Statutory Valuation of Individual Life and Annuity Contracts

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