session 21 panel discussion a pricing actuary's...

Session 21 PD, A Pricing Actuary's Perspective on PBR, 2017 CSO and Profit

Moderator:

William Gus Mehilos, FSA, MAAA

Presenters: Genevieve D. Knight, FSA, MAAA

Gerald Nicholas Sontheimer III, FSA, MAAA Andrew G. Steenman, FSA, MAAA

SOA Antitrust Disclaimer SOA Presentation Disclaimer

https://www.soa.org/legal/antitrust-disclaimer/

https://www.soa.org/legal/presentation-disclaimer/

MAY 7, 2018

Andrew Steenman, FSA, MAAA2018 Life & Annuity Symposium: Session 21

A Pricing Actuary's Perspective on PBR, 2017 CSO, and Profit

LimitationsThe content of this presentation represents the views of the presenter and not those of Milliman.These slides have been prepared for the educational use of meeting participants. There are no intended

beneficiaries of this work. This presentation may not be distributed, disclosed, copied or otherwise furnished to any additional party

without our prior written consent. Any distribution of this presentation must be in its entirety.The presented information is intended to be valid as of the date it has been prepared. Its future validity

depends on the further development of market events, regulations, and standards of practice.This presentation is not intended to contain material that represents an actuarial opinion. The

professionals responsible for preparing this report are members of the American Academy of Actuaries and meet the Qualification Standards of the American Academy of Actuaries.

VM-20 and 2017 CSOIntroduction

VM-20 and 2017 CSO are here!!!Effective January 1, 20173 year transition period (January 1, 2020)

Principle-based reserves2017 CSO Table

References Valuation Manual (NAIC adoptions through 8/29/2016)

http://www.naic.org/documents/committees_a_latf_related_valuation_manual_noapf_160829.pdf AG-48:

http://www.naic.org/documents/committees_ex_pbr_implementation_tf_related_actuarial_guideline_ag48.pdf 2017 CSO Tableshttps://www.soa.org/experience-studies/2015/2017-cso-tables/

http://www.naic.org/documents/committees_a_latf_related_valuation_manual_noapf_160829.pdf

http://www.naic.org/documents/committees_ex_pbr_implementation_tf_related_actuarial_guideline_ag48.pdf

https://www.soa.org/experience-studies/2015/2017-cso-tables/

2017 CSO Tables14 sets of tables (94 unique tables) on SOA websiteLoaded vs UnloadedComposite vs Smoker-DistinctGender-Blended vs Gender-DistinctPreferred StructureSelect and UltimateAge Nearest Birthday and Age Last Birthday table versions

SOA Website for 2017 CSO

14 Excel FilesFrom:

https://www.soa.org/experience-studies/2015/2017-cso-tables/


Unloaded (2015 VBT Rolled Forward)3 Excel Files


Loaded11 Excel Files


Smoker-Distinct9 Excel Files


Composite5 Excel Files


Gender-Distinct8 Excel Files


Gender-Blended6 Excel Files


Tables Likely of Interest Loaded Smoker-Distinct Loaded Preferred Structure

High Level Comparison to 2001 CSO

High Level Comparison to 2001 CSO – Early Ages

High Level Comparison to 2001 CSO – Ratios

2017 CSOPricing Considerations

2017 CSO Pricing ConsiderationsTraditional Products: Premium RatesUniversal Life: COI RatesReservesSNFLIRS Section 7702Filings:ContractActuarial MemorandumVariability MemorandumRates

IRS Section 7702 – Mortality AssumptionHow does 2017 CSO impact 7702?7702(c)(3)(B)(i):

“reasonable mortality charges that meet the requirements (if any) prescribed in regulations and that (except as provided in regulations) do not exceed the mortality charges specified in the prevailing commissioners’ standard tables (as defined by section 807(d)(5)) as of the time the contract is issued”

Subject to company interpretationNext slides provide sample generic calculations based on CSO Ultimate tables without expenses

IRS Section 7702 – CVAT Generic Example

IRS Section 7702 – Guideline Single Premium Example

Standard Non-forfeiture Law - ExamplesNAIC Standard Non-forfeiture Law (SNFL) in 1948Calculation to set minimum cash value for traditional productsNAIC Universal Life Model Regulation in 1994For Universal Life, application of SNFL is to set a maximum surrender charge.For illustrative purposes of Universal Life, we are showing generic calculations based on CSO ultimate tables and assume level charges for the first 20 years so the full expense allowance is amortized.

SNFL Whole Life – Generic Example

SNFL Universal Life – Generic Example

ConclusionsConsider all the aspects of 2017 CSOSample test key cells or issue age ranges where possibleAdjust product rates or structure to measure impactsOutcomes may vary by cellPossible outcomes that effect pricing and profitability:Higher minimum cash valuesLarger corridor factors – affecting cash value to death benefit ratioLower GLP, GSP, and MEC premiums

VM-20Some Considerations

NPR for ULSGNPR for ULSG is greater of* reserve under Section 3.B.5 and reserve under Section 3.B.6Section 3.B.5Ignores secondary guaranteeReserve = Funding Ratio * [ PV(Ben) – PV(NP) – UnamortEA ]

Section 3.B.6Focuses secondary guaranteeReserve = Funding Ratio * PV(Ben) – UnamortEA

*floored at max of cash value and amount to cover charges until next period

ULSG NPR Funding Ratio under Section 3.B.6Funding Ratio= Actual Secondary Guar / Fully Funded Secondary GuarSpecified Premium designsActual Secondary GuaranteeFully Funded GuaranteeVM20 funding ratio is based on cumulative premiumAG38 funding ratio is based on excess premiumsCauses Funding Ratio under VM-20 to be higher than under AG38NAIC working group (is?) was reviewing (no APF at slide due date)

ULSG NPR Funding Ratio: Specified Premium ExampleGeneric Policy with Hypothetical Unitized ValuesIssued as 65 year-old female, currently in policy year 10

Funding RatiosAG38 200 / 350 = 57.1%VM-20 450 / 600 = 75.0%

Actuals at t=10Accumulated Premium: $450Accumulated Excess Premium: $450 - $250 = $200

Accumulated Minimum Required Premium at t=10: $250Fully Funded basis at t=10

Required Premium: $600Excess Premium: $600 - $250 = $350

Example: ULSG NPR under Section 3.B.6

Deterministic Reserve Analysis

Other PBR ConsiderationsReinsurancePotential SimplificationsSensitivitySmall Company ExemptionImpact on Tax Reserves

Andrew Steenman

Thank you

[email protected]

2018 SOA Life & Annuity SymposiumGENNI KNIGHT, FSA, MAAASession 21, A Pricing Actuary's Perspective on PBR, 2017 CSO and Profit May 7, 2018

SOCIETY OF ACTUARIESAntitrust Compliance Guidelines

Active participation in the Society of Actuaries is an important aspect of membership. While the positive contributions of professional societies and associations are well-recognized and encouraged, association activities are vulnerable to close antitrust scrutiny. By their very nature, associations bring together industry competitors and other market participants.

The United States antitrust laws aim to protect consumers by preserving the free economy and prohibiting anti-competitive business practices; they promote competition. There are both state and federal antitrust laws, although state antitrust laws closely follow federal law. The Sherman Act, is the primary U.S. antitrust law pertaining to association activities. The Sherman Act prohibits every contract, combination or conspiracy that places an unreasonable restraint on trade. There are, however, some activities that are illegal under all circumstances, such as price fixing, market allocation and collusive bidding.

There is no safe harbor under the antitrust law for professional association activities. Therefore, association meeting participants should refrain from discussing any activity that could potentially be construed as having an anti-competitive effect. Discussions relating to product or service pricing, market allocations, membership restrictions, product standardization or other conditions on trade could arguably be perceived as a restraint on trade and may expose the SOA and its members to antitrust enforcement procedures.

While participating in all SOA in person meetings, webinars, teleconferences or side discussions, you should avoid discussing competitively sensitive information with competitors and follow these guidelines:

• Do not discuss prices for services or products or anything else that might affect prices• Do not discuss what you or other entities plan to do in a particular geographic or product markets or with particular customers.• Do not speak on behalf of the SOA or any of its committees unless specifically authorized to do so.

• Do leave a meeting where any anticompetitive pricing or market allocation discussion occurs.• Do alert SOA staff and/or legal counsel to any concerning discussions• Do consult with legal counsel before raising any matter or making a statement that may involve competitively sensitive information.

Adherence to these guidelines involves not only avoidance of antitrust violations, but avoidance of behavior which might be so construed. These guidelines only provide an overview of prohibited activities. SOA legal counsel reviews meeting agenda and materials as deemed appropriate and any discussion that departs from the formal agenda should be scrutinized carefully. Antitrust compliance is everyone’s responsibility; however, please seek legal counsel if you have any questions or concerns.

2

Presentation Disclaimer

Presentations are intended for educational purposes only and do not replace independent professional judgment. Statements of fact and opinions expressed are those of the participants individually and, unless expressly stated to the contrary, are not the opinion or position of the Society of Actuaries, its cosponsors or its committees. The Society of Actuaries does not endorse or approve, and assumes no responsibility for, the content, accuracy or completeness of the information presented. Attendees should note that the sessions are audio-recorded and may be published in various media, including print, audio and video formats without further notice.

3

ProductsSingle Premium Whole LifeFinal Expense Whole LifeTerm (5-yr level, to age 90)Fixed Rate Worksite ULEquity Indexed UL

4

Where to Start

Simplest ProductsUse existing model – add PBR codingAdapt PBR coding to other products

5

Challenges – PBR New softwarePBR set-up may coincide with conversionLearning software and PBR simultaneously

Entirely new reserving methodLearning ins & outs is time intensiveNot conducive to quick check

6

Challenges – PBR (cont’d)Uncertainty surrounding assumptionsMargins (lapses, expenses)Valuation mortality table (industry – SI)Mortality credibility/gradingDR discount ratesExclusion tests – scenariosAsset set-up

Staying grounded

7

Results/Observations – PBRWhole LifePassed SET and DET => hold NPRSimilar profitability metrics

TermVM20 NPR favorable compared to XXX DR was negative

ULDR has substantial negative impact on

profitabilityDiscount rates, expenses are drivers

8

Challenges – 2017 CSOSI table – indefinite timelineTimeline for filing/implementationWait until SI table available?Proceed with fully U/W 2017 CSO table, re-file when SI table adopted?

2017 CSO does not track with 2001 CSOGCOI’s, nonforfeiture values, reserves

9

Lessons LearnedStart earlyCoordination between pricing/valuationDriven/sponsored at senior mgmt level

Document!Educating non-actuarial areas about impact

of requirements

10

A Pricing Actuary’s Perspective on PBR, 2017 CSO and Profit

Financial Reinsurance Considerations

SOA 2018 Life & Annuity SymposiumMay 7, 2018

Gerald “Nick” Sontheimer, FSA, MAAAActuary, PricingGlobal Financial SolutionsRGA

2

Presentation Disclaimer The content of this presentation represents the views of the presenter and

not those of RGA. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, legal, tax, or other professional advice, nor is it an Actuarial Opinion.

This presentation may not be distributed, disclosed, copied or otherwise furnished to any additional party without prior written consent from RGA. Any distribution of this presentation must be in its entirety.

The presented information is intended to be valid as of the date it has been prepared. Its future validity depends on the further development of market events, regulations, and standards of practice.

3

Overview

Common types of financial reinsurance structures and uses in product development and management

What are the key impacts of 2017 CSO, and especially of PBR

Looking forward - focus question• “How do PBR and 2017 CSO affect the way actuaries will view

financial reinsurance as a tool in product pricing and development?”

PBR and Financial Reinsurance

Adapting to a changing environment

4

Definition

Financial reinsurance refers to reinsurance arrangements where the primary purpose is the achievement of a specific business objective such as increasing statutory surplus, reducing taxes, or acquiring blocks of business.1

1. John E. Tiller, Life, Health, & Annuity Reinsurance, Third Edition

5

Financial Reinsurance Overview

Some rules-based formulas can be excessively redundant• XXX, AXXX, deficiency reserves• Capital factors (ex. C-4 RBC on single premium)

Financing method affects profit• Internal – opportunity cost of capital• External – market price for financing

Demand Drivers for Financial Reinsurance

Redundant reserves and capital are costly

6

Financial Reinsurance OverviewPotential Benefits

Better pricing returns on new business1

More competitive premium rates2

Reduced new business strain 3

Greater capital efficiency on in-force business4

7

Financial Reinsurance Overview

Third-party Reinsurance• Business ceded to an unaffiliated reinsurer• Typically use an authorized or certified reinsurer• Utilizes the reinsurers balance sheet to provide reserve and/or capital relief

Affiliated (Captive-based) Reinsurance• Reinsurer is an affiliate of the ceding company• Typically not accredited – reserve credit often comes from permitted practice• Subject to special regulations such as Actuarial Guideline 48 (AG48)• Primary used for financing redundant XXX/AXXX reserves

Two Common Structures

8

Third-party Financial Reinsurance

Common Features & Products

9

Financial Reinsurance Structures

For life products, typically use coinsurance treaties• Pass statutory risk transfer• Provide reserve credit

Usual features• Initial ceding commission commensurate with desired reserve relief or new business strain• Modified Coinsurance (ModCo) reserve or Funds Withheld (FWH) to retain non-relief part of

the reserve on ceding company’s balance sheet• Experience refund of profits for some period of time

o Net of profits used to amortize reliefo Net of a risk fee passed to reinsurer

• Option to recapture by ceding companyo After relief is amortizedo If experience refunds are withheld by reinsurer

• Net cash settlements collapse to risk fee

Third-party Reinsurance Description

10


• Time 0 Net Product Cash Flows (a) 15k initial premium net of 5k commission• ModCo Adjustment is ModCo interest credit less the increase in the ModCo reserve• Relief amortizes by EOY 5, and net settlement is just risk fees paid to reinsurer

Third-party Reinsurance Simplified Example (Co/ModCo)

TimeTotal Stat

ReserveModCoReserve

Coins Reserve (“Relief”)

Net Product Cash Flows

(a)

ModCoAdjustment

(b)

Experience Refunds

(c)

Net Settlements(a) + (b) – (c)

0 15,000 10,000 5,000 10,000 -10,000 0 0

1 15,000 11,000 4,000 1,000 -500 450 50

2 15,000 12,000 3,000 1,000 -450 510 40

3 15,000 13,000 2,000 900 -400 470 30

4 15,000 14,000 1,000 900 -350 530 20

5 15,000 15,000 0 800 -300 490 10

11


Third-partyFinancial

Reinsurance

Limited Pay Whole Life

Single Premium UL

Disability Income

Closed Par Blocks

Annuity Riders

Term Life

Group Life

Other

Third-party Reinsurance Common Products

12


Impacts of 2017 CSO and PBR

13

Impacts to Financial Reinsurance

No material change to third-party reinsurance structure

Reserve impact• Typically reduce reserve, redundancy• Tax impact

Other impacts• COI charges on UL• Guaranteed rates on YRT

2017 CSO Third-party Reinsurance

Similar impacts as when previous CSO tables released

14


Reinsurance structures that were effective before PBR will generally still be effective with the NPR

For term & ULSG, Net Premium Reserve (NPR) is new rules-based method• Generally lower reserve relative to XXX/AXXX

For other life products, NPR is based on previous CRVM• Deficiency reserve replaced by Deterministic Reserve• CSO mortality table could unlocked in the future1

• Reserve credit still applies as before PBR – SSAP No. 61R

PBR VM-20 Net Premium Reserve

Many familiar concepts carried over

1. Guidance Note in VM-20 Section 3.C.1.

15


Modeling of reinsurance cash flows1

• Must model all treaty cash flows between ceding company and reinsurer• Assume counterparties are knowledgeable about contingencies in the treaty and will take

actions to their advantage (ex. recapture)

Assumptions and margins1

• Reinsurance cash flows should be consistent with the assumptions and margins used in calculating the underlying cash flows

• Ceding company and reinsurer can and will have different assumptions and margins

Credit for reinsurance regulations still apply2

• Only compliant reinsurance treaties can be used for reserve credit• Non-compliant treaties can still reduce surplus

PBR VM-20 Modeled Reserves Key Considerations

1. VM-20 Section 8.C

2. VM-20 Section 8.A

Modeled reserve credit is principle-based

16


Reinsurance cash flows• Scenario dependent

o Dynamic lapses in interest rate scenarioo Scenario’s effect on ModCo and FWH adjustments

• Financial reinsurance treaty cash flows often collapse to just risk fees paid from ceding company to reinsurer

Counterparty actions• Ceding company perspective

o Decide if/when reinsurer would raise rates (if applicable)o Decide if/when reinsurer shuts off experience refunds

• Reinsurero Decide how ceding company will manage non-guaranteed elementso Decide if/when ceding company will recapture

PBR VM-20 Modeled Reserve Credit Inputs

17


NPR can still be effectively financed by traditional financial reinsurance• Reserve calculations similar to CRVM• Reserve credit based on previous regulations

Modeled reserves can increase in traditional financial reinsurance structure• To get modeled reserve credit, PV of future cash flows to ceding company needs to

exceed PV of future cash payments to reinsurer• In most valuation scenarios, net cash flows are to reinsurer

o Ceding company pays cash risk feeso Recapture after relief is amortized

• Modeled reserve same as before reinsurance, plus PV of remaining risk fees

PBR VM-20 Potential Reserve Impacts

18


Financial Reinsurance – Ceding Company Perspective

Single Premium UL Co/FWH Example

19


Looking Forward

20

Financial Reinsurance Looking Forward

Example 1 – Capital Relief Only• No reserve relief needed• RBC is still factor-based for life products

Example 2 – Relief on NPR• Modeled reserves exclusion tests are passed, or• NPR is winning reserve

o Redundancy in CRVM• Expense allowance limit on 10 Pay Whole Life• CSV minimum on front-loaded UL plans with ROP

o High credibility/low margins on modeled reserveso Goal to finance excess of NPR over modeled reserves

Uses for Third-party Reinsurance after PBR

21

Financial Reinsurance Looking Forward

Example 3 – Relief on modeled reserves• Modeled Reserve is winning reserve

o Low credibility/high marginso Inefficient expense or asset allocations

• Cede to reinsurer with highly credible and efficient modeled reserve assumptionso Net cash flows paid to ceding company and no recapture in their valuation scenario

• Generates a reserve credit down to a ModCo or FWH level supportable by reinsurero Recapture and net cash flows are just risk fees in reinsurer’s valuation scenario

• Relief would “amortize” as ceding company’s experience becomes more credible

Uses for Third-party Reinsurance after PBR

Leverage data and expertise of reinsurer

22

Financial Reinsurance After PBR

Modeling considerations• Including financial reinsurance structure• Stress scenarios• Simplifications are allowed, if justifiable

Treaty development becomes iterative process• Changes to reinsurance structure may impact reserves• Changes to reserves may impact structure• Increase collaboration between pricing actuaries at ceding company and reinsurer

PBR & Third-party Reinsurance Challenges

Robust and flexible modeling capabilities are key

23

Financial Reinsurance After PBR

“So how will pricing actuaries view financial reinsurance in light of 2017 CSO and PBR?”

Non-issue to some• When NPR is the main reserve, use for financial reinsurance may not be materially impacted

Challenge to others• Providing relief on PBR modeled reserves can be difficult using traditional third-party

reinsurance methods• Modeling requirements are more rigorous

Opportunity• Demand will still exist to improve pricing by more efficiently financing reserves & capital• Modeling tools and techniques are more powerful than ever, and getting better• Solutions of the past can be leveraged to shape the successes of tomorrow

Final Thoughts

©2018 RGA. All rights reserved.No part of this publication may be reproduced in any form without the prior permission of RGA. The information in this publication is for the exclusive, internal use of the recipient and may not be relied upon by any other party other than the recipient and its affiliates, or published, quoted or disseminated to any party other than the recipient without the prior written consent of RGA.

session 21 panel discussion a pricing actuary's...

Documents