Statutory Valuation of Individual Life and Annuity Contracts

Description

Table of Contents Foreword ....................................................................................................................................................... i Preface .......................................................................................................................................................... iii About the Authors ..................................................................................................................................... v Access to Excel Models ............................................................................................................................ vii Part 4 I Principle-Based Reserves ...................................................................................... 1 23. VM-20: PBR for Life Products ..................................................................................... 3 23.1 VUL Model ...................................................................................................................................... 4 23.1.1 Model Overview .............................................................................................................. 5 23.1.2 Gathering Data ................................................................................................................ 7 23.1.3 Preparing the Model ..................................................................................................... 17 23.1.4 Running the Model ....................................................................................................... 19 23.1.5 Storing the Results ........................................................................................................ 20 23.1.6 Analyzing Reports ......................................................................................................... 21 23.2 Overview ofVM-20 ...................................................................................................................... 22 23.3 Scope ofVM-20 ............................................................................................................................. 23 23.4 Purpose and Definitions .............................................................................................................. 25 23.5 Minimum Reserves ....................................................................................................................... 26 23.6 Net Premium Reserve Overview ................................................................................................ 31 23.6.1 Net Premium Reserve for Term lnsurance .............................................................. 33 23.6.2 Net Premium Reserve for ULSG ............................................................................... 38 23.6.3 Net Premium Reserve for Other Types .................................................................... 43 23.6.4 Net Premium Reserve Floor ........................................................................................ 44 23.7 Deterministic Reserve .................................................................................................................. 45 23.7.1 Prospective Method ...................................................................................................... 46 23.7.2 Retrospective Method .................................................................................................. 57 23.8 Stochastic Reserve ......................................................................................................................... 59 23.9 Exclusion Tests .............................................................................................................................. 66 23.9.1 Life PBRExemption ..................................................................................................... 66 23.9.2 Stochastic Exclusion Test ............................................................................................ 67 23.9.3 Deterministic Exclusion Test ..................................................................................... 69 23.10 Cash Flow Models ........................................................................................................................ 70 23.10.1 Model Structure ............................................................................................................ 70 23.10.2 General Description of Cash Flow Projections ....................................................... 70 23.10.3 Non-Guaranteed Elements ......................................................................................... 71 23.10.4 StartingAssets ................................................................................................................ 72 23.10.5 Reinvestment Assets and Disinvestment .................................................................. 72 23.10.6 Cash Flows from Invested Assets ............................................................................... 73 23.10.7 Economic Scenarios ...................................................................................................... 74 23.10.8 Net Asset Earned Rates and Discount Rates ........................................................... 75 23.10.9 Modeling of Derivative Programs .............................................................................. 76 23.10.10 Clearly Defined Hedging Strategy ............................................................................. 77 23.11 Reinsurance .................................................................................................................................... 78 23.11.1 General Considerations ............................................................................................... 78 23.11.2 Reinsurance Ceded ....................................................................................................... 79 23.11.3 Reflection of Reinsurance in Projected Cash Flows ............................................... 79 23.11.4 Minimum Reserve before Reinsurance ..................................................................... 80 23.12 Assumptions ................................................................................................................................... 81 23.12.1 General Assumption Requirements .......................................................................... 81 23.12.2 Assumption Margins .................................................................................................... 83 23.12.3 Mortality Assumptions ................................................................................................ 83 23.12.4 Policyholder Behavior Assumptions ......................................................................... 84 23.12.5 Expense Assumptions ................................................................................................... 87 23.12.6 Asset Assumptions ........................................................................................................ 88 23.12.7 Revenue Sharing Assumptions ................................................................................... 89 24. VM-21: PBR for Variable Annuities .......................................................................... 91 24.1 Simple Example ............................................................................................................................. 92 24.2 VA Model .................................................................................................................................... 101 24.2.1 Model Overview ......................................................................................................... 102 24.2.2 Gathering Data ........................................................................................................... 104 24.2.3 Preparing the Model .................................................................................................. 116 24.2.4 Running the Model. ................................................................................................... 118 24.2. 5 Storing the Results ..................................................................................................... 119 24.2.6 Analyzing Reports ...................................................................................................... 120 24.3 Overview ofVM-21 ................................................................................................................... 121 24.4 Background ................................................................................................................................. 122 24.4.1 Purpose ............................................... ; ......................................................................... 122 24.4.2 Principles ...................................................................................................................... 122 24.4.3 Risks Reflected ............................................................................................................ 123 24.4.4 Scope ............................................................................................................................. 125 24.4.5 Key Definitions ........................................................................................................... 126 24.5 Reserve methodology ................................................................................................................. 128 24.5.1 Illustration for Chapter 24 ....................................................................................... 129 24.5.2 Alternative Methodology ......................................................................................... 130 24.S.3 Allocation of Results to Contracts ......................................................................... 130 24.6 Determination of CTE Amount ............................................................................................ 132 24.6.1 Projection of Accumulated Deficiencies ............................................................... 132 24.6.2 Determination of Scenario Greatest Present Values ........................................... 134 24.6.3 Projection Scenarios .................................................................................................. 134 24.6.4 Projection of Assets .................................................................................................... 135 24.6.5 Projection of Annuitization Benefits ..................................................................... 137 24.6.6 Relationship to RBC Requirements ....................................................................... 138 24.6.7 Compliance with ASOPs and Other Principles .................................................. 138 24.7 Illustration of Determination of CTE Amount .................................................................. 139 24.8 Reinsurance and Statutory Reporting Issues ........................................................................ 158 24.8.1 Treatment of Reinsurance Ceded in the Aggregate Reserve ............................. 158 24.8.2 Aggregate Reserve to Be Held in General Account ............................................. 158 24.8.3 Actuarial Certification and Memorandum ........................................................... 159 24.9 Standard Scenario Requirements ............................................................................................ 160 24.9.1 Overview ...................................................................................................................... 160 24.9.2 Basic Reserve and Basic Adjusted Reserve ............................................................. 162 24.9.3 Illustration for Basic Adjusted Reserve using VA Model... ................................ 163 24.9.4 Standard Scenario Reserve ........................................................................................ 176 24.9.S Illustration for Standard Scenario Reserve using VA Model... .......................... 189 24.10 Alternative Methodology ......................................................................................................... 201 24.11 Scenario Calibration Criteria .................................................................................................. 202 24.12 Allocation of Aggregate Reserves to Contract Level... ........................................................ 204 24.13 Modeling of Hedges .................................................................................................................. 206 24.14 Certification Requirements ..................................................................................................... 208 24.15 Contract Owner Behavior Assumptions ............................................................................... 209 24.16 Specific Guidance on Prudent Estimate Mortality ............................................................. 213 25. Principle-Based Reserve Report ................................................................................ 215 25.1 Overview ofVM-31 ................................................................................................................... 216 25.1.1 General Requirements ............................................................................................... 216 25.1.2 ReportFormat ............................................................................................................ 217 25.1.3 Executive Summary .................................................................................................... 217 25.1.4 Life PBRActuarial Report ....................................................................................... 218 25.2 Executive Summary Illustration .............................................................................................. 219 25.2.1 Length of Executive Summary ................................................................................. 219 25.2.2 Thesis Sentence or Mission Statement .................................................................. 219 25.2.3 Language for Target Audience ........................ , ....................................................... 219 25.2.4 Style and Structure ..................................................................................................... 220 25.2.5 Peer review ................................................................................................................... 220 25.3 Sub-Reports ................................................................................................................................. 221 25.3.1 Thesis Sentence or Mission Statement .................................................................. 221 25.3.2 Sryle and Structure ..................................................................................................... 221 25.3.3 Formulas ....................................................................................................................... 222 25.3.4 High Level Flowcharts .............................................................................................. 223 25.3.5 Key Reports ................................................................................................................. 225 25.3.6 Graphs .......................................................................................................................... 226 25.4 Governance and Controls ........................................................................................................ 227 25.4.1 Model Design, Development & Testing ............................................................... 230 25.4.2 Roles & Responsibilities ............................................................................................ 232 26. Experience Reporting ................................................................................................. 235 26.1 Guiding Principles ..................................................................................................................... 237 26.1.1 Types of Experience Studies ..................................................................................... 238 26.1.2 Designing an Experience Study ............................................................................... 239 26.1.3 Key Dates ..................................................................................................................... 242 26.1.4 Symbols ........................................................................................................................ 244 26.1.5 Cohorts ........................................................................................................................ 244 26.2 Overview of Experience Study Process .................................................................................. 245 26.2.1 Data Extracts ............................................................................................................... 246 26.2.2 Matching Process ....................................................................................................... 247 26.2.3 Compare Routine ....................................................................................................... 249 26.2.4 Other Data Considerations ..................................................................................... 253 26.3 Termination Studies .................................................................................................................. 254 26.3.1 Probabilities versus Rates .......................................................................................... 255 26.3.2 Common Approximations ....................................................................................... 257 26.3.3 Example 1 ..................................................................................................................... 258 26.3.4 Actual-to-Expected Studies ...................................................................................... 269 26.3.5 Example 2 ..................................................................................................................... 271 26.3.6 Longevity Studies ....................................................................................................... 274 26.3.7 Mortality Studies by Cause of Death ..................................................................... 275 26.4 Utilization Studies ..................................................................................................................... 276 26.4.1 Partial Withdrawals ................................................................................................... 276 26.4.2 Annuitizations ............................................................................................................ 281 26.5 Confidence Intervals ................................................................................................................. 282 26.5.1 Variance ........................................................................................................................ 282 26.5.2 Confidence Intervals ................................................................................................. 286 26.6 Credibility Measures ................................................................................................................. 287 26.6.1 Approaches to Credibility ........................................................................................ 287 26.6.2 Limited Fluctuation Approach ............................................................................... 289 26.6.3 Biihlmann Credibility Approach ............................................................................ 296 26.7 Company Experience Reporting ............................................................................................. 297 26.7.1 Organizational Structures ........................................................................................ 297 26.7.2 Experience Studies' Formats .................................................................................... 298 26.7.3 Data Quality ................................................................................................................ 299 26.7.4 Reviewing Results ....................................................................................................... 300 26.8 Experience Reporting Under VM-20 .................................................................................... 301 26.8.1 Mortality ...................................................................................................................... 302 26.8.2 Premium Payment Patterns ..................................................................................... 303 26.8.3 Lapses ............................................................................................................................ 303 26.8.4 Expenses ....................................................................................................................... 304 26.8.5 Other Experience Reporting Requirements ......................................................... 304 26.9 Experience Reporting Under VM-21 .................................................................................... 305 26.9.1 Assets ............................................................................................................................ 305 26.9.2 Mortality ...................................................................................................................... 305 26.9.3 Lapses ............................................................................................................................ 306 26.9.4 Living Benefits ............................................................................................................ 306 26.9.5 Other Experience Reporting Requirements ......................................................... 306 26.10 Experience Reporting Under VM-50 and VM-51 .............................................................. 307 26.10.1 The NAIC and Experience Reporting ................................................................... 307 26.10.2 Types of Data the NAIC Will Be Requesting ...................................................... 308 26.10.3 Example of the Experience Reporting Requirements ......................................... 309 26.11 Statistical Agent .......................................................................................................................... 310 26.11.1 Use of Statistical Agents with regard to PBR ....................................................... 310 26.11.2 Responsibilities of the Statistical Agent ................................................................. 310 26.11.3 Reports Anticipated from the Statistical Agent ................................................... 311 26.12 Company Requirements Regarding Experience Reporting .............................................. 312 26.12.1 Company Responsibility Regarding Data Quality .............................................. 312 26.12.2 Critical Indication Requirements ........................................................................... 313 Part 5 I Capital & Surplus ............................................................................................. 315 27. Valuation Actuary in the U.S . .................................................................................. 317 27.1 Model Standard Valuation Law .............................................................................................. 318 27.1.1 General Requirement ................................................................................................ 318 27.1.2 Appointed Actuary .................................................................................................... 319 27.1.3 Actuarial Opinion of Reserves ................................................................................. 319 27.1.4 Professional Liability ................................................................................................. 319 27.1.S Supporting Memorandum ....................................................................................... 319 27.2 Actuarial Opinion and Memorandum Model Regulation ................................................ 320 27.2.1 Actuarial Opinion Requirements ........................................................................... 320 27.2.2 Actuarial Memorandum Requirements ................................................................. 321 27.3 Actuarial Standard of Practice No. 22 ................................................................................... 324 27.4 Required Analysis ....................................................................................................................... 326 27.4.1 Additional Analysis .................................................................................................... 326 27.4.2 Considerations ............................................................................................................ 327 28. Actuarial Opinion and Memorandum ..................................................................... 329 28.1 Cash Flow Testing ..................................................................................................................... 331 28.1.1 Definition .................................................................................................................... 331 28.1.2 Scope ............................................................................................................................. 332 28.2 Cash Flow Testing Process ....................................................................................................... 333 28.2.1 Extract Process ............................................................................................................ 334 28.2.2 Description Files ......................................................................................................... 338 28.2.3 Calculation Modules ................................................................................................. 339 28.2.4 Model Validation ....................................................................................................... 342 28.2.S Model Reports ............................................................................................................ 343 28.3 Scenarios ...................................................................................................................................... 344 28.3.1 Deterministic .............................................................................................................. 344 28.3.2 Stochastic ..................................................................................................................... 345 28.3.3 Interest Rate Models .................................................................................................. 346 28.3.4 Investment Strategy ................................................................................................... 347 28.3.5 Policyholder Behavior ............................................................................................... 348 28.3.6 Nonguaranteed Elements Practices ........................................................................ 350 28.3.7 Lapse Rates .................................................................................................................. 350 28.4 Case Study ................................................................................................................................... 352 28.4.1 Cash Flow Model ....................................................................................................... 354 28.4.2 Product Description .................................................................................................. 355 28.4.3 Model Cell ................................................................................................................... 357 28.4.4 Scenarios ....................................................................................................................... 358 28.4.5 Asset File ...................................................................................................................... 359 28.4.6 Assumptions ................................................................................................................ 360 28.4.7 Calculation Modules ................................................................................................. 366 29. Risk-Based Capital ..................................................................................................... 377 29.1 Goal of Risk-Based Capital ...................................................................................................... 379 29.1.1 Insolvency Risk ........................................................................................................... 379 29.1.2 Risk-Based Capital Defined ..................................................................................... 380 29.1.3 Target Surplus ............................................................................................................. 380 29.1.4 Moderately Adverse Conditions ............................................................................. 381 29.2 RBC Formula .............................................................................................................................. 384 29.2.1 Asset Risk- Affiliates (C-0) .................................................................................... 385 29.2.2 Asset Risk- Other (C-1) .......................................................................................... 385 29.2.3 Insurance Risk (C-2) ................................................................................................. 393 29.2.4 Interest Rate Risk, Health Credit Risk and Market Risk (C-3) ....................... 394 29.2.5 Business Risk (C-4) .................................................................................................... 396 29.2.6 Other Risks .................................................................................................................. 397 29.2.7 RBC Ratio ................................................................................................................... 397 29.2.8 Calculation of Total Adjusted Capital .................................................................. 397 29.2.9 Covariance Adjustment ....................................... , .................................................... 398 29.2.10 Regulatory Action Levels .......................................................................................... 399 29 .3 Principle-Based Risk-Based Capital ....................................................................................... 400 29.3.1 Cash Flow Testing for C-3 RBC (Phase I) ........................................................... 400 29.3.2 Cash Flow Testing for C-3 RBC (Phase II) .......................................................... 403 29.4 Example ........................................................................................................................................ 407 30. Own Risk & Solvency Assessment (ORSA) ............................................................ 415 30.1 Objectives of ORSA .................................................................................................................. 417 30.2 ORSA Summary Report ........................................................................................................... 418 30.2.1 Description of the Insurer's Risk Management Framework ............................. 418 30.2.2 Insurer Assessment of Risk Exposures ................................................................... 419 30.2.3 Group Risk Capital and Prospective Solvency Assessment ............................... 419 30.3 Final Note .................................................................................................................................... 420 Appendix I Sample PBR Actuarial Report ................................................................. .421 Bibliography ......................................................................................................................4 37 Index ...................................................................................................................................4 39