverability Assumptions

• Best estimate assumptions w/o PADs• Do not include overhead expenses• Once in loss recognition, these new

best estimate assumptions are locked in

• Consider consistency with Statutory Asset Adequacy Testing

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Shadow Loss Recognition Testing

Shadow Loss Recognition Testing

EITF D-41 • Adjust certain balance sheet items

assuming that unrealized gains and losses on Available for Sale (AFS) securities are realized

• Generates consistency in the balance sheet• Cushions the impact of movements in

valuations caused by interest rate movements

• Only occurs in declining interest rate environments

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Prospective UnlockingProspective Unlocking

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FAS 60 Prospective Unlocking

FAS 60 Prospective Unlocking

• Exceptions to “lock-in” principle are rare: Guaranteed renewable A&H, Indeterminate premium non-par life

• Method for Unlocking:– Lock-in current benefit reserve, DAC– Recalculate net premiums prospectively– Considers actual or expected increases

• Supporting References– Cloninger, TSA 1981 Vol.33– Ernst & Ernst GAAP Stock Life Companies, Chapter 19 Individual

Health Insurance, Guaranteed Renewable Business– ASOP 10, Paragraph 3.7.2 – US GAAP, SOA, 2006, Chapter 10 Individual Health Insurance,

Section 10.7

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ALR: Original vs. Prospective

ALR: Original vs. Prospective

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

12,000

13,000

5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Policy Duration

Original Unlocked

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Disabled Life ReservesDisabled Life Reserves

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DLR AssumptionsDLR Assumptions

• FAS 60 guidance for termination rates:FAS 60, paragraph 18, states “Changes in estimates of claim costs resulting from the continuous review process and differences between estimates and payments for claims shall be recognized in income of the period in which the estimates are changed or payments are made.”

• SEC guidance for interest rates for certain types of P&C coverages:SAB 62, Section N interpretative response references rates that are used “…for reporting to statutory authorities” or rates that are “…reasonable on the facts and circumstances applicable to the registrant at the time the claims are settled.”

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Allen J. Schmitz, F.S.A.Allen J. Schmitz, F.S.A. Milliman Inc.

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Reserve TestingReserve Testing

• Active Life Reserves• Disabled Life Reserves

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Discuss One Approach…Discuss One Approach…

Why is this one Approach

Important?

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You Have To Do It !You Have To Do It !

Part of the New LTC Experience

Forms

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LTC Experience FormsLTC Experience Forms

• What is Changing?• Why / When Change?• Form I, II, III• Implications and Uses

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What is Changing?What is Changing?Current:• Form A – Claim Experience by Calendar Duration

• Form B – Cumulative Claim Experience

• Form C – State Specific Form B

New:• Form I – Actual Claims and Persistency Against

Expected

• Form II – Ratio of Experience Reserve to Reported Reserve

• Form III – Claim Runout

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What is Changing? (continued)What is Changing? (continued)

Current Forms:• Form A – Claim Experience by Calendar

Duration

• Form B – Cumulative Claim Experience

• Form C – State Specific Form B

• Pricing Basis• Loss Ratio Focus• “Expected” Based on Original Pricing

– Distribution of Business– Persistency

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What is Changing? (continued)What is Changing? (continued)

New Forms:• Form I – Actual Claims and Persistency Against

Expected• Form II – Ratio of Experience Reserve to

Reported Reserve• Form III – Claim Runout

• Valuation Basis• Pricing and Reserve Adequacy Focus• “Expected” Based on Actual

– Distribution of Business– Persistency

• Sample Calculations

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Why / When Change?Why / When Change?

Why?• New Model Regulation

– No longer Loss Ratio Focus

• Regulatory Request• AAA

When?• 2007 Experience Year

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Form IForm IPurpose / Description: • Track Claims and Persistency

Against Expected• Group Separate from Individual• Three Policy Form Categories:

– Comprehensive– Institutional – Non-institutional

• Policy Form Level Information Should be Kept

• Direct Basis• Accelerated Benefits

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Form IForm I

1. Individual1 2 3 4 5 6 7 8 9

EarnedPremiums

IncurredClaims

ValuationExpectedIncurredClaims

Actual toExpectedIncurredClaims

OpenClaimCount

New ClaimCount

LivesInforceEnd ofYear

Expected Lives

Inforce End of

Year

Actual toExpected

Lives InforceComprehensive

Current 235,673 91,172 50,810 1.79 3 1 88 88 0.99Prior 243,317 122,045 44,028 2.77 2 1 91 92 0.99

2nd Prior 249,822 0 38,713 0.00 1 0 94 93 1.023rd Prior4th Prior5th Prior

Form Inception-to-Date 728,811 213,217 133,551 1.60 6 2 273 273 1.00Total Inception-to-Date 2,071,991 325,966 XXX XXX XXX XXX XXX XXX XXX

LONG-TERM CARE EXPERIENCE REPORTINGFORM 1 REPORTING YEAR 2008

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Form IForm I

Collected Premiums + Change in Due Premiums– Change in Advanced Premiums– Change in Unearned Premium Reserves= Earned Premiums

• Column 1 – Earned Premiums

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Form IForm I• Column 2 – Incurred Claims

For T>0

0Paid Claimsiy × v¼ + 1Paid Claimsiy × v1 + 2Paid Claimsiy × v2 + . . . + TPaid Claimsiy × vT + TCase Reserveiy × vT+½ + (TIBNRiy × vT+½ )

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Form IForm I• Valuation Expected Incurred

Claims

– Exposure Adjustment:

[Actual Number of Lives Inforce at Beginning of Year – (Expected Deaths + Expected Lapses) ÷ 2] ÷ Actual Number of Lives Inforce at Beginning of Year

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Form IIForm IIPurpose / Description

• Calculate Ratio of Experience Reserve to Reported Reserve

• Experience Reserve Developed from:

1) The experience reserve at the end of the prior reporting year (E-1)

2) Valuation net premiums and interest rates, and

3) Experience incurred claims, earned premiums, and actual persistency.

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Form IIExperience Reserve to Reported

Reserve

Form IIExperience Reserve to Reported

Reserve1. Individual

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15First Last Ann. Net: Current Inforce New Issues Inforce Inforce Experience Reported Experience :

Reporting Policy Year Year Earned Incurred Loss Ann. Gross Year Net Count Current Count EOY'S: Policy Policy ReportedYear Form Issue Issue Premiums Claims Ratio Premiums Premiums BOY's Year EOY'S BOY's Reserves Reserves Ratio

Current LTC-1 1999 2001 235,673 137,548 58.36% 70.33% 172,273 91 0 88 0.97 1,210,373 1,388,218 0.87Prior 243,317 73,158 30.07% 71.21% 175,479 94 0 91 0.97 1,118,029 1,174,655 0.95

2nd Prior 249,822 (89,478) -35.82% 71.16% 177,861 95 0 94 0.99 966,294 966,294 1.00Current

Prior2nd PriorCurrent

Prior2nd PriorCurrent Total xxx xxx 235,673 137,548 58.36% 70.33% 172,273 91 0 88 0.97 1,210,373 1,388,218 0.87

Prior Total xxx xxx 243,317 73,158 30.07% 71.21% 175,479 94 0 91 0.97 1,118,029 1,174,655 0.952nd Prior Total xxx xxx 249,822 (89,478) -35.82% 71.16% 177,861 95 0 94 0.99 966,294 966,294 1.00

1. Individual1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

First Last Ann. Net: Current Inforce New Issues Inforce Inforce Experience Reported Experience :Reporting Policy Year Year Earned Incurred Loss Ann. Gross Year Net Count Current Count EOY'S: Policy Policy Reported

Year Form Issue Issue Premiums Claims Ratio Premiums Premiums BOY's Year EOY'S BOY's Reserves Reserves RatioCurrent LTC-1 1999 2001 235,673 137,548 58.36% 70.33% 172,273 91 0 88 0.97 1,210,373 1,388,218 0.87

Prior 243,317 73,158 30.07% 71.21% 175,479 94 0 91 0.97 1,118,029 1,174,655 0.952nd Prior 249,822 (89,478) -35.82% 71.16% 177,861 95 0 94 0.99 966,294 966,294 1.00Current




1. Individual1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

First Last Ann. Net: Current Inforce New Issues Inforce Inforce Experience Reported Experience :Reporting Policy Year Year Earned Incurred Loss Ann. Gross Year Net Count Current Count EOY'S: Policy Policy Reported

Year Form Issue Issue Premiums Claims Ratio Premiums Premiums BOY's Year EOY'S BOY's Reserves Reserves RatioCurrent LTC-1 1999 2001 235,673 137,548 58.36% 70.33% 172,273 91 0 88 0.97 1,210,373 1,388,218 0.87

Prior 243,317 73,158 30.07% 71.21% 175,479 94 0 91 0.97 1,118,029 1,174,655 0.952nd Prior 249,822 (89,478) -35.82% 71.16% 177,861 95 0 94 0.99 966,294 966,294 1.00Current




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Form IIForm II• Column 5 – Incurred Claims

Where: t(Paid Claims)n = The paid claims of all business of CYI n in calendar duration t for the reporting year. Paid claims is the total direct paid claims for LTC business from Exhibit 8 Part 2, line 1.1.

in = The valuation interest rate for CYI n. tIBNRE

n = The claim liability of all business of CYI n in calendar duration t for the reporting year. IBNRE is the total direct claim liability for LTC business from Exhibit 8 Part 2, line 2.1.

tICE

n = [t(Paid Claims)n] + [tIBNREn – (t-1IBNRE-1

n ) x (1+in)] + [tDLRE

n – (t-1DLRE-1n ) x (1+in)]

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Form IIForm II• Column 13 – Experience Policy

Reserves tV

E n = [(t-1VE-1 n) + tPn] x (1+ in ) – tIC En x (1+ in )

1/2

Where: tV

E n = The experience reserve as of the end of the reporting year for calendar duration t, and CYI n. t-1V

E-1 n

= The experience reserve as of the end of the prior reporting year for calendar duration t-1, and CYI n. For the first filing of this Form, the experience reserve as of the second prior year is set equal to the reported reserve as of that date. tPn = The annual valuation net premium for all business of CYI n in calendar duration t. The total for the reporting year is the amount reported in Column (8). in = The valuation interest rate for CYI n.

tIC En = The experience incurred claims for all business of CYI n in calendar duration t. The total amount for the reporting year is reported in Column (5).

tV


1/2

Where: tV


E-1 n

= The experience reserve as of the end of the prior reporting year for calendar duration t -1, and CYI n. For the first filing of this Form, the experience reserve as of the second prior year is set equal to the reported reserve as of that date. tPn = The annual valuation net premium for all business of CYI n in calendar duration t. The total for the reporting year is the amount reported in Column (8). in = The valuation interest rate for CYI n.


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Form IIIForm III

• Claim Reserve Adequacy• Similar to Schedule O – But

LTCI Only• Track Development for 8

Incurred Years• Split Between Individual and

Group• Require Individual Claim Data

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Parts of Form III Parts of Form III Part 1 Paid

Part 2 Cumulative Paid & Claim Reserves

Part 3 Transferred Reserves

Part 4 PV of Incurred Claims

Direct Only (Including Purchased Business)

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Part 1Payment Triangle

Part 1Payment Triangle

Total (Direct and Transferred) Amount Paid Policyholders

Incurred Year

2001

2002 2003 2004 2005 2006 2007 2008

Prior

2001

2002 xxx

2003 xxx xxx $23,933

$414

2004 xxx xxx xxx $6,440

$41,730

$11,280

2005 xxx xxx xxx xxx $517 $10,080

$12,564

$11,345

2006 xxx xxx xxx xxx xxx

2007 xxx xxx xxx xxx xxx xxx $12,740

$24,480

2008 xxx xxx xxx xxx xxx xxx xxx $13,608

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Part 2Cumulative Claim Triangle


Incurred Year 2001 2002 2003 2004 2005 2006 2007 2008

Paid

2004 xxx xxx xxx $6,440 $41,730 $11,280

Cumulative Paid

2004 xxx xxx xxx $6,440 $48,170 $59,450

$59,450

$59,450

+

Claim Reserves

2004 xxx xxx xxx $43,097

$95,678

=

Cumulative Paid Plus Reserves

2004 xxx xxx xxx $49,537

$143,848 $59,450

$59,450

$59,450

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Sum of Total Amount Paid Policyholders and Claim Liability and Reserve Outstanding at End of Year

Incurred Year 2001 2002 2003 2004 2005 2006 2007 2008

2001 $3,427

$ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0

2002 xxx 4,958 0 0 0 0 0 0

2003 xxx xxx 131,327 118,958

24,347 24,347 24,347 24,347

2004 xxx xxx xxx 49,537 143,848

59,450 59,450 59,450

2005 xxx xxx xxx xxx 40,461 31,963 32,391 35,026

2006 xxx xxx xxx xxx xxx 9,521 0 0

2007 xxx xxx xxx xxx xxx xxx 93,641 129,110

2008 xxx xxx xxx xxx xxx xxx xxx 93,051

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Part 4Interest Adjusted Development

Part 4Interest Adjusted Development

Interest Adjusted Development of Incurred Claims - Assume No TransfersIncurred

Year200

1 2002 2003 2004 2005 2006 2007 2008

2001 $3,352

$ 0 $ 0

$ 0 $ 0 $ 0 $ 0 $ 0 $3,352

2002 xxx 4,851 0 0 0 0 0 0 4,851

2003 xxx Xxx 128,727

112,634 24,067 24,067 24,067 24,067

104,660

2004 xxx xxx xxx 48,529 135,867 56,632 56,632 56,632

(8,104)

2005 xxx xxx xxx xxx 39,586 30,158 29,931 32,050

7,536

2006 xxx xxx xxx xxx xxx 9,314 0 0 9,314

2007 xxx xxx xxx xxx xxx xxx 81,958 122,045

(40,087)

2008 xxx xxx xxx xxx xxx xxx xxx 93,051

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Implications / UsesImplications / Uses

Form I• Review Actual vs. Valuation

Expected Claims• Review Open and New

Claims• Review Actual vs. Expected

Persistency

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Form II• Review Experience Reserve

vs. Reported Reserve• Experience Reserve

Formula:

Implications and UsesImplications and Uses

tV


1/2

Where: tV


E-1 n

= The experience reserve as of the end of the prior reporting year for calendar duration t-1, and CYI n. For the first filing of this Form, the experience reserve as of the second prior year is set equal to the reported reserve as of that date. tPn = The annual valuation net premium for all business of CYI n in calendar duration t. The total for the reporting year is the amount reported in Column (8). in = The valuation interest rate for CYI n.


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Form II• Experience Reserve Formula:

If claims lower than expected

Reported Reserve < Experience Reserve

Conclusion?


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Form III• Claim Reserve Adequacy • More Frequent Adjustments

of Claim Reserves• Ranking of Companies


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• Monitoring Tool• Effort / Work

– Learning Curve

• Transparency– Claim Reserves– Contract Reserves– Ranking of Companies




Miscellaneous Topics and Observations With Respect

to Analyzing Reserve Adequacy

Mark H. Press, FSA, MAAAGenRe LifeHealth

February 27, 2006

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Considerations at the OutsetConsiderations at the Outset

A. How do you define reserve adequacy?

B. What tests are you performing and how often are they being performed?

C. What level of margins are in your reserves?

D. Are you perhaps ignoring critical

Information or “shooting yourself

in the foot” when setting reserves?

E. If you find yourself potentially under reserved how do you manage to the theoretically correct level?

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Surprise, Surprise, SurpriseSurprise, Surprise, Surprise

A. Claim Reserves: May appear adequate in the aggregate but upon closer inspection there may be underlying issues that warrant additional analyses.

B. IBNR Reserves: Various techniques are used but ultimately may misstate what’s really happening and result in additional margins being held.

C. Active Life Reserves: Possible “black-box” effect with regard to a vendor’s actuarial system which can lead to additional margins and / or deficiencies.

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Claim Reserve AdequacyUnpleasant Surprises Abound


Analysis of a closed cohort projected out x months and compared to a current listing may very well determine how well your continuance assumptions are holding up in general.

But…

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• A distinction of claims open less than 1 year and those open greater than 1 year may lead to disturbing results on longer term claims.

• Rate of payment per unit of exposure: Affects how long a pool of money might be available if current benefit levels are and have been something less than the daily benefit amount.

• Claim experience for stand alone plans may vary significantly in comparison to integrated products.

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• Claim management practices / programs recently implemented may allow for reserve adjustment on new claims but may not for claims already open.

• Potential changes in care path need to be considered when setting these reserves but are they?

• Claims that do change status may be viewed as new when they are really continuing.

• The definition of your incurral date needs to be consistent with your actuarial assumptions.

• Policies written without “hard edges” may be prone to additionaland longer durational claims.

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IBNR AdequacyAre You “Shooting Yourself in the Foot?”


Reported amounts typically a function of either a durational loss ratio factor times earned premium or some other plug

number.

But…

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• Periodic look backs to measure actual to reported IBNR claims may yield few unreported claims and may result in additional margins.

• Consistency within the claims department as to when a claim is considered IBNRand when it is considered DLR criticalfor future A/E studies.

• Some actuarial projection systems may not be measuring IBNR at the start of the projection appropriately. This in turn may unnecessarily cause the actuary concern if future PVANYD amounts appear inadequate when compared to actual amounts at a later valuation date.

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A. B. C. D. E. F. G. G. H.

CompanyValuation

DateReported

IBNRBest

Estimate

Time Between

File Dates (months)

Completion Factor

Adjusted Best

Estimate: D / F

A-to-R: F / C Sufficient?

A Jun-30-2004 411,067 7,243 3 85% 8,521 2.1% SufficientB Jun-30-2004 679,219 24,135 6 90% 26,817 3.9% SufficientC Sept-30-2004 602,772 27,665 6 90% 30,739 5.1% SufficientD Jun-30-2004 63,829 12,881 6 90% 14,312 22.4% SufficientE Dec-31-2004 1,151,933 111,736 3 85% 131,454 11.4% SufficientF Mar-31-2004 1,066,188 54,473 6 90% 60,526 5.7% SufficientG Dec-31-2004 306,588 44,372 6 90% 49,302 16.1% SufficientH Dec-31-2004 1,170,611 751,046 3 85% 883,584 75.5% SufficientI Sept-30-2004 424,315 20,713 6 90% 23,014 5.4% SufficientJ Sept-30-2004 437,399 173,175 6 90% 192,417 44.0% Sufficient

Totals 6,313,921 1,227,439 1,420,685 22.5% Sufficient

Margin 4,893,236

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ALR Adequacy The Potential “Black Box”ALR Adequacy

The Potential “Black Box”

While licensed actuarial systems develop factors at the cell level do you know what’s happening “behind the scenes” and how these factors make things appear at the cohort level?

For instance…

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ALR Adequacy The Potential “Black Box” Affect


• Some projection systems don’t explicitly adjust exposure for lives goingon claim and, therefore, project additional incurrals in the future which would lead to holding ALRs higher than necessary.

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An example to illustrate reserve levels with and without an implicit adjustment to exposure or claims costsAssumptions– Female aged 52– Plan Type: LTC, 0-day EP, Lifetime, No Inflation– Mortality: 1994 GAM w/ improvement– Lapse: 1.0% ultimate– Morbidity: 3rd party claims costs– Interest: 4.5%– No PADs

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t ALRs - No Adjustment

ALRs Adjustment

Included

Reduction Due to

Adjustment1 3,641.25 2,767.82 24.0%2 7,121.37 5,397.24 24.2%3 10,481.36 7,917.67 24.5%4 13,753.11 10,350.82 24.7%5 16,907.32 12,658.26 25.1%6 20,006.31 14,893.59 25.6%7 23,090.25 17,088.82 26.0%8 26,184.63 19,261.57 26.4%9 29,286.57 21,407.68 26.9%

10 32,402.56 23,532.52 27.4%

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• GAAP Issue– Although a system will levelize a model cell from

issue, a projection of a closed block will show continued deterioration when examining the interest adjusted benefit loss ratio due to unisex pricing as the subsidization of women by men wears off.

– Even if all assumptions are accurate, it will appear to management that results are deteriorating as additions to the GAAP ALR increase as a percentage of earned premium in each duration.

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Assumptions for Sample Cohort• 2 cell cohort: 1 Male aged 72 and 1 Female aged

62• Plan Type: LTC, 0 day EP, Lifetime, No inflation• Mortality: 1994 GAM w/ improvement• Lapse: 1.0% ultimate• Morbidity: 3rd party claims costs• Interest: 4.5%• No PADs

Interest Adjusted Benefit Loss Ratio: The ratio of incurred claims plus change in reserve divided by earned premium adjusted for interest earned on the reserves being held.

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tLevelized Male LR

Levelized Female LR

Straight Average

Composite Trending Composite

1 49.6% 63.6% 56.6% 55.2%5 49.6% 63.6% 56.6% 55.6%

10 49.6% 63.6% 56.6% 56.5%15 49.6% 63.6% 56.6% 57.9%20 49.6% 63.6% 56.6% 59.8%25 49.6% 63.6% 56.6% 61.7%30 49.6% 63.6% 56.6% 62.9%

Interest Adjusted Benefit Loss Ratios

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Final ThoughtsFinal Thoughts

1. Reports. It’s a good idea to have several types of reports to help keep you on track.

a. Reported vs. Plan: YTD, QTD and Month. A-to-E progression of reserve and other items will give you a birds-eye view of how your blocks are performing in comparison to your models.

b. Inforce Statistics Report: Periodic review of persistency. If lives are persisting longer than projected, all else being equal, your reserves may be in trouble.

c. [GAAP Val Prem ] / GP should be a good bogey as to what your interest adjusted loss ratios should be on a block of policies.

2. Data. Make sure you can get the data you need in a timely manner to prepare your analysis. If there are changes to the data process make certain you’re comfortable with them before moving forward with your valuation work.

3. “Granularity”. Try and analyze your plans by as many characteristics as possible as some plan types will drive your reserve levels (and bottom line results) more so than others.

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4. Valuation Models: Revisit, Refine, Re-Test. The reserves you develop are a function of your models. Take time to revisit, refine and re-test to make sure your projected results are consistent with your expectations.

5. Documentation. Recording your process will help expedite the next iteration and give your auditors an additional level of comfort when they come to visit.

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Documents

Comfortable with your Reserves? Session 9: February 27, 2006 Session Producer: Mark Press, FSA, MAAA Gen Re LifeHealth