Update on Principle Based Reserving - Actuary.com

6/2/2012Net Premium Reserve (NPR) Method• ACLI reported more work is needed for the NPR methodologyfor universal life insurance products with secondary guarantees(ULSG). Based on the PBR study and input from membercompanies the ULSG NPR was difficult to apply in some casesand results were not as expected.• Given the short period of time prior to a targeted June LATFadoption, ACLI will have up to weekly status calls to help LATFbe up to speed when the final ULSG NPR is submitted.SEAC Spring ConferenceCopyright © 2012 by the American Academy of ActuariesAll Rights Reserved. 11Mortality Development in VM-20• Feedback from NAIC Impact Study was that mortalityassumption was complex and difficult to implement.• The Academy submitted a proposal to address concerns that theVM-20 mortality development was too confusing, complicated,and conservative.• LATF exposed this proposal for comment at March meeting.• Academy was asked to provide input on:• The “X” factor which relates to the number of claims for a single durationto be considered to have sufficient data.• Margin table• Examples to test extremesSEAC Spring ConferenceCopyright © 2012 by the American Academy of ActuariesAll Rights Reserved. 126

6/2/2012Applicable Industry Mortality Table• Determine appropriate industry table to blend with own experience• Using SOA Underwriting Criteria Scoring Tool or other methods, if moreappropriate• Currently, table is specified as 2008 VBT Tables, all forms• New tables being worked on• A modified industry basic table is permitted in a limited number ofsituations where an industry basic table does not appropriately reflect theexpected mortality experience• joint life mortality• simplified underwriting• substandard or rated livesSEAC Spring ConferenceCopyright © 2012 by the American Academy of ActuariesAll Rights Reserved. 17Anticipated Experience Assumptions• Determine period for which sufficient data exists (basedon policy duration)• Determine aggregate credibility over sufficient dataperiod• Grade own company experience mortality rates toapplicable industry table following method specified• Make any adjustments for reasonableness ofrelationships between classesSEAC Spring ConferenceCopyright © 2012 by the American Academy of ActuariesAll Rights Reserved. 189

6/2/2012Mortality ExampleSetting anticipated experience assumption, Male Preferred and Male SuperPreferred Nonsmoker risksYears 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25+(1) % own exp 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 92% 85% 77% 69% 62% 54% 46% 38% 31% 23% 15% 8% 0% 0%(2) % industry table 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 8% 15% 23% 31% 38% 46% 54% 62% 69% 77% 85% 92% 100% 100%Experience Mortality Assumption% 2008 VBT RR80 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25+Assumption as % 08VBT 90% 92% 98% 94% 94% 94% 94% 94% 94% 94% 95% 95% 95% 95% 95% 95% 95% 95% 95% 98% 98% 98% 98% 98% 98%Using Conservation of total deathsSuper Preferred NS (35%)% 2008 VBT RR80 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25+(3) % own exp 82% 84% 90% 86% 86% 86% 86% 86% 86% 86% 87% 87% 87% 87% 87% 87% 87% 87% 87% 90% 90% 90% 90% 90% 90%(4) % industry table 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%Preferred NS (65%)% 2008 VBT RR80 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25+(5) % own exp 94% 96% 102% 98% 98% 98% 98% 98% 98% 98% 99% 99% 99% 99% 99% 99% 99% 99% 99% 102% 102% 102% 102% 102% 102%(6) % industry table 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%Anticipated Experience Assumption1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25+Male, SPNS 82% 84% 90% 86% 86% 86% 86% 86% 86% 86% 87% 88% 89% 90% 91% 92% 93% 94% 95% 97% 98% 98% 99% 100% 100%= [ (1) * (3) ] + [ (2) * (4) ] Male, PNS 94% 96% 102% 98% 98% 98% 98% 98% 98% 98% 99% 99% 99% 99% 100% 100% 100% 100% 100% 101% 101% 100% 100% 100% 100%= [ (1) * (5) ] + [ (2) * (6) ] Weighted 90% 92% 98% 94% 94% 94% 94% 94% 94% 94% 95% 95% 96% 96% 97% 97% 97% 98% 98% 99% 100% 100% 100% 100% 100%Check > Aggregate Pass Pass Pass Pass Pass Pass Pass Pass Pass Pass Pass Pass Pass Pass Pass Pass Pass Pass Pass Pass Pass Pass Pass Pass PassSEAC Spring ConferenceCopyright © 2012 by the American Academy of ActuariesAll Rights Reserved. 25Determining the Margin• A single margin in the form of a %• Margin % varies by issue age• Margin % still to be determined• Margin should be increased to reflect situationsinvolving greater uncertaintySEAC Spring ConferenceCopyright © 2012 by the American Academy of ActuariesAll Rights Reserved. 2613

6/2/2012Determining the Margin – CurrentFactorsPercentage margin table for company variation riskIssue Age Load Issue Age Load

6/2/2012Margin Consideration For GrossPremium Reserve, cont’d• The margins are specific to the underlying VBT tableand experience of the contributors relative to the mean(i.e., the variation around the mean)• Margins/loads will need to be re-evaluated once 2014VBT is complete• In interim, suggest just modifying the current table tobe based on attained age rather than issue ageSEAC Spring ConferenceCopyright © 2012 by the American Academy of ActuariesAll Rights Reserved. 29Determining the Margin - ProposedPercentage margin table for company variation riskAttained Age Load Attained Age Load

6/2/2012PBR Review and Updating Process• A well-conceived and designed PBR Review and Updating Process (formerlyreferred to as a "PBR Feedback Loop") is essential to ensure that there is anongoing evaluation of the effectiveness of the PBR methodology andprescribed assumptions defined in the Valuation Manual.• Academy developed a proposal that provides a summary of the importance,purpose, and goals of such a process.• A key element of the PBR Review and Updating Process is providing supportto state insurance regulators regarding the necessary expertise, resources, data,and tools to effectively review PBR models and reporting for products subjectto PBR requirements.• LATF adopted the Academy proposal (with some modifications) in sectionVM-00 of the Manual.SEAC Spring ConferenceCopyright © 2012 by the American Academy of ActuariesAll Rights Reserved. 31Q&ASEAC Spring ConferenceCopyright © 2012 by the American Academy of ActuariesAll Rights Reserved. 3216