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Regulatory Issues for Small Insurance Companies Moderator: Jerry F. Enoch, FSA, MAAA Presenters: Mark William Birdsall, FSA, MAAA Michael W. Boerner, ASA, MAAA E. Perry Kupferman, FSA, MAAA


Smaller Insurance Company Section And

The American Academy of Actuaries 2


Smaller Insurance Company Section  Special concerns in small company environment  Getting the work done without the resources of a larger company  We want YOU: www.soa.org

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SOCIETY OF ACTUARIES Antitrust Notice for Meetings Active participation in the Society of Actuaries is an important aspect of membership. However, any Society activity that arguably could be perceived as a restraint of trade exposes the SOA and its members to antitrust risk. Accordingly, meeting participants should refrain from any discussion which may provide the basis for an inference that they agreed to take any action relating to prices, services, production, allocation of markets or any other matter having a market effect. These discussions should be avoided both at official SOA meetings and informal gatherings and activities. In addition, meeting participants should be sensitive to other matters that may raise particular antitrust concern: membership restrictions, codes of ethics or other forms of self-regulation, product standardization or certification. The following are guidelines that should be followed at all SOA meetings, informal gatherings and activities: •DON’T discuss your own, your firm’s, or others’ prices or fees for service, or anything that might affect prices or fees, such as costs, discounts, terms of sale, or profit margins. •DON’T stay at a meeting where any such price talk occurs. •DON’T make public announcements or statements about your own or your firm’s prices or fees, or those of competitors, at any SOA meeting or activity. •DON’T talk about what other entities or their members or employees plan to do in particular geographic or product markets or with particular customers. •DON’T speak or act on behalf of the SOA or any of its committees unless specifically authorized to do so. •DO alert SOA staff or legal counsel about any concerns regarding proposed statements to be made by the association on behalf of a committee or section. •DO consult with your own legal counsel or the SOA before raising any matter or making any statement that you think may involve competitively sensitive information. •DO be alert to improper activities, and don’t participate if you think something is improper. If you have specific questions, seek guidance from your own legal counsel or from the SOA’s Executive Director or legal counsel.

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Questions  Questions will be addressed at the end  Submit questions any time  Questions can be on any subject

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Questions -

fine print

 Speakers may exercise discretion about answering a question  You are NOT anonymous

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Opinions  Opinions expressed are personal • Don’t represent employer, unless specified

 Are subject to change

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Presenters  Perry Kupferman – California  Mike Boerner - Texas  Mark Birdsall - Kansas

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What can companies do to get new products approved faster?

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Policy Approval          

Apply state laws and regulations including borders and fonts. Include ranges for bracketed policy variables. Avoid sending generic product filings to specific states. Communicate with the reviewer. Do not involve the Commissioner or the executive staff. Respond quickly and thoroughly to the state reviewer. Complete and send checklists to indicate compliance. Include a copy of the original policy when filing riders. Include sources and samples with Actuarial Memorandum. Consider approved competitor policy features.

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What do you do with our RAAIS and actuarial memorandum supporting asset adequacy analysis?

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AO, RAAIS, & AOM  Each state own process  Function of resources  Typical focus is on domestics and priority non-domestics. Others reviewed based on issues and resources. 12


Example of Review Process  Review RAAIS & AO in same priority order of internal annual Financial Analysis review.  Level of AOM review depends on issues and other factors.  Cover actuarial related items as provided in the Financial Analysis Handbook.  Provide internal review summary report to assigned Financial Analyst. Any follow-up is noted in the report. 13


AO Review Includes  Appropriate appointment of Appointed Actuary and reasons for a change.  Whether Appointed Actuary is compliant with CE requirements as noted on SOA website.  Any deviation from standard language and especially any qualifications made.  Asset adequacy method employed and level of amounts and reasons for not subjecting to asset adequacy analysis.  Whether numbers tie to the annual statement.

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RAAIS Review Includes  Whether any scenarios produced negative ending surplus, materiality of results, and any explanation or additional reserves provided.  Whether there were any interim values of concern.  Prefer for RAAIS to summarize the Company’s approach to asset adequacy analysis, results, and issues encountered. This can be discussed as a future consideration. 15


AOM Review Includes  Getting additional understanding of any issues noted in the RAAIS or qualifications in the AO.  Whether assumptions are reasonable.  Whether statements made in the AO & RAAIS are supported by actual results.  Whether asset adequacy method used makes sense for the business tested.  Types of assets used and whether they are appropriate to support the reserve liabilities. 16


Communication is Key  Department Financial Analyst always kept informed on the review and any issues.  For non-domestic companies the domestic regulator is contacted if there are any issues.  Appointed Actuary is contacted if there are any questions.  Less is more may be appropriate as long as it is meaningful. Suggestions are welcome and will be discussed later in these slides. 17


What do you like to see in an RAAIS and an actuarial memorandum supporting asset adequacy analysis?

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In General  Good information with explanations and numbers tied back to support provided in the actuarial memorandum.  Information regarding sensitivity testing that conveys thinking regarding the risks and what might adversely impact results.  Communication should be clear, summary provided with key results, and support that is referenced, meaningful, and easy to find. 19


RAAIS  Summary of testing results including sensitivity testing.  Prefer summary of interim results even if all results were non-negative.  Comments on additional reserves established. Would like summary comments regarding criteria used to establish such amounts.  Discussion of any significant changes in methods and/or assumptions and the basis for such changes.  Perhaps a discussion for the future but would like key memorandum references that provide support.

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Actuarial Memorandum  Would like interim and ending results provided for each year and for each scenario.  Sources and justification of modeling assumptions.  Future consideration: Electronic links to the sections and key areas of the memorandum to be provided in the table of contents.  As mentioned before, communication is key. The better the construction and content of communication the fewer the questions. You have an opportunity for input. See next slide.

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You Can Provide Input  The American Academy of Actuaries (AAA) formed an Actuarial Opinion and Memorandum Regulation (AOMR) Communication Discussion Group chaired by Tom Campbell.  This group has been having regular calls with regulatory and non-regulatory actuaries and other interested parties.  The focus of this discussion group is designed to improve communication of key issues around the appointed actuary’s memorandum.

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AAA AOMR Communication Group  Three subgroups have been formed to consolidate and standardize AOMRs; to improve communication of assumptions and enhance the Regulatory Asset Adequacy Issues Summary; and to add links to the memorandum for key issues.

 The discussion group is considering a next step to develop a list of best practices for providing information in the actuarial memorandum.

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I recently underwent my first risk-based quinquennial examination. In my opinion, it involved a great deal of extra work, and I can’t imagine that the additional benefit came close to the extra work involved.  Is there structure for improving this process?  Is this the beginning of a trend that I’d better resign myself to?  Finally, what do you think actuaries should do to adapt to the new examinations?

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How You Can Prepare  If you are a chief actuary or if you are the primary contact for a certain process, be prepared to be interviewed. Interviews last about an hour.  Have narratives developed describing your reserving process (and perhaps even product development and pricing processes/philosophies).  Make sure you can tie your summaries back to the annual statement.  Have an explanation of your reinsurance assumed and ceded any recent changes.

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Suggestions (cont’d)  Be prepared to explain unusual trends.  Have information available about unusual features and guarantees in products or riders (policy forms w/ actuarial memorandum, etc)  Think about how you can provide seriatim data if it is requested. If you or your CPA do sample checks of reserves during the year, provide that information, along with any supporting documentation you have 26


Suggestions (cont’d)  Have a description of controls in place. Such controls may include reviews performed by peer or external actuaries and sign offs between actuarial and financial reporting offices  Better to have easy access to and deal directly with company actuary versus a non-actuary point of contact.

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How You Can Affect The Process  NAIC continues to work towards process improvements and is open to suggestions.  Get involved. Listen to NAIC conference calls, provide comment letters.  Discuss with your regulators. Any improvements serve both regulators and companies.

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How do you think ORSA will help you?

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ORSA Benefits

 Identifies and quantifies material risks and provides the basis for rewarding effective risk mitigation • Embeds risk analysis and risk mitigation in the analysis and decisions of both companies and regulators

 Consistent with risk-based approach to examinations  Developing synergy with PBR and RBC (see Q7 and Q8) • Provides the basis for stress scenarios to test both the adequacy of reserves and RBC • Mandatory experience reporting will improve the valuation of risk

 Supports product innovation and the removal of product and risk silos • Emerging risks will be more quickly identified and mitigated 30


Where do you think ORSA will be 5-10 years from now?

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ORSA in 5-10 years  The separate documentation of ORSA, reserves, and RBC will be integrated and standardized  Companies and regulators will develop considerably more expertise in risk management  Exemptions by company size will eventually be removed as ORSA proves a valuable exercise  Additional quantitative tools, such as predictive modeling and decision theory, will become much more prevalent  It will become possible to build risk models of the industry, identifying and measuring the risks associated with interconnections among entities 32


As a small company actuary, I think PBR will take a lot more work, but won’t make much difference in our reserves. I think we’d be better off without it. Do you think I’m missing something?

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PBR and Smaller Companies  Current Valuation Manual Provisions • VM-20 Reserve = max(Net Premium Reserve, Deterministic Reserve, Stochastic Reserve) • Stochastic Exclusion Test and Deterministic Exclusion Test 

    

Except for UL with secondary guarantees and variable UL, a qualified actuary can certify every three years that the block does not have significant interest rate or asset return volatility riskPass the SET Demonstrate every 3 years: calculating the SR would not increase the final reservePass the SET If the block passes both the SET and DET, only need to calculate NPR If the block passes the SET, but not the DET, then calculate NPR and DR If the block does not pass the SET, then calculate NPR, DR, and SR Must calculate SR if a clearly defined hedging strategy applies Must calculate DR if reserving for a ULSG product

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PBR and Smaller Companies (cont’d)  Current Valuation Manual Provisions • Alternate Reserve Calculations 

VM-20 Section 2.G provides for simplifications, approximations, and modeling efficiency techniques to calculate any or all of the NPR, DR, and SR Actuary must demonstrate that the alternate reserve does not understate the reserve by a material amount  

Question: Could a company with traditional products and assets continue to hold its current reserve levels for new life business under VM-20? Answer: Depending on the specific facts and circumstances, it is a real possibility.

• Experience Reporting Exemptions 

VM-50 Section 2B provides for exemptions from experience reporting based on achieving an 80% target level of experience for each product line 

For individual ordinary life insurance mortality, about 100 companies would be needed to reach this target

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PBR and Smaller Companies (cont’d)  Current Valuation Manual Provisions • Product Exemptions  

For Credit Life and Disability, simplified methods are described in VM-26 Preneed (“and other similar products” from Model A-817) are exempted from VM-20 

Continue to use current reserving methodologies

• Flexibility through demonstration   

  

May group of assets May use a proxy for policy loans For clearly defined hedging strategies, may use zero for residual risks and frictional costs May use different assumptions than reinsurer May reduce margins to account for correlations among assumptions May choose applicable mortality table with a method other than the UCS

 What else? • Suggestions from smaller insurance company actuaries

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PBR and Smaller Companies (cont’d)  Suggestions from Dialog with Smaller Company Actuaries (like you) • •

• •

In addition to preneed, continue current CRVM for traditional whole life and some term products For the alternative reserve calculations, provide more clarity in VM-20 regarding how to make the required demonstration to show the reserves are high enough to be exempted from other PBR requirements Clarify the definition of universal life with secondary guarantees (including lengthening the 5-year minimum premium threshold) in order to minimize the inclusion of accumulation UL products in ULSG PBR requirements Raise the Stochastic Exclusion Ratio Test threshold to 5.5% or 6.0% and evaluate company experience over time for future refinement Simplify certain VM-20 requirements, such as the calculations of the Deterministic Reserve and the Net Asset Earned Rate

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Polling Question How important would it be to you for PBR to keep current CRVM for certain additional products? 1. 2. 3. 4.

Unimportant Somewhat important Very Important No opinion / don’t understand

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Polling Question How important would it be to you for PBR to provide a safe harbor demonstration methodology for alternative reserve calculations? 1. 2. 3. 4.

Unimportant Somewhat important Very Important No opinion / don’t understand

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Polling Question How important would it be to you for PBR to clarify the ULSG definition to exclude accumulation UL? 1. 2. 3. 4.

Unimportant Somewhat important Very Important No opinion / don’t understand

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What else do you think about PBR?

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Current PBR Issues  Auditability and explainability • Results of NPR, DR, and SR hard to validate and analyze • Resource needs are a concern for all stakeholders

 Need for additional risk analysis • VM-20 is based on the cash flow testing C-3 risk testing paradigm from the 1980s • More complex current products may have multiple significant risks and hybrids such as CDAs and fixed annuities with GLIBs • Continue use of product silos versus holistic view based on risks

 May not right-size reserves • Size of implicit margins • Industry may continue to use captive insurers to finance reserves 42


Current PBR Issues (cont’d)  PBR development continues • Consider NPR calculations for products other than term and UL with secondary guarantees • Pending Amendment Proposal Forms (APFs)  

Simplify DR calculation Determine level of starting assets

• AG 43 (VM-21) for variable annuities is under review • VM-22 for non-variable annuities is under development • Need to define PBR for LTC and LTD

 Minimum required capital is not yet synchronized with new PBR reserve levels

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How is AG-38 working now?

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AG 38 – Some Background  AG 38 involved a couple of examples to date where interpretations and innovative product designs resulted in what could be referred to as designer reserves resulting in a non-level playing field .  Good communication and efforts to work towards clear requirements are keys to avoid non-level playing fields.  To address the most recent AG 38 issue a great deal of work led by the NAIC’s Joint A&E Working group resulted in the NAIC 2012 adoption of the bifurcated approach reflected in new Sections 8D and 8E in AG 38.

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AG 38, Section 8D  Section 8D provides requirements for certain ULSG business in force on 12/31/12.  Such ULSG business includes policies issued on and after 7/1/2005 and prior to 1/1/2013 with multiple sets of interest rate or other credits or multiple sets of COI, expense, or other charges that may become applicable in any one policy year for the secondary guarantee.  Section 8D involves a PBR like reserve calculation to test or adjust reserves.

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AG 38, Section 8E  Section 8E provides requirements for ULSG business issued on and after 1/1/2013.  8E provides for a “Method I” calculation of the minimum gross premium for products that fall into one of three specified designs.  A “Method II” calculation is provides for other product designs. Method II is based on deriving the minimum gross premium that produces the greatest deficiency reserve.

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Emerging Actuarial Issues WG  To answer immediate implementation questions for Section 8D,12/31/12 year end calculations as well as questions regarding 8E requirements NAIC formed the Emerging Actuarial Issues (E) Working Group (EAIWG).  To date the EAIWG has adopted 29 responses to questions which are referred to as interpretations (INTs).  The INTs adopted by the EAIWG & NAIC will become part of the Accounting Practices and Procedures Manual. Adopted INTs can be found at: http://www.naic.org/committees_e_emerging_actuarial_issues_wg.htm

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Financial Analysis WG (FAWG)  Companies subject to AG 38, Sections 8D and 8E, submit required filings to their domestic state.  The domestic state forwards these filings to the NAIC FAWG who works with the domestic state in the review of these filings.  FAWG will follow the INTs adopted by the NAIC in performing its review of the filings.  If there are any unresolved disagreements in the review of a filing between FAWG and the domestic state then FAWG will communicate this to other states.

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From your observations, what do you think about the level of professionalism in our profession? What would you like to see done?

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Professionalism  Put issues in writing in advance and do not expect immediate response.  Remember regulatory actuaries are generalists who know their state laws.  Annual peer review helps keep current with best practices.

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Professionalism  Most Appointed Actuaries provide even more information than is requested.  Significant number of Appointed Actuaries are minimalists who respond only to questions asked.  Small number of Appointed Actuaries do not answer the questions asked and are uncooperative. 52


Professionalism  Consulting actuaries push the envelope more than company actuaries.  How far will consultants go to keep a client happy by avoiding billing for unanticipated studies.

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What advice do you have for company actuaries?

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Advice  Communicate directly and not only using attorneys.  Discuss issues in advance and do not fear saying something wrong.  Communicate a question and not just to stay in touch.  Preschedule calls and tell the regulator the topic in advance.

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Advice  Document conversations and agreement reached.  Do not complain unless you provide examples.  Do not belabor why the requested information is not needed.

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Q&A Slide Goes Here

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Polling Question How important would it be to you to raise the Stochastic Exclusion Test Ratio threshold from 5.5% to 6.0%? 1. 2. 3. 4.

Unimportant Somewhat important Very Important No opinion / don’t understand

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Polling Question How important would it be to you to simplify certain PBR calculations, such as the Deterministic reserve? 1. 2. 3. 4.

Unimportant Somewhat important Very Important No opinion / don’t understand

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Reg_Issues_for_Small_Companies_Webinar_6-4-13