two or more behaviors. [Note: more discussion and feedback is needed (e.g., ASOP, practice note or addition to the valuation manual) to add guidance on how to perform this demonstration.]
A9.3)
Sensitivity Testing
The impact of behavior can vary by product, time period, etc. Sensitivity testing of assumptions is requiredrecommended. Due to the aggregation of stochastic modeling results, it is important that the sensitivity testing of assumptions and shall be more complex than e.g., base lapse assumption minus 1% across all contracts. A more appropriate sensitivity test would in this example might be to rdevise parameters in a dynamic lapse formula to reflect more out-of-the-money contracts lapsing and/or more holders of in-the-money contracts persisting and eventually utilizing the guarantee. The actuary should apply more caution in setting assumptions for behaviors where testing suggests that stochastic modeling results are sensitive to small changes in such assumptions. For such sensitive behaviors, the actuary shall use higher margins when the underlying experience is less than fully relevant and credible.
A9.4)
Specific Considerations and Requirements
Within materiality considerations, the actuary should consider all relevant forms of contractholder behavior and persistency, including but not limited to the following: •
Mortality (additional guidance and requirements regarding mortality is contained in Appendix 10)
•
Surrenders
•
Partial Withdrawals (Systematic and Elective)
•
Fund Transfers (Switching/Exchanges)
•
Resets/Ratchets of the Guaranteed Amounts (Automatic and Elective)
•
Future Deposits
It may be acceptable to ignore certain items that might otherwise be explicitly modeled in an ideal world, particularly if the inclusion of such items reduces the calculated provisions. For example: •
The impact of fund transfers (intra-contract fund “switching”) might be ignored, unless required under the terms of the contract (e.g., automatic asset re-allocation/rebalancing, dollar cost averaging accounts, etc.)
•
Future deposits might be excluded from the model, unless required by the terms of the contracts under consideration and then only in such cases where future premiums can reasonably be anticipated (e.g., with respect to timing and amount).
However, the actuary should exercise caution in assuming that current behavior will be indefinitely maintained. For example, it might be appropriate to test the impact of a shifting asset mix and/or consider future deposits to the extent they can reasonably be anticipated and increase the calculated amounts. Normally, the underlying model assumptions would differ according to the attributes of the contract being valued. This would typically mean that contractholder behavior and persistency may be expected to vary according to such characteristics as (this is not an exhaustive list): •
Gender
•
Attained age
•
Issue age
•
Contract duration
•
Time to maturity
•
Tax status
•
Fund value
•
Investment option
© 2006 National Association of Insurance Commissioners
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