Principles-based Reserves for Life Products - ACSW Neve - Principles Based Reserves.pdf · Principles-based Reserves for Life Products ACSW Meeting June 16, ... Select Cash Flow model

PrinciplesPrinciples--based Reserves forbased Reserves forLife ProductsLife Products

ACSW MeetingACSW MeetingJune 16, 2006June 16, 2006

David Neve, CoDavid Neve, Co--chair, Life Reserve Work Groupchair, Life Reserve Work Group

Overview of SessionOverview of Session

Description of proposed principlesDescription of proposed principles--based based approach (PBA) for Life Products approach (PBA) for Life Products

Modeling resultsModeling results–– 2020--year level term productyear level term product

–– UL shadow account productUL shadow account product

Implementation of the new PBA approachImplementation of the new PBA approach

Update of Recent LRWG DevelopmentsUpdate of Recent LRWG Developments

PrinciplesPrinciples--based Approach forbased Approach forLife ProductsLife Products

Overview Overview

Definition of PrinciplesDefinition of Principles--basedbased

1. Captures all of the material financial risks, benefits, an1. Captures all of the material financial risks, benefits, and d guarantees associated with the contracts, including any ‘tail guarantees associated with the contracts, including any ‘tail risk’ and the funding of the risks.risk’ and the funding of the risks.

2. Utilizes risk analysis and risk management techniques to 2. Utilizes risk analysis and risk management techniques to quantify the risks. This may include stochastic models or quantify the risks. This may include stochastic models or other means of analysis that properly reflect the risks of the other means of analysis that properly reflect the risks of the underlying contracts.underlying contracts.

Copyright © 2006 by theAmerican Academy of Actuaries

LRWG Update for LHATFMarch 2006 4


LRWG Information


3. Incorporates assumptions and methods that are consistent 3. Incorporates assumptions and methods that are consistent with, but not necessarily identical to, those utilized within with, but not necessarily identical to, those utilized within the company’s overall risk assessment process.the company’s overall risk assessment process.

4. Permits the use of company experience to establish 4. Permits the use of company experience to establish assumptions for risks over which the company has some assumptions for risks over which the company has some degree of control or influence. degree of control or influence.

5. Provides for the use of assumptions set on a prudent best 5. Provides for the use of assumptions set on a prudent best estimate basis that contain an appropriate level of estimate basis that contain an appropriate level of conservatism when viewed in the aggregate.conservatism when viewed in the aggregate.




LRWG Information

In contrast, a “rulesIn contrast, a “rules--based” approach:based” approach:

Relies on a static formula that may not capture all Relies on a static formula that may not capture all of the risks of the contract. of the risks of the contract.

Uses prescribed valuation assumptions that are the Uses prescribed valuation assumptions that are the same across all companies, regardless of same across all companies, regardless of differences in the risk profile of companies.differences in the risk profile of companies.





LRWG Information

1. Is consistent with the global trend toward 1. Is consistent with the global trend toward Enterprise Risk Management Enterprise Risk Management

2. Relies more on actuarial judgment2. Relies more on actuarial judgment

3. Requires more sophisticated tools3. Requires more sophisticated tools

4. Requires that a stronger regulatory governance 4. Requires that a stronger regulatory governance process be in place, including independent review process be in place, including independent review

Observations of moving to a Observations of moving to a PrinciplesPrinciples--based approach (PBA)based approach (PBA)




LRWG Information

LRWG Charge and ScopeLRWG Charge and ScopeLRWG = Life Reserve Work GroupLRWG = Life Reserve Work Group

Charge: Charge: Develop a proposal for a new PrinciplesDevelop a proposal for a new Principles--based statutory based statutory reserve method for life productsreserve method for life productsCoordinate with C3 Phase III work group (which is working Coordinate with C3 Phase III work group (which is working on RBC requirements for life products)on RBC requirements for life products)

Scope: Scope: Initially, scope was limited to ULInitially, scope was limited to ULNow, scope is all life productsNow, scope is all life products




LRWG Information

Decisions made by LHATF at June 8 Decisions made by LHATF at June 8 LHATF MeetingLHATF Meeting

1. June drafts of Model Regulation and three Actuarial Guidelin1. June drafts of Model Regulation and three Actuarial Guidelines es were exposed for comment (are available on Academy were exposed for comment (are available on Academy website)website)

2. Gross Premium Valuation method will be used for 2. Gross Premium Valuation method will be used for Deterministic Reserve, but the Greatest PV of Accumulated Deterministic Reserve, but the Greatest PV of Accumulated Deficiency (VACARVM approach) will be used for Stochastic Deficiency (VACARVM approach) will be used for Stochastic Reserve.Reserve.

3. Initial approach for PBA life reserves will be prospective o3. Initial approach for PBA life reserves will be prospective only. nly. May allow retroactive application to May allow retroactive application to inforce inforce (or subset) later.(or subset) later.




LRWG Information

Decisions made by LHATFDecisions made by LHATF

4. 4. Determining assumption margins Determining assumption margins –– general support for LRWG general support for LRWG recommendation:recommendation:

Determining margins will be left to the professional Determining margins will be left to the professional judgment of the actuary, rather than imposing prescribed judgment of the actuary, rather than imposing prescribed numeric limits, caps or ranges on margin levels. numeric limits, caps or ranges on margin levels.

Robust guidelines will be provided in Robust guidelines will be provided in ASOPsASOPs, Actuarial , Actuarial Guidelines and regulations to identify the considerations Guidelines and regulations to identify the considerations and procedures that the actuary must follow. and procedures that the actuary must follow.

If acceptable guidelines to establish margins are not If acceptable guidelines to establish margins are not established, then LHATF may decide to impose specific established, then LHATF may decide to impose specific numeric limits, caps or ranges for some margins. numeric limits, caps or ranges for some margins.




LRWG Information

Basic Framework (cont) Basic Framework (cont) Reserve is the greater of:Reserve is the greater of:

1.1. A deterministic, seriatim, single A deterministic, seriatim, single scenario reserve calculationscenario reserve calculation

2. A stochastically derived reserve (if needed) 2. A stochastically derived reserve (if needed) using a prescribed CTE levelusing a prescribed CTE level

Since the stochastic reserve is done in the aggregate, Since the stochastic reserve is done in the aggregate, risk offsets between contracts are recognized.risk offsets between contracts are recognized.




LRWG Information

Basic Framework (cont)Basic Framework (cont)

Deterministic ReserveDeterministic Reserve: :

Based on Gross Premium Valuation (GPV) method.Based on Gross Premium Valuation (GPV) method.

GPV reserve = PV of future benefits and expenses, GPV reserve = PV of future benefits and expenses, less PV of future gross premiums. less PV of future gross premiums.

Is not designed to capture tail riskIs not designed to capture tail risk

Is subject to a cash surrender value floor on a Is subject to a cash surrender value floor on a contract by contract basiscontract by contract basis




LRWG Information

Basic Framework (cont)Basic Framework (cont)

Stochastic ReserveStochastic Reserve::

Multiple scenarios will be used to properly capture the Multiple scenarios will be used to properly capture the “tail risk” of the contract (risks that have high impact, “tail risk” of the contract (risks that have high impact, but low probability)but low probability)

Current thinking is that only interest rates and equity Current thinking is that only interest rates and equity returns will be modeled stochasticallyreturns will be modeled stochastically

Will use a CTE (conditional tail expectation) level that Will use a CTE (conditional tail expectation) level that is set by regulators, such as 65 CTEis set by regulators, such as 65 CTE




LRWG Information

Basic Framework (cont)Basic Framework (cont)Stochastic Reserve, contStochastic Reserve, cont::

Reserve for each scenario will be based on the same Reserve for each scenario will be based on the same method used for C3P2 and VACARVM, that is, the method used for C3P2 and VACARVM, that is, the Greatest PV of Accumulated Deficiencies (GPVAD)Greatest PV of Accumulated Deficiencies (GPVAD)

GPVAD reserve = starting assets plus the greatest PV GPVAD reserve = starting assets plus the greatest PV of accumulated deficiencies in any future yearof accumulated deficiencies in any future year

The accumulated deficiency for each year in the The accumulated deficiency for each year in the projection is determined by taking the difference projection is determined by taking the difference between the working reserve (a proxy for the statutory between the working reserve (a proxy for the statutory reserve) and the accumulated assets. reserve) and the accumulated assets.




LRWG Information

Basic Framework (cont) Basic Framework (cont) “Prudent Best Estimate” Assumptions“Prudent Best Estimate” Assumptions

Assumptions will be based on “best estimates” plus a Assumptions will be based on “best estimates” plus a margin that includes a provision for adverse deviation margin that includes a provision for adverse deviation and estimation error.and estimation error.

Margins will be determined by the actuary using Margins will be determined by the actuary using professional judgment, subject the guidelines established professional judgment, subject the guidelines established by the NAIC and by the NAIC and ASOPsASOPs. .

The NAIC may prescribe numeric limits, caps or ranges The NAIC may prescribe numeric limits, caps or ranges on certain margins.on certain margins.




LRWG Information

Basic Framework (cont) Basic Framework (cont) Asset Model Is Needed to Project Cash FlowsAsset Model Is Needed to Project Cash Flows

Asset Model is used to determine:Asset Model is used to determine:Discount rates Discount rates Earned rates for surrender benefitsEarned rates for surrender benefitsAssets for GPVAD calculation for Stochastic Reserve Assets for GPVAD calculation for Stochastic Reserve

Discount ratesDiscount ratesBased on projected portfolio rates in each year Based on projected portfolio rates in each year New money treasury rates will be prescribed for New money treasury rates will be prescribed for Deterministic Reserve; modeled for Stochastic ReserveDeterministic Reserve; modeled for Stochastic Reserve




LRWG Information

PBA PBA Life Reserves Life Reserves

Implementation Example Implementation Example

Implementation of PBA ReservesImplementation of PBA Reserves

Assumes the company is in the 3Assumes the company is in the 3rdrd year year after the effective date of PBAafter the effective date of PBA

Assumes that the new PBA approach to Assumes that the new PBA approach to reserves was not applied to the entire reserves was not applied to the entire inforceinforce block. block.

Implementation of PBA Reserves:Implementation of PBA Reserves:

Product PortfolioProduct Portfolio

Products currently being issued:Products currently being issued:

Accumulation UL, no secondary guaranteesAccumulation UL, no secondary guarantees

UL with Shadow Account UL with Shadow Account

2020--year level termyear level term

Variable ULVariable UL


Product PortfolioProduct Portfolio

Products No longer issued but on the books:Products No longer issued but on the books:

Traditional whole life (numerous policy forms) Traditional whole life (numerous policy forms)

Level term (numerous policy forms)Level term (numerous policy forms)

ART Term (numerous policy forms)ART Term (numerous policy forms)

UL with SG (numerous policy forms)UL with SG (numerous policy forms)

UL with no SG (numerous policy forms) UL with no SG (numerous policy forms)


Reserve Valuation ProcessReserve Valuation Process


Reserve Valuation ProcessReserve Valuation Process

1. Select Cash Flow model1. Select Cash Flow model

2. Finalize Prudent Best Estimate valuation assumptions2. Finalize Prudent Best Estimate valuation assumptions

3. Test blocks for Stochastic Reserve exclusion 3. Test blocks for Stochastic Reserve exclusion

4. Define scenarios for Stochastic Reserve 4. Define scenarios for Stochastic Reserve

5. Define Asset Segments; allocate assets5. Define Asset Segments; allocate assets

6. Review assumptions, methodologies, and conclusions 6. Review assumptions, methodologies, and conclusions with PBA Reviewer (prewith PBA Reviewer (pre--release basis). release basis).


Reserve Valuation ProcessReserve Valuation Process7. Build liability populations for Stochastic Reserve 7. Build liability populations for Stochastic Reserve

8. Calculate Net Asset Earned Rates8. Calculate Net Asset Earned Rates

9. Perform PBA reserve calculations9. Perform PBA reserve calculations

10. Complete aggregate Asset Adequacy Analysis 10. Complete aggregate Asset Adequacy Analysis

11. Complete certification and documentation 11. Complete certification and documentation requirementsrequirements

12. Review documentation with PBA reviewer (post12. Review documentation with PBA reviewer (post--release basis) release basis)

Step 1: Select Cash Flow ModelStep 1: Select Cash Flow Model

Will need projection of cash flows for each Will need projection of cash flows for each future year. Need to project:future year. Need to project:

–– future liability cash flows (benefits, expenses, etc) future liability cash flows (benefits, expenses, etc)

–– asset cash flows from starting assets (investment asset cash flows from starting assets (investment earnings, maturities, prepayments, etc). earnings, maturities, prepayments, etc).

Model Regulation allows cash flows to be Model Regulation allows cash flows to be determined using methods and techniques used determined using methods and techniques used for cash flow testing under existing Guidelines for cash flow testing under existing Guidelines and ASOPs.and ASOPs.

Select Cash Flow Model, cont. Select Cash Flow Model, cont.

Question: Use same Cash Flow Model used for Question: Use same Cash Flow Model used for cash flow testing, or develop new one?cash flow testing, or develop new one?

Answer: Use same model as cash flow testingAnswer: Use same model as cash flow testing

–– Expect most companies will use existing cash Expect most companies will use existing cash flow testing models flow testing models

–– Need to determine what modifications (if any) Need to determine what modifications (if any) need to be made to cash flow model.need to be made to cash flow model.

Step 2: Finalize Prudent Best Step 2: Finalize Prudent Best Estimate Valuation Assumptions Estimate Valuation Assumptions

Assumptions not stochastically modeled: Assumptions not stochastically modeled: –– MortalityMortality–– Policyholder Behavior * Policyholder Behavior * –– Expenses *Expenses *–– Asset Defaults Asset Defaults –– NonNon--guaranteed elements * guaranteed elements *

Assumptions stochastically modeled:Assumptions stochastically modeled:–– Interest rate movements Interest rate movements –– Stock market performanceStock market performance

* dynamically modeled (i.e. will vary by scenario)* dynamically modeled (i.e. will vary by scenario)

Prudent Best Estimate Assumptions, cont.Prudent Best Estimate Assumptions, cont.

For assumptions not stochastically modeled:For assumptions not stochastically modeled:Best Estimate: Best Estimate:

Actuary’s most reasonable estimate of the risk, with no Actuary’s most reasonable estimate of the risk, with no provision for adverse deviation or estimation errorprovision for adverse deviation or estimation error

Prudent Best Estimate: Prudent Best Estimate: Best estimate adjusted for a margin that reflects a Best estimate adjusted for a margin that reflects a provision for adverse deviation and estimation error provision for adverse deviation and estimation error

Margin: Margin: Determined by the actuary using actuarial judgment. Determined by the actuary using actuarial judgment. Note: some margins may be subject to limits and/or Note: some margins may be subject to limits and/or ranges determined by regulators. ranges determined by regulators.

Prudent Best Estimate Assumptions, cont.Prudent Best Estimate Assumptions, cont.

Work with Pricing Area to update best estimate Work with Pricing Area to update best estimate assumptions used in pricing assumptions used in pricing

–– What new experience studies have been done What new experience studies have been done since initial pricing?since initial pricing?

–– Has experience changed enough to justify Has experience changed enough to justify revising an assumption that was used in pricing revising an assumption that was used in pricing for valuation purposes?for valuation purposes?

Conclusions:Conclusions:–– New lapse study has been completed since New lapse study has been completed since

initial pricing indicating that valuation lapse initial pricing indicating that valuation lapse assumptions need to be adjusted. assumptions need to be adjusted.

–– Other assumptions need no adjustment. Other assumptions need no adjustment.

Step 3: Stochastic Modeling Step 3: Stochastic Modeling Exclusion Exclusion

Review product portfolio for blocks with little or no Review product portfolio for blocks with little or no tail risk. tail risk.

Two candidates for stochastic modeling exclusion:Two candidates for stochastic modeling exclusion:–– 2020--year term product with 90% reinsurance of mortality risk. year term product with 90% reinsurance of mortality risk. –– UL block with no secondary guaranteesUL block with no secondary guarantees

It must be demonstrated that the Deterministic It must be demonstrated that the Deterministic Reserve adequately provides for the risks of the block Reserve adequately provides for the risks of the block in order to elect the Stochastic Reserve exclusion. in order to elect the Stochastic Reserve exclusion.

Stochastic Modeling Exclusion, cont. Stochastic Modeling Exclusion, cont.

Demonstration needs to:Demonstration needs to:–– indicate that there is a reasonable assurance that the indicate that there is a reasonable assurance that the

Stochastic Reserve will not be greater than the Stochastic Reserve will not be greater than the Deterministic Reserve for the current year. Deterministic Reserve for the current year.

–– provide sufficient supporting information for an provide sufficient supporting information for an independent PBA reviewer to assess the reasonableness independent PBA reviewer to assess the reasonableness of the exclusion.of the exclusion.

–– If applicable, provide an effective evaluation of the If applicable, provide an effective evaluation of the residual risk exposure resulting form any risk residual risk exposure resulting form any risk mitigation techniques used, such as hedge instruments mitigation techniques used, such as hedge instruments and reinsurance. and reinsurance.

Stochastic Modeling Exclusion, cont. Stochastic Modeling Exclusion, cont.

Method used for stochastic exclusion test:Method used for stochastic exclusion test:–– Project cash flows using actual asset & liability records Project cash flows using actual asset & liability records

for the block to be tested as of 6/30.for the block to be tested as of 6/30.

–– Calculate the Deterministic Reserve (DR) per the Calculate the Deterministic Reserve (DR) per the Model Regulation on the block being tested. Model Regulation on the block being tested.

–– Calculate several deterministic reserve amounts using a Calculate several deterministic reserve amounts using a set of adverse deterministic interest rate scenarios (e.g. set of adverse deterministic interest rate scenarios (e.g. interest rates increase dramatically, and fall suddenly). interest rates increase dramatically, and fall suddenly).

–– If impact of adverse scenarios on the reserve is If impact of adverse scenarios on the reserve is immaterial, then conclude the Stochastic Reserve (SR) immaterial, then conclude the Stochastic Reserve (SR) is not necessary.is not necessary.

Stochastic Modeling Exclusion, cont.Stochastic Modeling Exclusion, cont.

Result of testing 20Result of testing 20--year term:year term:–– Immaterial differences between the various Immaterial differences between the various

deterministic reserve levels (less than 1%).deterministic reserve levels (less than 1%).

–– Conclusion: will only calculate Deterministic Reserve Conclusion: will only calculate Deterministic Reserve for this block. for this block.

Results of testing UL with no secondary guarantees: Results of testing UL with no secondary guarantees: –– Result: material differences between the DR and the Result: material differences between the DR and the

various deterministic reserve levels (up to 5%). various deterministic reserve levels (up to 5%).

–– Conclusion : Need to calculate the Stochastic Reserve Conclusion : Need to calculate the Stochastic Reserve for this block for this block

Step 4: Define Stochastic ScenariosStep 4: Define Stochastic Scenarios

Four OptionsFour Options::1.1. Prescribed stochastic generators and model parametersPrescribed stochastic generators and model parameters2.2. PrePre--packaged scenarios generated from prescribed packaged scenarios generated from prescribed

generators and model parametersgenerators and model parameters3.3. PrePre--determined scenarios sets *determined scenarios sets *4.4. Stochastic models developed by the company if mandated Stochastic models developed by the company if mandated

calibration criteria established by the NAIC are met. calibration criteria established by the NAIC are met.

* * A small number of prescribed paths that are not necessarily a A small number of prescribed paths that are not necessarily a representative sample of a larger set of stochastic paths, but arepresentative sample of a larger set of stochastic paths, but aconservative sample created explicitly for PBA reserves. (This conservative sample created explicitly for PBA reserves. (This option option creates an alternative for small companies)creates an alternative for small companies)

Define Stochastic Scenarios, cont.Define Stochastic Scenarios, cont.

Conclusion:Conclusion: option #2: Prepackaged scenariosoption #2: Prepackaged scenarios

–– A representative sample of 1,000 scenarios was selected A representative sample of 1,000 scenarios was selected using the prescribed scenario picking tool. using the prescribed scenario picking tool.

–– Representative scenarios were selected for: Representative scenarios were selected for: U.S. Treasury ratesU.S. Treasury ratesS&P 500 returns for GA assetsS&P 500 returns for GA assetsFund performance for SA assets, using a blend of prepackaged Fund performance for SA assets, using a blend of prepackaged scenarios for each fundscenarios for each fund

–– Integration of interest returns and equity returns was done Integration of interest returns and equity returns was done using prescribed method developed by the NAIC using prescribed method developed by the NAIC

Step 5: Define Asset Segments and Step 5: Define Asset Segments and Allocate AssetsAllocate Assets

Definition of “Asset Segment” (from Definition of “Asset Segment” (from proposed Model Reg): proposed Model Reg):

A grouping of policies in a manner that A grouping of policies in a manner that generally follows the company’s asset generally follows the company’s asset segmentation plan, investment strategies, or segmentation plan, investment strategies, or approach used to allocate investment income.approach used to allocate investment income.

Conclusion: use the same asset segments used Conclusion: use the same asset segments used in company’s asset segmentationin company’s asset segmentation

Asset Segments, cont.Asset Segments, cont.

Current Asset segmentsCurrent Asset segmentsSegment 1: All traditional whole life products Segment 1: All traditional whole life products

Segment 2: All term productsSegment 2: All term products

Segment 3: All UL productsSegment 3: All UL products

Segment 4: All Variable UL productsSegment 4: All Variable UL products

Asset Segments, cont. Asset Segments, cont.

Segments with PBA products Segments with PBA products Segment 1: None Segment 1: None

Segment 2: 10% of total assets *Segment 2: 10% of total assets *

Segment 3: 15% of total assets *Segment 3: 15% of total assets *

Segment 4: negative asset balance *Segment 4: negative asset balance *

* based on starting assets for each segment * based on starting assets for each segment (see next slide) (see next slide)

Asset Segments, cont. Asset Segments, cont. Determine the starting asset amountDetermine the starting asset amount

–– Equals estimated PBA reserve, less any SA assetsEquals estimated PBA reserve, less any SA assets

–– Estimated PBA reserve is based on pricing model. Estimated PBA reserve is based on pricing model. May eventually use prior years actual PBA May eventually use prior years actual PBA reserve to estimate the current year PBA reservereserve to estimate the current year PBA reserve

–– Estimated PBA reserve is:Estimated PBA reserve is:

Segment 2: Term: 50% of premiumSegment 2: Term: 50% of premium

Segment 3: UL: 102% of account valueSegment 3: UL: 102% of account value

Segment 4: VUL: 90% of total account value Segment 4: VUL: 90% of total account value


Note: starting asset for segment 4 is negative: Note: starting asset for segment 4 is negative:

Account value: SAAccount value: SA 95,00095,000GAGA 5,0005,000

Total Total 100,000100,000Estimated PBA reserve: 90,000 (90%)Estimated PBA reserve: 90,000 (90%)

SA Assets: SA Assets: 95,00095,000

Starting assets:Starting assets: (5,000)(5,000)


Allocation of assetsAllocation of assetsFor segments 2 and 3, the modeled assets in the PBA For segments 2 and 3, the modeled assets in the PBA cash flow model will equal a procash flow model will equal a pro--rata slice of each rata slice of each asset in the respective asset segment.asset in the respective asset segment.

Segment 2: 10% of each asset Segment 2: 10% of each asset

Segment 3: 15% of each assetSegment 3: 15% of each asset

For segment 4, assets will be based on a negative cash For segment 4, assets will be based on a negative cash balance (borrowing position) with an appropriate balance (borrowing position) with an appropriate borrowing rate.borrowing rate.


Treatment of IMRTreatment of IMRAllocate the total IMR to each PBA block using an Allocate the total IMR to each PBA block using an appropriate method. appropriate method.

If positive, may include as negative asset (allows If positive, may include as negative asset (allows additional income producing assets to be used) additional income producing assets to be used)

If negative, must include as a positive asset If negative, must include as a positive asset (reduces income producing assets in starting (reduces income producing assets in starting assets). assets).

Modeling SA Funds for Variable ProductsModeling SA Funds for Variable Products

–– Similar to approach used for C3 P2Similar to approach used for C3 P2

–– Determine number of fund categories (i.e. large cap stocks, Determine number of fund categories (i.e. large cap stocks, international stocks, etc.)international stocks, etc.)

–– Allocate each fund to a category Allocate each fund to a category

–– Total investment return for each fund category will be Total investment return for each fund category will be determined by weighting the returns from selected determined by weighting the returns from selected prepackaged fund categories. prepackaged fund categories.

For Deterministic Reserve, path of returns is prescribed for eacFor Deterministic Reserve, path of returns is prescribed for each h fund.fund.

For Stochastic Reserve, paths of returns are stochastically For Stochastic Reserve, paths of returns are stochastically generated for each fundgenerated for each fund

Step 6: Review Assumptions & Step 6: Review Assumptions & Methods with PBA ReviewerMethods with PBA Reviewer

Once assumptions and methods are finalized, a Once assumptions and methods are finalized, a meeting is scheduled to review conclusions with an meeting is scheduled to review conclusions with an independent peer reviewer (PBA Reviewer) on a independent peer reviewer (PBA Reviewer) on a “pre“pre--release” basis. release” basis.

Meeting is scheduled for early December. Meeting is scheduled for early December.

An actuarial report is prepared that documents the An actuarial report is prepared that documents the assumptions, methods and conclusions, and is sent assumptions, methods and conclusions, and is sent to the PBA reviewer in advance of the meeting. to the PBA reviewer in advance of the meeting.

“Pre“Pre--release” Reviewrelease” ReviewPBA reviewer needs to be satisfied that the PBA reviewer needs to be satisfied that the valuation was done properlyvaluation was done properly

PBA reviewer will evaluate the judgment used PBA reviewer will evaluate the judgment used by the valuation actuary rather than auditingby the valuation actuary rather than auditing

Purposes of review are to:Purposes of review are to:1. Improve the quality of the actuarial valuation1. Improve the quality of the actuarial valuation2. Reduce the likelihood of material errors2. Reduce the likelihood of material errors3. Provide pre3. Provide pre--release “early warning”release “early warning”

PrePre--release Review Conclusionsrelease Review ConclusionsTwo changes were identified by the PBA Reviewer Two changes were identified by the PBA Reviewer during the preduring the pre--release review:release review:

1.1. Mortality margin on 20Mortality margin on 20--year term product is too low. year term product is too low. Need to increase margin on mortality to produce a ZNeed to increase margin on mortality to produce a Z--value in the 8value in the 8--9 range (Z9 range (Z--value will be defined later). value will be defined later).

2.2. There is not enough experience to justify increasing There is not enough experience to justify increasing the lapse assumption on the UL with shadow account the lapse assumption on the UL with shadow account product. Lower the lapse assumption back to the product. Lower the lapse assumption back to the initial pricing level. initial pricing level.

Valuation Actuary incorporates these changes before Valuation Actuary incorporates these changes before performing reserve calculations. performing reserve calculations.

Step 7: Build Liability PopulationsStep 7: Build Liability Populations

Similar to cash flow testing procedures Similar to cash flow testing procedures ---- will will build populations as of 9/30.build populations as of 9/30.

For Deterministic Reserve (DR) : use actual 9/30 For Deterministic Reserve (DR) : use actual 9/30 liability records at the contract level.liability records at the contract level.

For Stochastic Reserve (SR): use same policy For Stochastic Reserve (SR): use same policy groupings (i.e. modeling cells) used for cash flow groupings (i.e. modeling cells) used for cash flow testing based on 9/30 data. testing based on 9/30 data.

The Stochastic Reserve will be determined in the The Stochastic Reserve will be determined in the aggregate for all policies. aggregate for all policies.

Build Liability Populations, cont. Build Liability Populations, cont.

Need to adjust results from 9/30 to 12/31 Need to adjust results from 9/30 to 12/31 using an appropriate method. using an appropriate method.

–– Calculate the DR and SR prior to year end Calculate the DR and SR prior to year end using 9/30 data.using 9/30 data.

–– Determine final Reported Reserve as of 9/30. Determine final Reported Reserve as of 9/30.

–– After year end, calculate the DR reserve using After year end, calculate the DR reserve using 12/31 data.12/31 data.

–– Multiply the 9/30 Reported Reserve by the Multiply the 9/30 Reported Reserve by the ratio of the 12/31 DR to the 9/30 DR. ratio of the 12/31 DR to the 9/30 DR.

Step 8: Calculate Net Asset Step 8: Calculate Net Asset Earned RatesEarned Rates

For each asset segment:For each asset segment:–– Determine a path of projected portfolio Net Asset Earned Determine a path of projected portfolio Net Asset Earned

Rates for each year (or month, etc)Rates for each year (or month, etc)

–– This path of projected portfolio Net Asset Earned Rate This path of projected portfolio Net Asset Earned Rate will differ by each asset segmentwill differ by each asset segment

–– Only returns on GA assets are used (not SA returns) Only returns on GA assets are used (not SA returns)

–– The Net Asset Earned Rate for each year (or month etc) The Net Asset Earned Rate for each year (or month etc) will equal: will equal:

Net Investment Income / Invested Assets Net Investment Income / Invested Assets

Net Asset Earned Rates, cont.Net Asset Earned Rates, cont.

Thus, the Net Asset Earned Rates will depend on:Thus, the Net Asset Earned Rates will depend on:

–– Projected Net Investment Earnings from the Projected Net Investment Earnings from the portfolio of starting assetsportfolio of starting assets

–– Projected Net Investment Earnings from Projected Net Investment Earnings from reinvestment assetsreinvestment assets

–– The pattern of projected net liability cash flows The pattern of projected net liability cash flows (premiums less benefits and expenses) (premiums less benefits and expenses)

–– Pattern of projected asset cash flows from Pattern of projected asset cash flows from starting assets and reinvestment assetsstarting assets and reinvestment assets

Net Asset Earned Rates, cont.Net Asset Earned Rates, cont.Starting AssetsStarting Assets::

Fixed income GA assets (bonds, commercial mortgages)Fixed income GA assets (bonds, commercial mortgages)–– Project gross investment earnings based on the contractual Project gross investment earnings based on the contractual

provisions for each asset.provisions for each asset.

–– Default costs and investment expenses determined using Default costs and investment expenses determined using prudent best estimate assumptions prudent best estimate assumptions

–– Asset optionality (i.e. call provisions, prepayments) will be Asset optionality (i.e. call provisions, prepayments) will be modeled using prudent best estimate assumptions. modeled using prudent best estimate assumptions.

–– Realized capital gains and losses due to asset sales (if any) Realized capital gains and losses due to asset sales (if any) will be projected following the company’s current will be projected following the company’s current investment strategy. investment strategy.


Starting Assets, contStarting Assets, cont::

Equity investments in GA (stocks, real estate, etc)Equity investments in GA (stocks, real estate, etc)–– Determine number of equity categories (i.e. large cap Determine number of equity categories (i.e. large cap

stocks, international stocks); allocate assets to categories stocks, international stocks); allocate assets to categories

–– Total investment return for each category will be projected Total investment return for each category will be projected based on a path of S&P 500 returns, with total return on based on a path of S&P 500 returns, with total return on each category reflecting differences from S&P 500 return. each category reflecting differences from S&P 500 return.

For Deterministic Reserve, path of S&P 500 returns is prescribedFor Deterministic Reserve, path of S&P 500 returns is prescribed..

For Stochastic Reserve, paths of S&P 500 returns are stochasticaFor Stochastic Reserve, paths of S&P 500 returns are stochastically lly generated.generated.

–– Investment expenses based on prudent best estimatesInvestment expenses based on prudent best estimates


Reinvestment Assets:Reinvestment Assets:–– Net cash flows will be reinvested in a manner consistent Net cash flows will be reinvested in a manner consistent

with the company’s investment policy for each asset with the company’s investment policy for each asset segment. segment.

–– Disinvestment will be consistent with the company’s Disinvestment will be consistent with the company’s investment policy and reflect reasonable sortinvestment policy and reflect reasonable sort--term term borrowing assumptionsborrowing assumptions

–– Net investment earnings on reinvested assets is based on:Net investment earnings on reinvested assets is based on:Prescribed new money rates for fixed income assetsPrescribed new money rates for fixed income assets

Prescribed S&P 500 returns for equity investments Prescribed S&P 500 returns for equity investments

New money rates, Deterministic Reserve:New money rates, Deterministic Reserve:–– An ultimate new money treasury yield curve will be An ultimate new money treasury yield curve will be

prescribed, based on a 65 CTE analysis of historical prescribed, based on a 65 CTE analysis of historical treasury curves. treasury curves.

–– New money treasury curves for each future period New money treasury curves for each future period will be based on a linear interpolation from current will be based on a linear interpolation from current treasury curve at valuation date to the ultimate treasury curve at valuation date to the ultimate treasury curve.treasury curve.

–– Spread over treasuries (net of defaults and invest. Spread over treasuries (net of defaults and invest. exp) is based on prudent best estimate, subject to an exp) is based on prudent best estimate, subject to an aggregate cap set by regulators. aggregate cap set by regulators.


New money rates, Stochastic Reserve: New money rates, Stochastic Reserve: –– New money treasury curves will be stochastically New money treasury curves will be stochastically

generated for each year for each scenario. generated for each year for each scenario.

–– Spread over treasuries (net of defaults and invest. Spread over treasuries (net of defaults and invest. Expenses) is based on prudent best estimate, subject Expenses) is based on prudent best estimate, subject to an aggregate cap set by regulators. to an aggregate cap set by regulators.

S&P 500 equity returns:S&P 500 equity returns:–– Deterministic Reserve: prescribedDeterministic Reserve: prescribed

–– Stochastic Reserve: stochastically generated for Stochastic Reserve: stochastically generated for each year for each scenario. each year for each scenario.



Net Investment Earnings in each period equals:Net Investment Earnings in each period equals:–– Gross Investment income plus capital gains and losses Gross Investment income plus capital gains and losses

minus default costs and investment expenses. minus default costs and investment expenses.

–– Policy loan interest (net of investment expense) will be Policy loan interest (net of investment expense) will be includedincluded

–– Shall also include income from hedge instruments and Shall also include income from hedge instruments and amortization of the IMR. amortization of the IMR.

Invested assets shall be determined in a manner that is Invested assets shall be determined in a manner that is consistent with the timing of cash flows and length of consistent with the timing of cash flows and length of each future period (e.g. month, quarter, year, etc)each future period (e.g. month, quarter, year, etc)


The Discount rates used in the Gross Premium The Discount rates used in the Gross Premium calculation will be set equal to the path of Net calculation will be set equal to the path of Net Asset Earned rates Asset Earned rates

The path of Net Asset Earned rates will also be The path of Net Asset Earned rates will also be used to determine:used to determine:

1)1) Asset crediting rates for surrender benefitsAsset crediting rates for surrender benefits2)2) Other cash flow items impacted by earnings rates (such Other cash flow items impacted by earnings rates (such

as the inflation assumption on expense growth)as the inflation assumption on expense growth)

Step 9: Perform reserve calculationsStep 9: Perform reserve calculations

1. The Deterministic Reserve is a seriatim, policy by policy 1. The Deterministic Reserve is a seriatim, policy by policy calculation. calculation.

2. The Stochastic Reserve is determined in the aggregate acros2. The Stochastic Reserve is determined in the aggregate across s all policies (except those subject to the SR exclusion) all policies (except those subject to the SR exclusion)

3. A Conditional Tail Expectation (CTE) level of 65 is assumed3. A Conditional Tail Expectation (CTE) level of 65 is assumedfor the Stochastic Reserve (will be determined by for the Stochastic Reserve (will be determined by regulators)regulators)

4. Reserve calculations are based on the 9/30 data, and then t4. Reserve calculations are based on the 9/30 data, and then the he results are adjusted to 12/31 (as described previously) results are adjusted to 12/31 (as described previously)

Perform reserve calculations, cont.Perform reserve calculations, cont.

Deterministic ReserveDeterministic Reserve1. 1. Calculate the Seriatim Reserve for each policy, which equals Calculate the Seriatim Reserve for each policy, which equals

A + B A + B –– C, where:C, where:A = PV of future benefitsA = PV of future benefitsB = PV of future expenses (excluding FIT)B = PV of future expenses (excluding FIT)C = PV of gross premiums and other revenueC = PV of gross premiums and other revenue

The PV amounts are calculated using the path of discount rates fThe PV amounts are calculated using the path of discount rates for each or each asset segmentasset segment

2. For each policy, take the greater of the cash surrender va2. For each policy, take the greater of the cash surrender value lue and the Seriatim Reserveand the Seriatim Reserve

3. The Deterministic Reserve equals the sum of the result from3. The Deterministic Reserve equals the sum of the result fromfrom step 2 for all polices. from step 2 for all polices.

Perform reserve calculations, cont. Perform reserve calculations, cont. Stochastic ReserveStochastic Reserve1. 1. Calculate the Scenario Reserve for each Scenario, which Calculate the Scenario Reserve for each Scenario, which

equals A + B:equals A + B:A = Starting AssetsA = Starting AssetsB = Greatest PV of accumulated deficiency B = Greatest PV of accumulated deficiency

Where the accumulated deficiency in each year is the working resWhere the accumulated deficiency in each year is the working reserve erve less the accumulated assets, and the PV amount is calculated usiless the accumulated assets, and the PV amount is calculated using the ng the path of discount rates for each asset segment, path of discount rates for each asset segment,

2. Rank the Scenario Reserves from lowest to highest2. Rank the Scenario Reserves from lowest to highest

3. Take the average of the highest 35% (the highest 350 of the3. Take the average of the highest 35% (the highest 350 of the1,000) Scenario Reserves 1,000) Scenario Reserves

4. Add the DR reserve to step 3 for polices subject to the 4. Add the DR reserve to step 3 for polices subject to the Stochastic Reserve exclusionStochastic Reserve exclusion

Perform reserve calculations, cont. Perform reserve calculations, cont. Reported ReserveReported Reserve1. Take the greater of the DR and SR as of 9/30. 1. Take the greater of the DR and SR as of 9/30. 2. Adjust the result of step 1 to reflect changes from 9/30 t2. Adjust the result of step 1 to reflect changes from 9/30 to 12/31 o 12/31

using the ratio of the DR as of 12/31 and 9/30.using the ratio of the DR as of 12/31 and 9/30.

Results:Results:Deterministic Reserve, 9/30: Deterministic Reserve, 9/30: 425,000425,000Stochastic Reserve, 9/30:Stochastic Reserve, 9/30: 450,000450,000Reported Reserve, 9/30:Reported Reserve, 9/30: 450,000450,000Deterministic Reserve, 12/31:Deterministic Reserve, 12/31: 437,000437,000

Reported Reserve, 12/31: 462,705Reported Reserve, 12/31: 462,705 = = 450,000 * (437/425) 450,000 * (437/425)

PrinciplesPrinciples--based versus Asset Adequacy Analysisbased versus Asset Adequacy Analysis

Both involve more actuarial judgment than current Both involve more actuarial judgment than current “rules“rules--based” valuation approach based” valuation approach

Asset adequacy analysis has few limits and Asset adequacy analysis has few limits and controls; actuary has a high degree of controls; actuary has a high degree of discretion in setting assumptions discretion in setting assumptions

In contrast, the PrinciplesIn contrast, the Principles--based approach will have based approach will have limits placed within the frameworklimits placed within the framework

Step 10: Complete Aggregate Step 10: Complete Aggregate Asset Adequacy AnalysisAsset Adequacy Analysis

Still need to perform asset adequacy analysis on all policies inStill need to perform asset adequacy analysis on all policies inthe aggregate for the purpose of the Actuarial Opinion as the aggregate for the purpose of the Actuarial Opinion as required by the AOMRrequired by the AOMR

Two possible options regarding PBA reserves:Two possible options regarding PBA reserves:

1. PBA reserves are added to formulaic reserves and cash flo1. PBA reserves are added to formulaic reserves and cash flow testing w testing is performed on a combined basis. is performed on a combined basis.

2. Per ASOP #22, the actuary may consider the PBA approach 2. Per ASOP #22, the actuary may consider the PBA approach an an acceptable asset adequacy analysis method, and thus, could excluacceptable asset adequacy analysis method, and thus, could exclude de PBA reserves from cash flow testing. PBA reserves from cash flow testing.

Conclusion: use option #1. Conclusion: use option #1.

Asset Adequacy Analysis, cont. Asset Adequacy Analysis, cont.

Step Step 11: Complete Documentation 11: Complete Documentation RequirementsRequirements

Model Reg requires the actuary to prepare an Model Reg requires the actuary to prepare an Actuarial Report that includes:Actuarial Report that includes:

–– A description of the blocks subject to PBA A description of the blocks subject to PBA –– Disclosure of the results of the DR and SR calculations Disclosure of the results of the DR and SR calculations –– Distribution of the Scenario ReservesDistribution of the Scenario Reserves–– Support for stochastic modeling exclusionSupport for stochastic modeling exclusion–– Analysis of the impact of aggregationAnalysis of the impact of aggregation–– Disclosure of embedded spread on existing assetsDisclosure of embedded spread on existing assets–– Documentation supporting assumptions Documentation supporting assumptions

Step Step 12: Review Documentation with 12: Review Documentation with PBA ReviewerPBA Reviewer

Once the Actuarial Memorandum is Once the Actuarial Memorandum is competed, a “postcompeted, a “post--release” review is release” review is scheduled with the PBA Reviewer. scheduled with the PBA Reviewer.

“Post Release” Review“Post Release” ReviewFinal evaluation that valuation actuary has:Final evaluation that valuation actuary has:

1.1. Prepared proper documentationPrepared proper documentation2.2. Made proper disclosuresMade proper disclosures3.3. Complied with regulatory requirementsComplied with regulatory requirements

PBA Reviewer SignPBA Reviewer Sign--OffOff(Sample)(Sample)

I have reviewed the PBA valuation performed by [valuation actuarI have reviewed the PBA valuation performed by [valuation actuary] y] and in my opinion:and in my opinion:

–– All material risks are capturedAll material risks are captured–– The methods used are appropriate*The methods used are appropriate*–– The models used are reasonable* for the purposeThe models used are reasonable* for the purpose–– The assumptions used are supportable*The assumptions used are supportable*–– The margins in the reserves are supportable*The margins in the reserves are supportable*–– The actuary has followed are relevant laws, regulations, AGs, anThe actuary has followed are relevant laws, regulations, AGs, and ASOPsd ASOPs

Disclaimer: I am not expressing any opinion regarding adequacy Disclaimer: I am not expressing any opinion regarding adequacy of of the reserves or solvency of the insurer. the reserves or solvency of the insurer.

* * Terms to be defined laterTerms to be defined later

Hot Topics under Discussion Hot Topics under Discussion by the LRWGby the LRWG

1. Incorporating GPVAD method into Stochastic 1. Incorporating GPVAD method into Stochastic Reserve calculationReserve calculation

Definition of “working reserve”Definition of “working reserve”Impact on stochastic modeling exclusionImpact on stochastic modeling exclusion

2. Small company issues2. Small company issues

3. Treatment of equity3. Treatment of equity--indexed ULindexed UL

4. Modeling returns on equity assets for DR4. Modeling returns on equity assets for DR

5. Treatment on non5. Treatment on non--guaranteed elementsguaranteed elements

Hot TopicsHot Topics




LRWG Information

6. Incorporating more robust guidance when 6. Incorporating more robust guidance when actuarial judgment is required. actuarial judgment is required.

7. Aggregation level (degree of risk offsets) for 7. Aggregation level (degree of risk offsets) for Stochastic Reserve calculation Stochastic Reserve calculation

8. Modeling of Hedges8. Modeling of Hedges

9. Embedded spread on starting assets 9. Embedded spread on starting assets

10. Tax treatment of the new PBA reserve (section 807 10. Tax treatment of the new PBA reserve (section 807 and 7702 impacts)and 7702 impacts)

Hot TopicsHot Topics




LRWG Information

Modeling ResultsModeling Results

2020--year level term productyear level term productUL shadow account productUL shadow account product

20 Year Term Product Description20 Year Term Product DescriptionPlan of Insurance:Plan of Insurance: 20 Year Level Term20 Year Level Term

Guaranteed PremiumsGuaranteed PremiumsNo Renewal Option after 20 yrs.No Renewal Option after 20 yrs.

Gender/Issue Ages: Gender/Issue Ages: Male, 45Male, 45Risk Class: Risk Class: Best Non Smoker ClassBest Non Smoker Class

10%10%PrePre--Tax IRR on Distributable Earnings Tax IRR on Distributable Earnings (1)(1)

$1,415.00$1,415.00

$65.00$65.00$1.35$1.35

Age 45Age 45

Total Premium $1,000,000 FaceTotal Premium $1,000,000 Face

Policy FeePolicy FeeAnnual Rate per $1000Annual Rate per $1000Premium InformationPremium Information

(1) Reflecting capital of 100% of claims and 5% of reserves. Res(1) Reflecting capital of 100% of claims and 5% of reserves. Reserves using PBE assumptionserves using PBE assumptions




LRWG Information

Market Perspective Premium ComparisonMarket Perspective Premium ComparisonIssue Age 45, Best Class Issue Age 45, Best Class –– Annual Premiums for $1,000,000 Face AmountAnnual Premiums for $1,000,000 Face Amount

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

Ann

ual P

rem

ium

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23LR

WG 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39

Company




LRWG Information

Three Margin Levels Three Margin Levels Numbering consistent with LRWG ReportsNumbering consistent with LRWG Reports

Best Estimate: No MarginsBest Estimate: No Margins

Level 2: Level 2: Deterministic Interest, but mortality margin of Deterministic Interest, but mortality margin of 9.375 deaths per 1000 divided by e9.375 deaths per 1000 divided by exx, 30% lower , 30% lower lapse rateslapse rates

Level 4: Level 4: Deterministic interest scenario, mortality margin Deterministic interest scenario, mortality margin of 3.2%, no other marginsof 3.2%, no other margins




LRWG Information

20 Year Term Examples:20 Year Term Examples:Deterministic Terminal Reserves at Different Margin LevelsDeterministic Terminal Reserves at Different Margin LevelsMale, 45, Best Class, $1,000,000, Annual Premium of $1,415.00.Male, 45, Best Class, $1,000,000, Annual Premium of $1,415.00.

NoneNone

NoneNone

NoneNone

6,567 6,567

4,7914,791

……

611 611

(309)(309)

(1,184)(1,184)

(2,026)(2,026)

(2,834)(2,834)

$(362)$(362)

BestBestEstimateEstimate

NoneNone30%30%Lapse Rate MarginLapse Rate Margin

3.2%3.2%0.009375/ex0.009375/exMortality MarginMortality Margin

DeterministicDeterministicDeterministicDeterministicDiscount Rate MarginDiscount Rate Margin

……………………

6,956 6,956 9,068 9,068 23,686 23,686 1515

5,2635,2638,5548,55424,14524,1451010

1,063 1,063 4,699 4,699 12,892 12,892 55

130 130 3,752 3,752 9,859 9,859 44

(760)(760)2,813 2,813 6,673 6,673 33

(1,618)(1,618)1,888 1,888 3,386 3,386 22

(2,448)(2,448)947 947 $ 0 $ 0 11

$3 $3 $3,309 $3,309 $ 0 $ 0 At IssueAt Issue

PBAPBALevel 4Level 4


CurrentCurrentFormulaicFormulaic

PolicyPolicyYearYear--EndEnd




LRWG Information

20 Year Term Examples:20 Year Term Examples:Deterministic Terminal Reserves at Different Margin LevelsDeterministic Terminal Reserves at Different Margin LevelsMale, 45, Best Class, $1,000,000, Annual Premium of $1,415.00.Male, 45, Best Class, $1,000,000, Annual Premium of $1,415.00.

-5,000

0

5,000

10,000

15,000

20,000

25,000

30,000

At I

ssue

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Formulaic Level 2 Level 4 Best Estimate




LRWG Information

Possible approach to compare aggregate Possible approach to compare aggregate impact of all assumption marginsimpact of all assumption margins

The LRWG is exploring the use of a number we are calling The LRWG is exploring the use of a number we are calling ““ZZ”” to to provide for the quantitative comparison of the aggregate impact provide for the quantitative comparison of the aggregate impact of of all assumption margins. It is defined as followsall assumption margins. It is defined as follows::

Z = Z = Reserve held Reserve held -- Best estimate liabilityBest estimate liabilityPresent value of capital requirementPresent value of capital requirement

““ZZ”” represents the amount by which the prerepresents the amount by which the pre--tax return on capital tax return on capital is expected to exceed the return on invested assets:is expected to exceed the return on invested assets:

ROC = Z + i (preROC = Z + i (pre--tax)tax)




LRWG Information

Possible approach to compare aggregate Possible approach to compare aggregate impact of all assumption marginsimpact of all assumption margins

Given this connection with the return on capital, one can Given this connection with the return on capital, one can determine whether the aggregate impact of all margins are determine whether the aggregate impact of all margins are within a reasonable range.within a reasonable range.

For these illustrations, the level of capital was set equal to For these illustrations, the level of capital was set equal to 100% of claims plus 5% of the reserve. 100% of claims plus 5% of the reserve.

““ZZ”” could be used as a disclosure item to compare the could be used as a disclosure item to compare the aggregate impact of all assumption margins. aggregate impact of all assumption margins.




LRWG Information

20 Year Term Examples:20 Year Term Examples:Comparison of Z Levels and Deterministic Reserve MarginsComparison of Z Levels and Deterministic Reserve MarginsMale, 45, Best Class, $1,000,000, Annual Premium of $1,415.00.Male, 45, Best Class, $1,000,000, Annual Premium of $1,415.00.

NoneNone

NoneNone

NoneNone

0.0%0.0%

0.0%0.0%





5.6%5.6%44.4%44.4%228.4%228.4%At 10 YearsAt 10 Years

4.5%4.5%45.7%45.7%4.5% 4.5% At IssueAt Issue




Policy YearPolicy YearZ ValuesZ Values




LRWG Information

Stochastic Reserve?Stochastic Reserve?

Not Materially Different than DeterministicNot Materially Different than Deterministic

Need to update for GPVAD approach Need to update for GPVAD approach

UL Product DescriptionUL Product DescriptionPlan of Insurance:Plan of Insurance: UL UL –– No Lapse GuaranteeNo Lapse Guarantee

Shadow Fund Design (significant sales loads)Shadow Fund Design (significant sales loads)

Gender/Issue Ages: Gender/Issue Ages: Male, 45Male, 45Risk Class: Risk Class: Best Non Smoker ClassBest Non Smoker Class

1616Breakeven Year (Profit Accumulated at 6%)Breakeven Year (Profit Accumulated at 6%)13.4%13.4%PrePre--Tax IRR on Distributable Earnings Tax IRR on Distributable Earnings (1)(1)

$1,000,000$1,000,000$8,233$8,233Age 45Age 45

Face AmountFace AmountAll Pay No Lapse Premium (fully commissionable)All Pay No Lapse Premium (fully commissionable)Premium InformationPremium Information

(1) Reflecting capital of 6% of reserve, $1.30 per 1000 of Net a(1) Reflecting capital of 6% of reserve, $1.30 per 1000 of Net at Risk, 25% of premium. Reserves using PBE assumptionst Risk, 25% of premium. Reserves using PBE assumptions




LRWG Information

Market Perspective Premium ComparisonMarket Perspective Premium ComparisonIssue Age 45, Best Class Issue Age 45, Best Class –– All Pay No Lapse Premiums for $1,000,000All Pay No Lapse Premiums for $1,000,000

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

Ann

ual P

rem

ium

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22LR

WG 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 42 46

Company




LRWG Information

Three Margin Levels Three Margin Levels Numbering consistent with LRWG ReportsNumbering consistent with LRWG Reports

Best Estimate: No marginsBest Estimate: No margins

Level 2:Level 2: Deterministic interest Scenario, Deterministic interest Scenario, mortality margin of 9.375 deaths per mortality margin of 9.375 deaths per 1000 divided by e1000 divided by ex,x,, 30% lapse , 30% lapse margin, 5% expense marginmargin, 5% expense margin

Level 4: Level 4: Deterministic interest scenario, Deterministic interest scenario, mortality margin of 1.20%, No lapse mortality margin of 1.20%, No lapse margin, 5% expense marginmargin, 5% expense margin




LRWG Information

UL with Shadow Account Value No Lapse Guarantee:UL with Shadow Account Value No Lapse Guarantee:Deterministic Terminal Reserves at Different Margin LevelsDeterministic Terminal Reserves at Different Margin LevelsMale, 45, Best Class, $1,000,000, Annual Premium of $8,233Male, 45, Best Class, $1,000,000, Annual Premium of $8,233

5%5%5%5%NoneNoneExpense MarginExpense Margin

NoneNone30%30%NoneNoneLapse Rate MarginLapse Rate Margin

1.2%1.2%0.009375/ex0.009375/exNoneNoneMortality MarginMortality Margin

DeterministicDeterministicDeterministicDeterministicNoneNoneDiscount Rate MarginDiscount Rate Margin

394,106394,106404,430404,430353,302353,302536,476536,4763030

…………………………

217,099217,099225,090225,090175,365175,365323,901 323,901 2020

79,94179,94188,47388,47350,56050,560113,966113,9661010

26,93226,93235,66335,6635,7855,78532,14032,14055

18,00018,00026,62126,621(1,652)(1,652)21,91621,91644

9,6799,67918,10718,107(8,480)(8,480)11,94711,94733

1,9351,93510,09210,092(14,788)(14,788)6,1406,14022

(5,275)(5,275)2,5362,536(20,585)(20,585)$43 $43 11

$92$92$7,787$7,787($13,865)($13,865)$ 0 $ 0 At IssueAt Issue





PolicyPolicyYearYear--EndEnd




LRWG Information

Revised

UL Shadow Account UL Shadow Account –– No Lapse Guarantee ExampleNo Lapse Guarantee ExampleDeterministic Terminal Reserves at Different Margin LevelsDeterministic Terminal Reserves at Different Margin LevelsMale, 45, Best Class, $1,000,000, Annual Premium of $8,233Male, 45, Best Class, $1,000,000, Annual Premium of $8,233

-40,000

-20,000

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000A

t Iss

ue

1 2 3 4 5 10





LRWG Information

Policy Years: 1-5 and 10

UL Shadow Account UL Shadow Account –– No Lapse Guarantee Example No Lapse Guarantee Example Deterministic Terminal Reserves at Different Margin Deterministic Terminal Reserves at Different Margin LevelsLevelsMale, 45, Best Class, $1,000,000, Annual Premium of $8,233Male, 45, Best Class, $1,000,000, Annual Premium of $8,233

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

1,000,00020 30 40 50 60





LRWG Information

Policy Years: 20, 30, 40, 50, 60

UL Shadow Account UL Shadow Account –– No Lapse Guarantee Example: No Lapse Guarantee Example: Comparison of Z Levels and Deterministic Reserve MarginsComparison of Z Levels and Deterministic Reserve MarginsMale, 45, Best Class, $1,000,000, Annual Premium of $8,233Male, 45, Best Class, $1,000,000, Annual Premium of $8,233

5%5%5%5%NoneNoneExpense MarginExpense Margin

NoneNone

NoneNone

NoneNone

0.0%0.0%

0.0%0.0%





9.6%9.6%12.5%12.5%27.9%27.9%At 10 YearsAt 10 Years

9.0%9.0%12.9%12.9%9.0% 9.0% At IssueAt Issue




Policy YearPolicy YearZ ValuesZ Values




LRWG Information

Stochastic Reserve?Stochastic Reserve?

Approximately 6% higher than Approximately 6% higher than Deterministic for a mature block of business Deterministic for a mature block of business under the GPV approach. under the GPV approach. Varies by durationVaries by durationNeed to update for GPVAD approachNeed to update for GPVAD approach

Documents

Principles-based Reserves for Life Products - ACSW Neve - Principles Based Reserves.pdf · Principles-based Reserves for Life Products ACSW Meeting June 16, ... Select Cash Flow model