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Session 118 PD - VM-20 Impact on Product Development: Research Study Phase 2
Moderator:
Kelly J. Rabin, FSA, MAAA
Presenters: Paul Fedchak, FSA, MAAA
Jacqueline M. Keating, FSA, MAAA Michael W. Santore, FSA, MAAA
SOA Antitrust Compliance Guidelines SOA Presentation Disclaimer
VM-20 Impact onProduct Development:Research Study Phase 2SOA Annual Meeting & ExhibitKelly Rabin, Paul Fedchak, Jackie Keating, Michael Santore
October 17, 2017
Agenda
Phase 1 Case Studies – High Level Background
Phase 2 Case Studies
Phase 2 Interviews
Observations / Commentary / Impacts
2
Phase 1 - Pricing SituationsDescription Statutory Reserves Tax Reserves
1 2001 CSO Model 830 statutory reserves (XXX, AG38) Model 830 tax reserves (XXX, AG38)
2 2001 CSO with AG48 Financing
NPR component of VM-20 reserves calculated using 2001 CSO Table with adjustment factors specified in AG48. DR and SR calculated as described below for PBR
Model 830 tax reserves (XXX, AG38)
3 2017 CSO Model 830 statutory reserves (XXX, AG38) Model 830 tax reserves (XXX, AG38)
4 2017 CSO with AG48 Financing
NPR component of VM-20 reserves calculated using 2017 CSO Table. DR and SR calculated as described below for PBR.
Model 830 tax reserves (XXX, AG38) using 2017 CSO Table
5 2017 CSO PBR VM-20 statutory reserves using 2017 CSO table. Term: DR, NPR. ULSG: SR, DR, NPR
NPR tax reserves calculated using 2017 CSO Table
3
VM-20 Pricing Case Studies
Case Studies focus on a single pricing scenario
Starts at December 31, 2015 Yield Curve, and grades to long-term expectations over three years.
Uses pricing assumptions in financial results (outer loop), and VM-20 assumptions at each future valuation date node (inner loop).
Profit Metrics:
Profit Margin – PV of Profits / PV of Premiums
Surplus Strain after Target Capital
IRR (adjusted for target capital and after-tax)
4
Term Case Study: Product Design
10 and 20 year Level Premium Term to A95 Design
Premiums represent average rates available in top quartile of market (as of early 2016); $60 policy fee
Issue ages 20-65 for 10T; 20-55 for 20T
Premiums guaranteed during initial level period
Tail premiums set at 250% of 2017 CSO Ultimate rates
4 NS; 2 S class structure
5
Term Phase 1 Case Study: Assumptions
6
Risk Factor Margin for Situations 2, 4, and 5Mortality From Limited Fluctuation table when 2015 VBT is the
industry basic table; assuming 99% credibility, no mortality improvement beyond node.
Lapse Term 10: (1-3) +5%; (4+) -10%Term 20: (1-5) +5%; (6+) -10%
Expense 5% on maintenance expensesReinsurance Premiums
Increased to reflect the VM-20 mortality margin. Some call this a “margin,” others may think of it as reconciling the economics of the reinsurance with the PBR valuation.
7
20 Year Term Case Study Profitability Results
PT Profit Margin*
AT Profit Margin**
Adjusted AT Profit
Margin***
Surplus Strain
IRR Adjusted After-Tax
Low Band Model Office1) XXX Stat/Tax, 2001 CSO 18.4% 11.2% 6.5% -180% 6.6%2) AG48 Stat, XXX Tax 2001 CSO 15.4% 16.0% 11.6% -172% 25.2%3) XXX Stat/Tax, 2017 CSO 18.4% 11.1% 6.6% -180% 7.4%4) AG48 Stat, XXX Tax, 2017 CSO 16.8% 13.7% 9.3% -172% 16.5%5) PBR NPR+DR Excess Stat, NPR Tax, 2017 CSO 18.4% 11.1% 6.7% -172% 9.9%High Band Model Office1) XXX Stat/Tax, 2001 CSO 19.9% 12.0% 6.5% -169% 6.4%2) AG48 Stat, XXX Tax 2001 CSO 16.0% 18.4% 13.2% -147% 37.5%3) XXX Stat/Tax, 2017 CSO 19.9% 11.9% 6.6% -169% 7.1%4) AG48 Stat, AG38 Tax, 2017 CSO 17.8% 15.3% 10.1% -147% 22.8%5) PBR NPR+DR Excess Stat, NPR Tax, 2017 CSO 19.9% 11.9% 6.7% -147% 10.4%* Pretax profit margin is calculated with discount at the pretax NIER.** After-tax profit margin is calculated with discount at the pretax NIER.*** Adjusted after-tax profit margin includes target capital effects and is calculated with discount at the pretax NIER.
Deterministic Reserve Attribution
DR Baseline: DR from the Phase 1 Situation 5
DR1 Remove Mortality Margins: For each future DR calculation, mortality improvement is included in cash flows beyond the valuation date, or node, and the VM-20 margin is omitted. This effectively brings the mortality assumption back to the company’s anticipated experience. Note that for Phase 1 term, because of the assumed availability of credible mortality data, there was no grading to industry tables over the level term period.
DR2 Remove Lapse Margins: Starting with DR1 assumptions, the lapse margin is omitted from the inner loop cash flows
DR3 Remove Expense Margin: Starting with DR2 assumptions, the expense margin is omitted from the inner loop cash flows
DR4 4% Discount Rate: Starting with DR3 assumptions, the Deterministic Reserve discount rate is assumed to be 4% level
8
Term Phase 1 Case Study: Key Reserve Pattern Observations
The driver of the PBR reserve for term is product/company-specific
NPR floor often the winner in the early and late LTP durations
The ability to forecast DR with mortality improvement to future valuation dates is an important element in the pricing exercise (metrics are lower without reflecting mortality improvement in forecast DR)
9
Term Phase 1 Case Study: DR Attribution
10
-2000
-1500
-1000
-500
0
500
1000
1500
2000
2500
3000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Thou
sand
s
Term DR Attribution
NPR DR Baseline DR1¹ DR2² DR3³ DR4⁴
■1 DR1: Remove mortality margins ■ 2 DR2: Remove lapse margins■ 3 DR3: Remove expense margin ■ 4 DR4: Level discount rate (4%)
ULSG Phase 1 Case Study: Product Design
Multi-Tier Shadow Account Design
Competitive in top quartile of market (as of early 2016)
Minimal Cash Value Accumulation Potential
Lifetime Guarantee
Assume level premium to provide coverage to age 110
11
ULSG Phase 1 Case Study: Assumptions
12
Risk Factor Margin for Situations 2, 4, and 5Mortality From Limited Fluctuation table when 2015 VBT is the
industry basic table; assuming 99% credibility, no mortality improvement beyond node.
Lapse 10%, grade to Term-to-100 table after year 10Expense 5% on maintenance expensesReinsurance Premiums
Increased to reflect the VM-20 mortality margin. Some call this a “margin,” others may think of it as reconciling the economics of the reinsurance with the VM-20 valuation.
ULSG Phase 1 Case Study: Stochastic Reserve Approach
Deferred Valuation Approach
Best Estimate Project to the Valuation Date (Node)
Then Branches into Stochastic Scenario Sets from the Node
Greatest PV of Negative Assets Discounted to Node
CTE70 Calculated
Calculated Explicitly at Six Nodes (1, 5, 10, 20, 30, 50)
Ratio of SR to DR at each node, Interpolate Ratios Between Nodes
13
ULSG Case Study: Profitability Results
14
ULSG with Level Premiums for Coverage to A110PT Profit Margin*
AT Profit Margin**
Adjusted AT Profit Margin***
Surplus Strain
IRR Adjusted After-Tax
Low Band Model Office1) AG38 Stat/Tax, 2001 CSO 22.5% 12.6% 10.5% -331% 7.0%2) AG48 Stat, AG38 Tax 2001 CSO 18.9% 18.7% 17.1% -180% 18.5%3) AG38 Stat/Tax, 2017 CSO 21.9% 7.8% 5.5% -610% 5.9%4) AG48 Stat, AG38 Tax, 2017 CSO 16.7% 16.7% 15.0% -183% 16.0%5) PBR NPR+DR+SR Stat, NPR Tax, 2017 CSO 23.7% 8.6% 6.9% -196% 7.3%High Band Model Office1) AG38 Stat/Tax, 2001 CSO 18.3% 9.0% 6.8% -395% 6.3%2) AG48 Stat, AG38 Tax 2001 CSO 14.9% 14.8% 13.1% -267% 11.5%3) AG38 Stat/Tax, 2017 CSO 17.9% 4.9% 2.6% -633% 5.6%4) AG48 Stat, AG38 Tax, 2017 CSO 13.2% 13.0% 11.3% -270% 10.2%5) PBR NPR+DR+SR Stat, NPR Tax, 2017 CSO 19.5% 4.4% 2.6% -285% 5.9%*Pre-tax profit margin is calculated with discount at the pre-tax NIER**After-tax profit margin is calculated with discount at the pre-tax NIER*** Adjusted after-tax profit margin includes target capital effects and is calculated with discount at the pre-tax NIER
ULSG Case Study: Statutory Reserve Patterns
15
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
$90,000
$100,000
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81
ULSG 350k Face 2017 CSO Reserve Patterns
AG38 Stat Reserve NPR Stat Reserve DR Excess Reserve Total PBR Stat Reserve SR Excess Reserve
There is an excess of DR over NPR in all policy durations
There is only an excess of SR over DR in early durations, and the excess is small
ULSG Case Study: Statutory Reserve Patterns
16
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
1 2 3 4 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 31
ULSG 350k Face 2017 CSO Reserve Patterns
SR Excess Reserve Account Value
As the account value dwindles, SR Excess declines
ULSG Phase 1 Case Study: Key Reserve Pattern Observations
There is an excess of DR over NPR in all policy durations
There is only an excess of SR over DR in early durations, and the excess is small
As the account value dwindles, SR Excess declines Interest sensitivity declines with account value
Level of NPR to DR is important, assuming NPR will be tax deductible
17
ULSG Phase 1 Case Study: DR Attribution
18
■1 DR1: Remove mortality margins ■ 2 DR2: Remove lapse margins■ 3 DR3: Remove expense margin ■ 4 DR4: Level discount rate (5.2%)
(20,000)
(10,000)
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
1 2 3 4 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 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50
ULSG - DR Attribution
NPR Baseline DR_1 DR_2 DR_3 DR_4
Phase 2
Phase 2 expands on the Phase 1 case studies to include the following situations:
Small company with limited data Simplified issue term product Guaranteed YRT premiums Level term product with post-level-term projection 30-year level term product Short pay ULSG product
19
Small Company Case Study
The Phase 1 case studies reflected characteristics of a large company in that the mortality experience was assumed to be fully credible with a 15-year sufficient data period
20
StepAcquisition
Expense per UnitMortality Credibility &Sufficient Data Period Reinsurance
Phase 1 $0.20 100% and 15 years Non-Guaranteed YRT, $1,000,000 RetentionStep 1 $1.00 100% and 15 years Non-Guaranteed YRT, $1,000,000 Retention
Step 2 $1.00 28% and 3 years Non-Guaranteed YRT, $1,000,000 Retention
Step 3
$1.00 28% and 3 years
80% Coinsurance with $100,000 limit on retention*
Expense allowances are 100% first year, 11% renewal years
Term: Small Company Pricing Results
21
Small Company20 Year Level Term
Pretax Profit
Margin1
After-Tax Profit
Margin2
Adjusted After-Tax
Profit Margin3
Surplus Strain
IRRAdjusted After-Tax
High-Band Model OfficePhase 1 Situation 5 19.9% 11.9% 6.7% -147% 10.4%Step 1: Increase Per Unit Acquisition to $1.00 14.7% 8.5% 3.3% -178% 7.1%Step 2: Inner loop mortality 28% credibility; 3 Yr SDP
14.7% 1.0% -4.5% -472% 4.2%
Step 3: Coinsurance 8.1% 1.9% -0.5% -75% 4.5%
1 Pretax profit margin is calculated with discount at the pretax net investment earnings rate (NIER).2 After-tax profit margin is calculated with discount at the pretax NIER.3 Adjusted after-tax profit margin includes target capital effects and is calculated with discount at the pretax NIER.
Term Small Company: Reserve Levels
1Step 1: Higher Acquisition Expenses 2Step 2: Lower Mortality Credibility
3Step 3: Coinsurance 22
20-Year Term, High Band
-2000
-1000
0
1000
2000
3000
4000
5000
6000
7000
8000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Thou
sand
s
20-Year Plan $1.2MM
Phase 1 DR Phase 1 NPR Step 1¹ DR Step 2² DR
Step 3³ DR Step 3 NPR XXX 2017 CSO
Small Company Sensitivity - ULSG
23
ULSG with Level Premiums for Coverage to A110 PT Profit Margin*
AT Profit Margin**
Adjusted AT Profit Margin***
Surplus Strain
IRR Adjusted After-Tax
High Band Model OfficeStep 1) Phase 1 Pricing Situation 5 19.5% 4.4% 2.6% -285% 5.9%
Step 2) Small Company Reserve Assumptions 18.5% -1.1% -3.0% -503% 4.9%
Step 3) Small Company with Coinsurance 4.9% 2.5% 2.3% -31% 13.4%
*Pre-tax profit margin is calculated with discount at the pre-tax NIER**After-tax profit margin is calculated with discount at the pre-tax NIER*** Adjusted after-tax profit margin includes target capital effects and is calculated with discount at the pre-tax NIER
Preliminary Draft - Subject to Change
Small Company Sensitivity - ULSG
24
(15,000)
(10,000)
(5,000)
-
5,000
10,000
15,000
20,000
25,000
1 11 21 31 41 51 61 71
Small Company Reserve Patterns - $1.2M Band
Small Co w Coin DR Small Co NPR Phase 1 with Coin
Preliminary Draft - Subject to Change
Guaranteed YRT Sensitivity
25Preliminary Draft - Subject to Change
Term Outer Loop Inner LoopMortality Company anticipated experience,
includes improvement into futureCompany anticipated experience with VM-20 margin, but assuming improvement only to the point of valuation, i.e. the future node
YRT premiums –Baseline with $200,000 retention (YRT premiums not guaranteed)
YRT premiums are assessed at a level equal to 110% of the mortality rates in the outer loop
DR calculation assumes YRT premiums equal to 110% of the mortality level in the inner loop which includes the VM-20 margin and improvement only to the point of valuation, i.e. the future node
YRT premiums –Guaranteed 120%
YRT premiums are assessed at a level equal to 120% of the mortality rates in the outer loop
DR calculation assumes YRT charge level equal to 120% of the best estimate mortality rates, therefore the inner loop YRT premiums are the same as the outer loop YRT premiums
Guaranteed YRT Sensitivity – 20 Year Term
26
Term PT Profit Margin*
AT Profit Margin**
Adjusted AT Profit Margin***
Surplus Strain
IRR Adjusted After-Tax
High Band Model Office
Situation 5 from Phase 1 report 19.9% 11.9% 6.7% -147% 10.4%
Revised Baseline with $200,000 retention 12.9% 7.1% 5.8% −55% 15.0%YRT premiums at 120% of expected mortality 7.2% 3.6% 2.4% −55% 11.7%
*Pre-tax profit margin is calculated with discount at the pre-tax NIER**After-tax profit margin is calculated with discount at the pre-tax NIER*** Adjusted after-tax profit margin includes target capital effects and is calculated with discount at the pre-tax NIER
Preliminary Draft - Subject to Change
Guaranteed YRT Sensitivity – 20 Year Term
27Preliminary Draft - Subject to Change
-1,000
-500
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Thou
sand
s20-year Plan $1.2 MM
DR, NPR
DR Baseline ($200K retention) DR 120%² NPR
Guaranteed YRT Sensitivity - ULSG
28
ULSG with Level Premiums for Coverage to A110
PT Profit Margin*
AT Profit Margin**
Adjusted AT Profit Margin***
Surplus Strain
IRR Adjusted After-Tax
High Band Model Office
Situation 5 from Phase 1 report 19.5% 4.4% 2.6% -285% 5.9%
Revised Baseline with $200,000 retention 14.0% -2.6% -4.2% −393% 4.6%YRT premiums at 120% of expected mortality 10.1% 4.9% 3.7% −64% 13.9%
*Pre-tax profit margin is calculated with discount at the pre-tax NIER**After-tax profit margin is calculated with discount at the pre-tax NIER*** Adjusted after-tax profit margin includes target capital effects and is calculated with discount at the pre-tax NIER
Preliminary Draft - Subject to Change
Guaranteed YRT Sensitivity - ULSG
29
-
50,000
100,000
150,000
200,000
250,000
300,000
350,000
1 11 21 31 41 51 61 71
Total VM-20 ULSG Reserve - Guaranteed YRT Study
Increased Reinsurance (New Baseline) Guaranteed YRT
Preliminary Draft - Subject to Change
Simplified Issue – 20-year Term Single Cell
Simplified Issue (Single Cell)20-year Term
Pretax Profit
Margin1
After-Tax Profit
Margin2
Adjusted After-Tax
Profit Margin3
Surplus Strain
IRRAdjustedAfter-Tax
20-Year Term
Phase 1, Situation 3 20.9% 12.8% 8.5% -164% 8.3%
SI_1: SI Experience Assumptions -53.1% -37.3% -40.7% -356% -13.6%
SI_2: $100,000 Average Policy Size; Higher Per Unit Premium
10.9% 6.3% 4.8% -120% 8.8%
SI_3: Implement VM-20 Reserves 10.9% 6.1% 4.6% -120% 10.6%1 Pretax profit margin is calculated with discount at the pretax net investment earnings rate (NIER).2 After-tax profit margin is calculated with discount at the pretax NIER.3 Adjusted after-tax profit margin includes target capital effects and is calculated with discount at the pretax NIER.
30
Simplified Issue VM-20 Impact
31
-5
0
5
10
15
20
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Simplified Issue Single CellDR, NPR
Phase 1, Situation 3 SI_1¹ SI_2² SI_3³: DR, unfloored SI_3: NPR
■ 1 SI_1: Simplified issue assumptions ■ 2 SI_2: Simplified issue average size and premiums■ 3 SI_3: Simplified issue VM-20
Simplified Issue VM-20 Impact
DR is negative at issue because the cell has been priced for statutory profit
NPR prevails from issue until the 6th duration
Reserve build up is delayed compared to XXX
DR is higher than NPR reserve after duration 6 which creates tax inefficiencies during those years
Other considerations: Is 2017 CSO appropriate table to use What if mortality expectations are higher than any available industry tables? With partial credibility, the company must choose what table to grade to How does the actuary demonstrate a mapping to the industry table?
32
30 Year Term Case Study: Pricing ResultsLow Band, Single Cell
33
30-Year Term (Single Cell)
Pretax Profit Margin1
After-Tax Profit
Margin2
Adjusted After-Tax
Profit Margin3
Surplus Strain
IRRAdjustedAfter-Tax
Cell: Issue age 45 Male N3, $350,000 Size
Situation 3) XXX Stat/Tax, 2017 CSO 25.2% 14.8% 12.4% -351% 7.5%
Situation 5) VM-20 NPR+DR Excess Stat, NPR Tax, 2017 CSO 25.2% 15.7% 13.5% -112% 15.0%
1 Pretax profit margin is calculated with discount at the pretax net investment earnings rate (NIER).2 After-tax profit margin is calculated with discount at the pretax NIER.3 Adjusted after-tax profit margin includes target capital effects and is calculated with discount at the pretax NIER.
Short Pay - ULSG
34
ULSG - Short Pay Single Cell PT Profit Margin*
AT Profit Margin**
Adjusted AT Profit Margin***
Surplus Strain
IRR Adjusted After-Tax
1) Level Pay 55 MN 30.4% 15.5% 14.0% -61% 15.4%2) Ten Pay 55 MN 22.3% 12.9% 10.9% -94% 10.2%3) Single Pay MN 27.2% 16.9% 15.0% -11% 19.8%
*Pre-tax profit margin is calculated with discount at the pre-tax NIER**After-tax profit margin is calculated with discount at the pre-tax NIER*** Adjusted after-tax profit margin includes target capital effects and is calculated with discount at the pre-tax NIER
Short Pay Study - ULSG
35
-
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
1 11 21 31 41 51 61 71
Total VM-20 Reserve - Short Pay Study
Level Pay Ten Pay Single Pay
Phase 2 – Interviews One hour discussions with product development actuaries Fourteen different companies Consistent set of open-ended questions
36
Phase 2 – Interviews
Preparedness Implementation Collaboration
Pricing Process Simplifications
37
Phase 2 – Interviews (Preparedness)
VM-20 “Czar” or special VM-20 committee. Valuation area lead effort in some companies. In others, pricing lead. Companies doing AG48 reserve financing ahead and valuation focused. Resources: conferences, webinars, boot camps, and pilot studies, individual
reading, outside consultants. Many companies doing trial runs with VM-20, but only a few planning product
launches in 2017 or early 2018. Term likely to come before ULSG. VM-20 may eventually produce Term and ULSG product design changes, but
no company indicated they worked through all the details. Most taking a “wait-and-see” approach.
38
Phase 2 – Interviews (Implementation Concerns)
Fluctuation of reserves and profitsUnlocking of assumptions and potential future changes in methodologyExplaining movements to senior management
Definition of tax reserves Guidance for assumptions and margins, particularly for newer features and
underwriting regimes with limited experience (e.g., accelerated underwriting) Lower profitability
Small companies with limited or near-zero credibilityCompanies currently engaged in reserve financing
Allocation of VM-20 excess reserves to profit cells
39
Phase 2 – Interviews (Implementation Concerns, cont.)
Complexity of calculationsMost systems can handle, but effort still required: upgrading, custom coding,
trainingSeparate inner-loop versus outer-loop assumptionsAuditabilityCoordinating multiple systems (e.g., NPR versus DR and SR)Moving to asset / liability approach (for companies previously using liability only)Runtime
Longer time-to-market in initial years following VM-20 implementation
40
Almost all companies noted increased cooperation and communication between company areas:
Pricing and ValuationCorporateModelingTax
Promote consistency in assumptions More cross functional meetings, work groups, and governance committees
Variety of levels of formality Common theme: VM-20 accelerating or strengthening already existing
governance structures and plans
Phase 2 – Interviews (Collaboration)
41
Phase 2 – Interviews (Changes to Pricing Process)
Same basic steps to pricing process as currently Slower process expected, at least initially, due to:
Collaboration / Communication (interdepartmental, regulators, reinsurers) Initial decision-making regarding various aspects of VM-20 calculations Increased runtimeMore sensitivity testingMore challenging auditing and validationMore reserves to calculate than currently (NPR, DR, SR)
Potential adjustments to reinsurance agreements/rates; reinsurer input being sought more often throughout pricing process
Stochastic pricing exacerbates the challenges
42
Phase 2 – Interviews (Anticipated Simplifications)
Likely to start with fewer shortcuts and after gauging materiality Liability grouping, cluster modeling, asset grouping Setting certain assumptions in the outer loop equal to the VM-20 compliant
assumptions of the inner loop Using an aggregate margin rather than margins on specific assumptions Calculate DR discount rates and SR only at selected nodes Assume no changes to future credibility or sufficient data period Particularly for sensitivity testing, use relationship between DR and SR to
approximate the SR, or only change outer loop assumptions
43
VM-20 Research Wrap Up – Phase 1
Term, not Financed: PBR increases internal rates of return (IRRs) Term, Financed: PBR decreases internal rates of return (IRRs) ULSG, not Financed: PBR has no material impact internal rates of return
(IRRs) ULSG, Financed: PBR decreases internal rates of return (IRRs) Companies that finance statutory reserves may have incentive to delay
implementation The intuitive idea of PBR reducing reserves and therefore premiums is
not a given under VM-20
44
VM-20 Research Wrap Up – Phase 2 Case Studies
For both term and ULSG, moving from anticipated experience mortality to VM-20 mortality assumptions had the biggest impact on the level of reserves
Small Company Study: Deterministic Reserves is as great as, or greater than, XXX reserves in many durations
Guaranteed YRT case studies produced different results for the term and ULSG products
SI: VM-20 reserving methods may improve IRR compared to Model 830 methods
45
VM-20 Research Wrap Up – Phase 2 Industry Interviews
Even mix between the pricing and valuation areas regarding where VM-20 expertise resided
Higher level of unpredictability and fluctuation in their reserves and anticipated profits under VM-20Guaranteed
Intensiveness and complexity of the computations necessary for VM-20
Lower anticipated profitability upon moving to VM-20 reserving
“Wait-and-see” approach on product design changes
Not much thought to “other” products in a VM-20 context
46
Questions?
47