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American Academy of Actuaries

Post-NAIC Update/PBA Webinar January 24, 2014 Post-NAIC Update/PBA Webinar Copyright Š 2014 by the American Academy of Actuaries All Rights Reserved.

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Agenda 

Moderator Dave Neve, MAAA, CERA, FSA Chairperson, American Academy of Actuaries Financial Soundness/Risk Management Committee

NAIC PBR Implementation and Life Actuarial Task Force Update Mike Boerner, MAAA, ASA Director, Texas Department of Insurance Chair, NAIC Life Actuarial Task Force & EAIWG

Academy Annuity Reserves Work Group and NAIC Life Risk-Based Capital Working Group Update Mark Birdsall, MAAA, FSA, MBA Chief Actuary, Kansas Insurance Department Chair, NAIC Life Risk-Based Capital Working Group

Captives Update Rich Daillak, MAAA, FSA Chairperson, Academy Life Reinsurance Work Group Post-NAIC Update/PBA Webinar Copyright © 2014 by the American Academy of Actuaries All Rights Reserved.

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NAIC PBR/LATF Update Mike Boerner, MAAA, ASA Director, Actuarial Office, Financial Regulation Division Texas Department of Insurance Chair, Life Actuarial (A) Task Force Chair, PBR Review (EX) Working Group Chair, Emerging Actuarial Issues (E) WG Post-NAIC Update/PBA Webinar Copyright Š 2014 by the American Academy of Actuaries All Rights Reserved.

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Complete in Valuation Manual (VM) Prior to Earliest Possible Operative Date of 1/1/2016 1.

Complete the 2014 VBT. (Spring 2015)

2.

Provide CSO tables based on the 2014 VBT. (Summer 2015)

3.

Implement maintenance in line with adopted VM-20 process to annually update asset spreads and default costs in VM-20. (Spring 2014)

4.

Develop accounting smoothing mechanism to address reserve volatility. (Summer 2014)

5.

Valuation Manual changes needed to support the experience data collection process in Section I of the PBR Implementation Plan. (Summer 2014)

6.

Governance revisions to the section in VM-00 regarding the process for updating the Valuation Manual. (Summer 2014)

7.

Commercial mortgage default costs. (Spring 2015)

8.

Additional small company considerations. (Summer 2014)

9.

Review of VM-31 documentation requirements. (Spring 2015)

10.

Definition of products included in VM-20 Section 3 (Net Premium Reserve). See parenthetical note in VM-20, Section 3.A.1. (Summer 2014) Post-NAIC Update/PBA Webinar Copyright Š 2014 by the American Academy of Actuaries All Rights Reserved.

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Complete in Valuation Manual (VM) Prior to Possible Operative Date of 1/1/2016 1. Complete the 2014 VBT. (Spring 2015) 2. Provide CSO tables based on the 2014 VBT. (Summer 2015)

====================================================== 

Mary Bahna-Nolan, Chairperson, American Academy of Actuaries Life Experience Subcommittee, expects to release a draft of the 2014 VBT select & ultimate S/NS tables at the end of March 2014.

Information will be provided to assist LATF input regarding the level of margin for the CSO tables used for the net premium reserve method.

Updating the VM-20 margins for the deterministic and stochastic reserve is dependent on LATF direction regarding aggregate vs. individual margins.

Detailed project plan with timelines and other information targeted for Spring 2014 NAIC meeting to support decisions to meet mortality deliverables. Post-NAIC Update/PBA Webinar Copyright © 2014 by the American Academy of Actuaries All Rights Reserved.

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Complete in Valuation Manual (VM) Prior to Possible Operative Date of 1/1/2016 3. Implement maintenance in line with adopted VM-20 process to annually update asset spreads and default costs in VM-20 (Spring 2014)  VM-20 spread tables updated to 9/30/13 exposed for comment thru 1/31/14.  Default cost table update efforts in progress.  Maintenance process being worked on to treat asset spreads and default costs as available for applicable year end when updated. 4. Develop accounting smoothing mechanism to address reserve volatility (Summer 2014)  To address potential reserve volatility in changes to assumptions used in VM-20 reserve methods.  Possible approaches to be discussed at or before Spring meeting.

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Complete in Valuation Manual (VM) Prior to Possible Operative Date of 1/1/2016 5. Valuation Manual changes needed to support the experience data collection process in Section I of the PBR Implementation Plan. (Summer 2014)  LATF will coordinate changes to VM-50 & 51 with the broader PBR Implementation efforts regarding this process as discussed in the PBR Implementation Plan. Draft edits to VM-50 & 51 in progress. 6. Governance revisions to the section in VM-00 regarding the process for updating the Valuation Manual. (Summer 2014)  Draft revisions to be discussed on call or at Spring meeting. Revisions include governance relating to assigned level of an amendment, exposure periods, and timing for updates to VM-20 spread and default cost tables being applicable to year end versus the following January 1st.

Post-NAIC Update/PBA Webinar Copyright © 2014 by the American Academy of Actuaries All Rights Reserved.

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Complete in Valuation Manual (VM) Prior to Possible Operative Date of 1/1/2016 7. Commercial mortgage default costs. (Spring 2015) 

ACLI to provide a proposal regarding default costs for commercial mortgages to be included in VM-20.

8. Additional small company considerations. (Summer 2014)  ACLI working on proposal based on ACLI letter provided to the PBR Implementation (EX) Task Force and discussed at LATF DC meeting. Letter discusses additional small company exemptions from PBR based on a measure of size and based on risk measures that may include the RBC level and types of products.

Post-NAIC Update/PBA Webinar Copyright © 2014 by the American Academy of Actuaries All Rights Reserved.

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Complete in Valuation Manual (VM) Prior to Possible Operative Date of 1/1/2016 9. Review of VM-31 documentation requirements. (Spring 2015) 

Review VM-31 documentation requirements and adjust as appropriate prior to VM operative date to support reporting and documentation needs without being excessive or duplicative.

10. Definition of products included in VM-20 Section 3 (Net Premium Reserve). See parenthetical note in VM-20, Section 3.A.1. (Summer 2014)  The parenthetical note calls for definitions of products to be provided regarding Section 3.A.1 that discusses net premium reserve applicability for term and universal life with secondary guarantees.

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LATF – Other PBR Related Efforts 

Academy ARWG & Kansas Field Test (Mark Birdsall will cover)

American Academy of Actuaries (Academy) Nonforfeiture Modernization WG  John MacBain chairs this working group and is close to recommendations regarding Guaranteed Lifetime Withdrawal Benefits on general account type deferred annuities. Although not directly PBR these efforts may be applicable within PBR.

Experience Reporting Subgroup (Chair: Fred Andersen, NY)  Exposed to 3/15/14: expense report entitled, “Expense Report and Additional Elements for Expense Units.”

VM Amendment Proposal Forms

LATF Charges from PBR Implementation (EX) TF  John Morris on behalf of the American Academy of Actuaries accepted the LATF request to provide recommendations for charges regarding PBR actuarial certification & CE requirements. Post-NAIC Update/PBA Webinar Copyright © 2014 by the American Academy of Actuaries All Rights Reserved.

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LATF – Other Than PBR 

“F” Committee Referral 

“E” Committee Referral 

LATF determined that no portion of Model 808, “Standard Nonforfeiture Law for Life Insurance,” should be an accreditation standard.

LATF exposed for comment draft 2014 life and fraternal actuarial opinion instruction changes requiring Appointed Actuary reporting to the Board or other appropriate committee. Intention is to be similar to corresponding reporting in the health and the P&C actuarial opinion instructions.

Academy AG33 Non-Elective Incidence Task Force 

Corrine Jacobson (Academy) reviewed a reserve issue related to nonelective, non-mortality incidence rate usage. Academy edits to AG33 to be discussed prior to Spring meeting. Post-NAIC Update/PBA Webinar Copyright © 2014 by the American Academy of Actuaries All Rights Reserved.

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LATF – Other Than PBR 

Index-linked UL Illustrations  

Guidance needed including consistency in time period used for recent history to reflect the index. ACLI to provide a draft actuarial guideline for the Spring LATF meeting.

C3 Phase II/AG43 (E/A) Subgroup 

Pete Weber, OH, is the new chair of this subgroup.

Academy AOMR Discussion Group

Joint Qualified Actuary (A/B/C) Subgroup

Professionalism & Comments on ASOPs

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LATF – Other Than PBR 

Contingent Deferred Annuity Subgroup (New subgroup formed prior to DC meeting)  Tomasz Serbinowski, Utah, chairs this subgroup whose charges are to: 1) Evaluate AG 43 to determine whether the reserve guidance as it applies for variable annuity guarantees would be deficient for CDAs and provide recommendations as appropriate; and 2) Consider revisions to the Standard Nonforfeiture Law for Individual Deferred Annuities (#805) to specifically exclude CDAs.

Indexed-Linked Variable Annuity Subgroup 

Another new subgroup formed prior to DC meeting. Blaine Shepherd, Minnesota, chairs this subgroup whose charge is to provide recommendations to LATF regarding applicability of the NAIC variable annuity regulatory framework to separate account index-linked products filed as variable, including but not limited to product definitions and nonforfeiture requirements.

Post-NAIC Update/PBA Webinar Copyright © 2014 by the American Academy of Actuaries All Rights Reserved.

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PBR Implementation PBR Review (EX) Working Group 

PBR Review (EX) Subgroup (Chair: Pete Weber, OH)  Developed draft high level exam repository language.  Next steps include consideration of detailed review steps for major risks.

PBR Blanks Subgroup (Chair: Kaj Samsom, VT)  Working to provide draft of PBR Blanks reporting by Spring meeting.

Valuation Analysis Working Group (VAWG) Procedures  FAWG procedures being considered.  VAWG to support regulatory consistency in PBR and other support for regulator review of PBR.

Experience Reporting Process  Outlined in PBR Implementation Plan. Includes procedures for selection & role of statistical agent, funding, and data considerations. Appropriate processes to be documented in VM-50 & 51. Post-NAIC Update/PBA Webinar Copyright © 2014 by the American Academy of Actuaries All Rights Reserved.

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PBR Implementation PBR Implementation (EX) Task Force 

PBR Training  Task force directly responsible for training outlined in PBR Implementation Plan.  Initial 3 hour regulator training provided this fall and available to interested parties.

Company Outreach  Andy Rarus, CT, provided outline at the DC meeting to support task force charges regarding company outreach for PBR.  Included in this outline are growing details regarding development of a survey to companies to elicit company PBR plans, timing, and training needs. Considerations for regulatory guidance on model expectations for PBR also included.

Post-NAIC Update/PBA Webinar Copyright © 2014 by the American Academy of Actuaries All Rights Reserved.

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Annuity Reserves Work Group and NAIC Life Risk-Based Capital Working Group Update Mark Birdsall, MAAA, FSA, MBA Chief Actuary, Kansas Insurance Department Chair, NAIC Life Risk-Based Capital Working Group

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Academy ARWG & Kansas Field Test 

Working in parallel with Academy’s ARWG

Field Test Objectives  

Test the VM-22 Floor Reserve calculations, including sensitivity testing the parameters Test the practicality of the new Representative Scenarios Method for calculating the Modeled Reserve for VM-22  

Current Estimate Reserve based on best estimate assumptions Aggregate margin based on the Cost of Capital Method

Provide information regarding an appropriate reserve level for nonvariable annuities with Guaranteed Lifetime Income Benefits (GLIBs) 

Compare Alpha, Beta (from Floor Reserve calculations) with current CARVM reserve, Cash Surrender Value, AG 43 Standard Scenario Reserve Compare Modeled Reserve with “cross-product reserve,” and a stochastic reserve

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Field Test (continued) 

Two participating companies provided a combined five products that are currently being sold

Software developers are modifying an existing valuation system to calculate the Floor Reserve and Modeled Reserve and preparing extracts of policies for the five products

Field Test Project Phases  

Match the company CARVM calculations for the five products (completed) Define and program the formulaic Floor Reserve (completed)

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Field Test (continued) 

Field Test Project Phases (continued) 

Test the Floor Reserve calculations (in progress)  

 

Spreadsheet checks Company checking of its products

Run sensitivity tests of the Floor Reserve calculations testing different parameters and looking for simplifications to the methodology (not started) Define the steps for determining the representative scenarios (in progress) Program the Modeled Reserve calculations (in progress) 

Companies identify key risks and provide modeling assumptions (nearly completed)

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Capital Adequacy Task Force 

Life Risk-Based Capital Working Group (LRBC) 

Possible C-3 Phase 1 modifications - a spectrum of options 

 

Update the Economic Scenario Generator - same as VM-20 – Consider use of proprietary generators with calibration criteria Include equity-indexed annuities Consistent treatment of the AVR and IMR in all C-3 phases

Limit the use of AVR in the calculation of Total Adjusted Capital to that portion not used by the company in asset-adequacy analysis-presentation by Academy RBC credit for reinsurance would follow the Credit for Reinsurance Model Law with regard to collateral requirements for unauthorized reinsurers

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Capital Adequacy Task Force (continued) 

LRBC (continued) 

Other Matters 

Commercial mortgage RBC implementation   

 

C-3 Phase 2/AG 43 (E/A) Joint Subgroup – New Chair-Pete Weber (Ohio) Operational Risk proposal exposed by Solvency Modernization Initiative RBC (E) Subgroup Spreadsheet data requests 2014 AVR changes to fully parallel the new RBC methodology ACLI working with NCREIF to make index publicly available

Stress-Testing Subgroup call to be scheduled Contingent Deferred Annuities will be discussed on an upcoming LRBC call

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Capital Adequacy Task Force (continued) 

Investment RBC Working Group   

Developing updated C-1 RBC factors for different classes of assets Time horizon and safety level Classes of assets currently examined – Corporate bonds—American Academy of Actuaries modeling » Role of AVR – Real Estate—report exposed – Derivatives—report exposed – Common Stocks—report adopted

Consider consistency of factors across life, health, and P&C RBC formulas

Post-NAIC Update/PBA Webinar Copyright © 2014 by the American Academy of Actuaries All Rights Reserved.

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Captives Update Rich Daillak, MAAA, FSA Chairperson, Academy Life Reinsurance Work Group

Post-NAIC Update/PBA Webinar Copyright Š 2014 by the American Academy of Actuaries All Rights Reserved.

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Captives Background 

   

An example: An affiliated reinsurer that is licensed and operating under captive or special purpose vehicle (SPV) insurer laws of a state (laws distinct from those applying to traditional re/insurers). The captive/SPV receives premiums ceded to it and secures other assets or instruments of collateral from the insurance group or unaffiliated parties. Regulators have observed that the use of insurer-owned captive reinsurers for XXX/AXXX life reserve financing has grown significantly in volume. Some regulators have questioned whether the use of captives is desirable or whether it could weaken solvency protections. The use of insurer-owned captives has now also garnered attention from the press, rating agencies, and other parties. NAIC Captives & SPV Use Task Force: Formed early 2012 to study the use and supervision of insurer-owned captives/SPVs; released final white paper, June 2013. 

 

White paper recommended follow-on study of: statutory accounting treatment of captives and at direct writers; additional disclosure and transparency; possible narrowing of practice as to acceptable forms of security as collateral; development of guidance for financial analysts; facilitating risk transfer to alternative capital markets; monitoring relevant international developments.

Responsibility for follow-ons assigned to PBR Implementation TF and Reinsurance TF. PBR Implementation TF engaged consultant (Rector & Associates) to assist its work. Post-NAIC Update/PBA Webinar Copyright © 2014 by the American Academy of Actuaries All Rights Reserved.

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Rector & Associates Initial Report High-level solution framework 

For insurer owned captives used to finance XXX and AXXX reserves.

Threshold Decision: Should insurers be allowed to back some portion of XXX/AXXX reserves with assets other than traditional admitted assets? 

If answer to Threshold Decision is "Yes," then two alternatives: 

A – Allow within a reinsurance captive; B – Allow similar option within direct writer.

Proposes that a new "Actuarial Standard" be devised to determine the minimum amount of Primary Assets. (N.B. "Actuarial Standard" ≠ ASOP).   

Total Reserve = Primary Assets + Other Assets

Higher than best estimate; would include a cushion for adverse experience. But expected to be lower than the current statutory XXX / AXXX reserve. Method (not necessarily a formula) should lead to "substantially the same result" for insurers with similar fact patterns and when executed by independent parties. Method should achieve consensus acceptance by most or all regulators and insurers.

Two potential options highlighted for the Primary Assets  

Option 1 – today's standard APPM admitted assets Option 2 – today's standard APPM admitted assets PLUS clean, evergreen, unconditional LOCs Post-NAIC Update/PBA Webinar Copyright © 2014 by the American Academy of Actuaries All Rights Reserved.

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NAIC Meeting PBR Implementation (EX) Task Force   

Rector Report exposed for comment prior to the meeting. Report and Framework discussed at the Task Force session. Q&A with Neil Rector. "Direction to Rector & Associates" (see meeting materials), summarizing the sense of the Task Force: 

 

Relative to the Threshold Decision: Financing transactions that meet the requirements of the Framework should be allowed until PBR is effective. Work should proceed on both Alternatives A and B. Focus on approaches to the Actuarial Standard that effectively eliminate the financial incentive for further financing transactions once PBR becomes effective. (Suggested as requiring a standard close to, or same as, VM-20.)

Comments from ACLI.  

Include improvements to transparency, disclosure, qualitative assessment & uniformity. Actuarial Standard should focus on a capital standard rather than a reserve standard. Post-NAIC Update/PBA Webinar Copyright © 2014 by the American Academy of Actuaries All Rights Reserved.

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NAIC Meeting Financial Regulation Standards & Accreditation (F) Committee 

Proposal from Rhode Island that it be clarified that reinsurers, including specifically XXX/AXXX captive and SPV reinsurers, are "multi-state insurers" and therefore subject to the standards delineated in accreditation. Comments 

ACLI and Delaware (both opposed).  Vermont (concurred in large part with respect to captives and special purpose entities owned by traditional insurers; opposed, with respect to 'traditional' captives owned by noninsurance entities). 

Action 

NAIC staff to draft proposed revisions that will clarify definition of "multi-state insurer," for review at NAIC Spring Meeting. Discussed that any action taken will include ample time for impacted jurisdictions to comply.

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Other Developments on Captives 

FIO Modernization Report*  

Notes the growth of insurer-owned captives and SPVs ("captives"). Cites two concerns  

"…[Captives] not bound by rigorous or consistent capital rules across the states." "[T]here is a lack of transparency for captive oversight from state-to-state."

Recommendation: States should develop a uniform and transparent solvency oversight regime for the transfer of risk to reinsurance captives. "As part of such an oversight regime, states should develop and adopt a uniform capital requirement for reinsurance captives, including a prohibition on those types of transactions that do not constitute a legitimate transfer of risk, e.g. that do not provide the protections intended by the Credit for Reinsurance Model Law. Subject to limitations on the disclosure of legitimately proprietary information, these transactions should be disclosed in the financial statements of the ceding insurer. Finally, states should develop and adopt nationally-consistent standards for oversight of the reinsurance captive industry that includes public disclosure of the financial statements of such captives, adopting nationally-consistent standards for oversight of all captives, and adopt those standards as a feature of the Accreditation Program." (p. 34)

* "How To Modernize And Improve The System Of Insurance Regulation In The United States," Federal Insurance Office, U.S. Department of the Treasury, December 2013. Post-NAIC Update/PBA Webinar Copyright © 2014 by the American Academy of Actuaries All Rights Reserved.

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Questions

For more information, please contact: John Meetz, Academy Life Policy Analyst meetz@actuary.org (202) 223-8196

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