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Post-NAIC Update/PBA Webinar Moderator: Dave Neve, FSA, MAAA, CERA Chairperson, American Academy of Actuaries Financial Soundness/Risk Management Committee December 13, 2012 Post-NAIC Update/PBA Webinar #25 Copyright Š 2012 by the American Academy of Actuaries All Rights Reserved.

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Agenda 

Fall 2012 LATF Update: Mike Boerner, Chair, NAIC Life Actuarial Task Force Update

Fall 2012 PBR Update: Dave Neve, Chairperson, Academy Life Financial Soundness/Risk Management Committee

2012 Individual Annuity Mortality Tables and Model Regulation: Mary Bahna-Nolan, Chairperson, Academy Life Experience Subcommittee

Post-NAIC Update/PBA Webinar #25 Copyright © 2012 by the American Academy of Actuaries All Rights Reserved.

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Fall 2012 LATF Update Mike Boerner, ASA, MAAA Chair, NAIC Life Actuarial (A) Task Force Chair, Emerging Actuarial Issues (E) WG Director, Actuarial Office Financial Regulation Division, Examinations Texas Department of Insurance Post-NAIC Update/PBA Webinar #25 Copyright Š 2012 by the American Academy of Actuaries All Rights Reserved.

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Fall 2012 LATF Update 

Valuation Manual Status

Actuarial Guideline 33

Synthetic GIC Reserves

Nonforfeiture Modernization

C3 Phase 2 / AG 43 Joint Subgroup

Actuarial Opinions

IIPRC, International Update

NAIC Adoptions – Model 821 (2012 IAR) & 2013 GRET

AG 38 & The Emerging Actuarial Issues (E) Working Group Post-NAIC Update/PBA Webinar #25 Copyright © 2012 by the American Academy of Actuaries All Rights Reserved.

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Valuation Manual Status Significant Developments Since the Summer NAIC Meeting: 

LATF adopted 8 Valuation Manual (VM) amendments

NAIC “A” Committee adopted these 8 amendments prior to the Fall NAIC meeting

NAIC Executive Committee adopted the 8/17/12 Valuation Manual, previously adopted by the “A” Committee, along with these 8 amendments at the Fall 2012 NAIC meeting

NAIC Plenary adopted the “A” Committee 8/17/12 Valuation Manual with these 8 amendments at the Fall NAIC meeting. There were 43 “yes” votes which satisfies the SVL supermajority requirement for this NAIC adoption.

Supermajority legislative adoptions of the SVL now must occur before the VM becomes operative

Post-NAIC Update/PBA Webinar #25 Copyright © 2012 by the American Academy of Actuaries All Rights Reserved.

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Valuation Manual – 8 Amendments 1)

Mortality grading schedule revised so that maximum number of years to reach industry table reflects years of sufficient data and percent credible

2)

Recognition of positive net cash flows limited when term premiums increase steeply to reflect relevance and credibility of experience

3)

Provides seriatim audit trail upon request for deterministic reserve calculation

4)

Calculate the mortality credibility percentage such that the minimum probability is at least 95% with a margin of error no greater than 5% Post-NAIC Update/PBA Webinar #25 Copyright Š 2012 by the American Academy of Actuaries All Rights Reserved.

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Valuation Manual – 8 Amendments (continued) 5)

Link provided for economic scenario generator and other clarification provided regarding economic scenarios

6)

Amendment regarding seriatim allocation of reserves in excess of the net premium reserve

7)

NPR was added to the upper range of the collar to be the greater of NPR or 102% of the final aggregate modeled reserve

8)

Clarification provided regarding impact of margins to modeled reserve vs. minimum reserve

Post-NAIC Update/PBA Webinar #25 Copyright Š 2012 by the American Academy of Actuaries All Rights Reserved.

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Valuation Manual – Starting Assets 

New York discussed concerns over use of low investment grade assets to increase the discount rate and lower reserves in VM-20 PBR calculations

The Academy reviewed the requirements in VM-20 to address these concerns, and the history behind the process to develop the requirements

New York and the American Council of Life Insurers (ACLI) discussed proposals to address these concerns

Further discussion and examples of calculations on these proposals will be considered on future calls Post-NAIC Update/PBA Webinar #25 Copyright © 2012 by the American Academy of Actuaries All Rights Reserved.

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Valuation Manual 

PBR Review & Updating Process 

Support for Regulatory Review of PBR

PBR Implementation Timeline

Experience Reporting Requirements  

Consumer Behavior Long Term Care

Aggregate Margin & Collar

VM-22 (PBR for Non-Variable Annuities) Post-NAIC Update/PBA Webinar #25 Copyright © 2012 by the American Academy of Actuaries All Rights Reserved.

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Actuarial Guideline 33 

LATF discussed whether to consider changes to AG 33 or AG 43 to address reserving concerns for guaranteed living income benefits within a non-variable deferred annuity  LATF did not provide direction at this time to develop such changes for consideration

LATF discussed a proposal to consider reserve changes to AG 33 for a type of participating non-variable annuity product  LATF exposed the proposal for comment

Post-NAIC Update/PBA Webinar #25 Copyright © 2012 by the American Academy of Actuaries All Rights Reserved.

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Synthetic GIC Reserves 

The Academy provided a report and proposal for reserve changes to synthetic guaranteed investment contracts

LATF requested the Academy to convert the proposal into edits to NAIC Model Rule 695

LATF will discuss on future conference calls & consider exposure

Post-NAIC Update/PBA Webinar #25 Copyright © 2012 by the American Academy of Actuaries All Rights Reserved.

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Other LATF Status Items 

Nonforfeiture Modernization

C3 Phase 2 / AG 43 Joint (A & E) Subgroup

Actuarial Opinions  Academy Discussion Group With Regulators  Joint LATF/HATF/CASTF Subgroup

IIPRC Status

International Update

Post-NAIC Update/PBA Webinar #25 Copyright © 2012 by the American Academy of Actuaries All Rights Reserved.

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Other LATF Status Items 

NAIC Adoptions  Changes to Model Rule 821 to Reflect the 2012 Individual Annuity Reserve Mortality Table  2013 GRET

Post-NAIC Update/PBA Webinar #25 Copyright © 2012 by the American Academy of Actuaries All Rights Reserved.

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AG 38 & the Emerging Actuarial Issues (E) Working Group (EAIWG) 

The EAIWG was created in November to respond to implementation questions regarding new requirements in AG 38 (Sections 8D & 8E)

Links to the EAIWG website and template for submitting questions:  

http://www.naic.org/committees_e_emerging_actuarial_issues _wg.htm http://www.naic.org/documents/committees_e_emerging_actu arial_issues_wg_related_submission_form.doc

Post-NAIC Update/PBA Webinar #25 Copyright © 2012 by the American Academy of Actuaries All Rights Reserved.

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AG 38 Model Responses to Questions 

At the NAIC Fall 2012 meeting the “E” Committee adopted 16 model responses to questions (referred to as INTs) previously adopted by the EAIWG

Adopted model responses to questions will be posted on the “E” Committee portion of the NAIC website

The NAIC Financial Analysis Working Group (FAWG) will use adopted model responses in its review

These adopted responses are to be included in the NAIC Accounting Practices and Procedures Manual Post-NAIC Update/PBA Webinar #25 Copyright © 2012 by the American Academy of Actuaries All Rights Reserved.

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Fall 2012 PBR Update David E. Neve, FSA, MAAA, CERA Chairperson, Life Financial Soundness/Risk Management Committee Chairperson, Life Reserves Work Group

Post-NAIC Update/PBA Webinar #25 Copyright Š 2012 by the American Academy of Actuaries All Rights Reserved.

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Overview 

Valuation Manual  Legislative approval timeline  Outstanding VM-20 Issues  VM-21 update  VM-22 update

NAIC Implementation Plan

Life PBR Practice Note

SOA Research Effort on PBR Implementation

Discussion Draft of PBR ASOP Post-NAIC Update/PBA Webinar #25 Copyright © 2012 by the American Academy of Actuaries All Rights Reserved.

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Valuation Manual Adopted by NAIC    

 

NAIC adopted the Valuation Manual at Fall NAIC meeting Culmination of over 8 years of work on VM-20, the principlebased reserve requirements for life products Includes reporting and documentation requirements Becomes operative January 1 following the first July 1 in which the following occurs:  Adoption by 42 states (out of 56 jurisdictions, or 75%)  Adoption by enough states that represent at least 75% of industry direct premiums in 2008 Expect work will continue to modify the VM during the legislative approval process Timeline: earliest operative date is probably January 1, 2016 Post-NAIC Update/PBA Webinar #25 Copyright © 2012 by the American Academy of Actuaries All Rights Reserved.

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Outstanding VM-20 Issues 1)

Aggregate Margin  Academy Task Force has been formed, chaired by Patricia Matson to develop a recommendation for LATF  LATF has also formed a regulatory subgroup, chaired by Mark Birdsall, to study and make recommendations

2)

Investment Return on Starting Assets

3)

Credibility Method for Mortality Assumptions

4)

98% - 102% collar on starting assets

Post-NAIC Update/PBA Webinar #25 Copyright © 2012 by the American Academy of Actuaries All Rights Reserved.

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VM-21: PBR for Variable Annuities 

VM-21 in the Manual is the current AG43 requirement

An NAIC joint subgroup, chaired by Al Sekac, has been formed to review the current AG43/C3P2 requirements  Goal is to evaluate the overall effectiveness of the methodology and make recommendations to LATF/CADTF  The subgroup is considering a plan to change the current requirements with an aggressive timeline, but it hasn’t adopted the plan yet

Both the Academy and ACLI submitted comments for a 12/11/12 subgroup call

Post-NAIC Update/PBA Webinar #25 Copyright © 2012 by the American Academy of Actuaries All Rights Reserved.

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VM-22: PBR for Fixed Annuities 

LATF has asked the Academy’s Annuity Reserve Work Group (ARWG), chaired by Jim Lamson, to develop an initial draft of the PBR requirements for fixed annuities

The ARWG is developing a proposal that will include:  A stochastic principle-based component  A prescribed deterministic floor based on modifying AG33  An exclusion test for the stochastic component

The ARWG has set a target date of delivering a proposed framework to LATF during 2013

Post-NAIC Update/PBA Webinar #25 Copyright © 2012 by the American Academy of Actuaries All Rights Reserved.

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NAIC Implementation Plan 

NAIC has prepared a discussion draft (available on NAIC website); comments due by January 10

Key elements of plan:  Regulatory Support for PBA Review  

    

NAIC Actuarial Staff Support Actuarial Analysis Working Group (AAWG)

Defining Statistical Data Standardized Financial Reporting and Analysis Tools PBR Asset Spread Data Training Accreditation Post-NAIC Update/PBA Webinar #25 Copyright © 2012 by the American Academy of Actuaries All Rights Reserved.

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Life PBR Practice Note 

Work Group to prepare a draft PN has been formed, chaired by Todd Erkis, to update initial draft prepared several years ago

Q&A format that addresses practical issues on implementation

Goal: document industry practice. This is difficult since VM-20 is not in place yet (and may still be changing somewhat).

Objective is to put in a range of practice believed to be appropriate

Not binding

Goal is to complete first draft for comment by mid-2013

Post-NAIC Update/PBA Webinar #25 Copyright © 2012 by the American Academy of Actuaries All Rights Reserved.

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SOA Research Effort on PBR Implementation 

New research initiated by SOA Financial Reporting Section

Objective: utilize current literature, studies and experience to provide a resource that outlines key considerations for a company implementing PBA

Not designed to duplicate practice notes

Sample of issues to be addressed (not complete):     

How large a staff is needed? What system modifications may be needed? What data will be required? What information may be needed by external auditors? What are good control processes? Post-NAIC Update/PBA Webinar #25 Copyright © 2012 by the American Academy of Actuaries All Rights Reserved.

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Discussion Draft of PBR ASOP 

An ASB Task Force led by Frank Irish is developing a draft ASOP to provide guidance to actuaries on PBR

ASB has authorized the Task Force to distribute a Discussion Draft (not an Exposure Draft)

Expect the Discussion Draft to be completed in early 2013

The Task Force expects to create an Exposure Draft after discussions with interested parties.

Post-NAIC Update/PBA Webinar #25 Copyright © 2012 by the American Academy of Actuaries All Rights Reserved.

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2012 Individual Annuity Mortality Tables and Model Regulation Mary Bahna-Nolan, FSA, CERA, MAAA Chairperson, Academy Life Experience Subcommittee

Post-NAIC Update/PBA Webinar #25 Copyright Š 2012 by the American Academy of Actuaries All Rights Reserved.

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Model Regulation 

  

The NAIC recently adopted amendments to the NAIC Model Rule (Regulation) for Recognizing a New Annuity Mortality Table for Use in Determining Reserve Liabilities for Annuities Changes are effective for individual annuities or pure endowment contracts issued on or after January 1, 2014  Also applies to settlement options in life insurance contracts Prescribes the 2012 Individual Annuity Reserving Table (2012 IAR Table) as the minimum standard of valuation Defines and requires use of a projection scale, Scale G2 Defines an explicit margin = 10%  Same as that applied to a2000 Table

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Model Regulation 

Prescribes rounding rules

Prescribes the method for determining the generational mortality

Defines 2 tables  

2012 IAM Period Table 2012 IAM Reserve Table

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Model Regulation 

2012 IAM Period Table  

Table of mortality rates for a given year, e.g., qx2012 Based on Individual Annuity Mortality Basic Table and improvement factors to 2012 (2012 IAM Basic Table) with margin

2012 IAR Table, which is a generational mortality table 

Table of mortality rates is determined by applying a combination of a Period table and Projection Scale (e.g., qx2012+n where n = # years from 2012)  Results in a table where, for a given age, the mortality rate decreases from year to year

Post-NAIC Update/PBA Webinar #25 Copyright © 2012 by the American Academy of Actuaries All Rights Reserved.

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Development of Generational Mortality Table Rates 

Mortality rate for a person age x in year (2012 + n) determined as follows:

q

2012  n x

q

2012 x

* (1  G 2 x ) n

where, 

G2x is annual rate of mortality improvement for age x from projection scale G2 qx is the mortality rate from 2012 Individual Annuity Mortality Period Table

Post-NAIC Update/PBA Webinar #25 Copyright © 2012 by the American Academy of Actuaries All Rights Reserved.

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Development of Generational Mortality Table Rates Illustration of Development of 2012 IAR Mortality Table, which is a Generation Mortality Table from 2012 IAM Period Table Age

2012

2013

2014

2015

2016

2017

2018

2070

65

q652012

q652013

q652014

q652015

q652016

q652017

q652018

q652070

66

q662012

q662013

q662014

q662015

q662016

q662017

q662018

q662070

67

q672012

q672013

q672014

q672015

q672016

q672017

q672018

q672070

68

q682012

q682013

q682014

q682015

q682016

q682017

q682018

q682070

69

q692012

q692013

q692014

q692015

q692016

q692017

q692018

q692070

120

q1202012

q1202013

q1202014

q1202015

q1202016

q1202017

q1202018

q1202070

Source: Society of Actuaries Individual Annuity Experience Committee for the American Academy of Actuaries Life Experience Subcommittee

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Reserve Impact of Margins Initial Reserve Impact per $1,000 Select Issue Ages Male Risks with Interest at 5% Without Improvement

Including Improvement

Issue Age

a2000

2012 Basic

2012 Valuation

2012 Basic

2012 Valuation

Margin impact on reserves

Life

65

11.60

12.09

12.37

12.48

12.76

2.2%

Life

75

8.50

8.88

9.20

9.12

9.45

3.6%

Life

85

5.50

5.30

5.63

5.39

5.72

6.1%

60/80

1.78

1.98

2.14

2.31

2.46

6.8%

20-year deferred

Source: Society of Actuaries Individual Annuity Experience Committee for the American Academy of Actuaries Life Experience Subcommittee

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Q&A

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

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