session 21 panel discussion a pricing actuary's...
TRANSCRIPT
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
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/
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/
SOA Website for 2017 CSO
Unloaded (2015 VBT Rolled Forward)3 Excel Files
SOA Website for 2017 CSO
Loaded11 Excel Files
SOA Website for 2017 CSO
Smoker-Distinct9 Excel Files
SOA Website for 2017 CSO
Composite5 Excel Files
SOA Website for 2017 CSO
Gender-Distinct8 Excel Files
SOA Website for 2017 CSO
Gender-Blended6 Excel Files
SOA Website for 2017 CSO
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
2018 SOA Life & Annuity SymposiumGENNI KNIGHT, FSA, MAAASession 21, A Pricing Actuary's Perspective on PBR, 2017 CSO and Profit May 7, 2018
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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.
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ProductsSingle Premium Whole LifeFinal Expense Whole LifeTerm (5-yr level, to age 90)Fixed Rate Worksite ULEquity Indexed UL
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Where to Start
Simplest ProductsUse existing model – add PBR codingAdapt PBR coding to other products
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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
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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
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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
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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
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Lessons LearnedStart earlyCoordination between pricing/valuationDriven/sponsored at senior mgmt level
Document!Educating non-actuarial areas about impact
of requirements
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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
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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.
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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
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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
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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
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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
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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
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Third-party Financial Reinsurance
Common Features & Products
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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
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Financial Reinsurance Structures
• 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
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Financial Reinsurance Structures
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
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Third-party Financial Reinsurance
Impacts of 2017 CSO and PBR
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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
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Impacts to Financial Reinsurance
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.
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Impacts to Financial Reinsurance
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
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Impacts to Financial Reinsurance
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
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Impacts to Financial Reinsurance
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
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Impacts to Financial Reinsurance
Financial Reinsurance – Ceding Company Perspective
Single Premium UL Co/FWH Example
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Third-party Financial Reinsurance
Looking Forward
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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
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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
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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
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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
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