Session 69 PD, PBR Implementation Moderator: Jason E. Kehrberg, FSA, MAAA Presenters: Michael W. Boerner, ASA, MAAA Timothy C. Cardinal, FSA, MAAA Jason E. Kehrberg, FSA, MAAA Leonard Mangini, FSA, MAAA
Session 69: PBR Implementation Tuesday, May 17 2016
Jason Kehrberg Tim Cardinal Mike Boerner Leonard Mangini
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Session 69: PBR Implementation
VM‐20 Practice Note Update Tuesday, May 17 2016
Jason Kehrberg, FSA, MAAA Vice President, PolySystems Inc.
The original VM‐20 practice note has been exposed since February 2014 • The first and current exposure draft, “Life Principle‐ Based Reserves Under VM‐20” is available at the Academy’s website (www.actuary.org) • Several amendments to VM‐20 • More companies have started to calculate VM‐20 to gauge its impact or as part of AG‐38 8D or AG‐48 • The Academy’s Life Principle‐Based Approach Practice Note Work Group began work to revise the draft early 2016 with the goal of exposing the revised draft sometime in the middle of the year
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Practice note outline − 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Summary and Calculation Schematic Products Covered Available Information on Common Practice VM‐20 Calculation Overview Net Premium Reserve Deterministic Reserve Stochastic Reserve Stochastic Reserve Exclusion Test Deterministic Reserve Exclusion Test Differences from Cash Flow Testing Performing Work on Other Than the Valuation Date 5
Practice note outline (continued) 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21.
Starting Assets and Asset Modeling Scenarios and Economic Assumptions Prudent Estimate Assumptions Overview Margins Mortality Assumptions Premium Assumptions Policyholder Behavior Assumptions Other than Premiums Expense Assumptions Non‐Guaranteed Element Assumptions Reinsurance Hedging / Derivative Programs 6
LATF has adopted a number of amendments to VM‐20 • Policy loans, due premiums, pre‐tax IMF (2, 7, 18) • NPR Clarifications (3, 6) • Direct iteration method for deterministic reserve (4) • Credibility and margins (10, 17, 19) • Stochastic exclusion ratio test clarifications (11, 21) • Small company exemption (13) • Commercial mortgages (15) • Mortality tables (16, 22, 23, 24, 25, 26) • Underwriting criteria scoring tool (20) 7
Amendments and industry feedback will result in new practice note Q&A • Examples of the types of questions being added to the practice note • What is the small company exemption? Is it optional? How is it elected? What happens if a company that was once exempt no longer qualifies? • How is the direct iteration method different from the gross premium valuation method? What are its advantages? Can a company switch between the two methods? • How can a company determine if their mortality experience is credible?
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Questions? Jason Kehrberg, FSA, MAAA Vice President, PolySystems Inc.
[email protected] (312) 332‐5670
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May 17, 2016 Tim Cardinal, FSA, MAAA, CERA, MBA
Resources
Resources: A New Trio PBA Implementation Guide Revised PBA Implementation: Beginning Tales PBA Implementation: VM‐20 Calculation Examples
Original Guide Picture of revised Guide cover
focus on processes and foundational infrastructures as a primer for high level planning
Revised Guide What’s new in VM: 11/2015 VM vs. 12/2012 VM Entire Guide revised to reflect 11/2015 language, retains 2013 time orientation – what’s and implications Case Study 1 completely redone
User Manual Travel Guide Book: 5 Days in Paris and Rome Interests, itineraries, things to do Browse, jump around and revisit User Manual: Steps Review Executive Overview Review Case Study Road Map Review Flow Charts Conduct Scoping Exercise Conduct Road Mapping Exercise Construct your Road Map
Case Study 3
Visual Glance Flowcharts Product Decision Tree PBA Operational Flow Exclusion Tests Deterministic Exclusion Test Deterministic Reserve and Stochastic Reserve Assumptions (mortality, asset default and spreads, constraint)
Scoping and Mapping Requirements & Frameworks Product Decision Tree PBA Operational Flow Five Stages Considerations Self‐Assessment Organized by Assumption Setting and Inputs Models and Uses Output Governance / Regulatory PBA Strategy / Planning
Beginning Tales 2013 vs. 2016: implementation changers Experiences. Where participants are in the process Common issues and pain points
2013 vs. 2016: Implementation Changers 2013 Operative date ‐ uncertainty Term passed DET → minimum reserve = NPR 2016 Operative date = 1/1/2017 Term fails DET Mitigates benefits of permitting AAT models for SERT Is minimum reserve = NPR or DR ??? AAT Asset Adequacy Testing DET Deterministic Exclusion Test DR Deterministic Reserve
NPR Net Premium Reserve SERT Stochastic Exclusion Ratio Test
Experiences One word summary: time Beginning Tales, not Concluding Tales 2013 – 2015 activities Assumptions Experience studies Governance Models
Experiences / Where In Implementation? Setting assumptions Initial model build (to calculate reserves as of valuation date) Placeholders Projecting VM‐20 modeled reserves Time and resource, more staff Product development Common pain points Process to set mortality assumptions Underwriting Criteria Score. Credibility by amount rather than count Process to set asset assumptions Developing margins and in particular on dynamic assumptions Model granularity e.g., individual asset defaults and spreads by weighted average life
VM-20 Calculation Examples Some examples adapted from the online Voyager m2Lab PBA Training courses Mortality assumption Asset defaults and spreads Deterministic Exclusion Test Stochastic Exclusion Ratio Test Term NPR and Deterministic Reserve
Questions … Contact Information Tim Cardinal
[email protected] 513.607.3019
Session 69: PBR Implementation
PBR Status Tuesday, May 17 2016
Mike Boerner, ASA, MAAA Actuarial Office Director, Texas Dept. of Insurance Chair:
NAIC Life Actuarial (A) Task Force (LATF) NAIC PBR Review (EX) Working Group
PBR Status: Legislation & Operative Date Valuation Manual Amendments Regulatory Review
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Adoption Status Source: NAIC as of 4/26/16 Legislative Session
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States
2013-4/11/16 Enacted
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AZ, AR, CA, CO, CT, DE, FL, GA, HI, IL, IN, IA, ID, KS, KY, LA, ME, MD, MI, MS, MO, MT, NE, NV, NH, NJ, NM, NC, ND, OH, OK, OR, RI, SC, SD, TN, TX, UT, VT, VA, WA, WI, WV
2016 Introduced
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Total of enacted & introduced (Goal is 42 states & 75% premium)
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AL, MA, MN, PA
Premium Threshold Percentage 76.170%
12.822%
88.992%
NAIC Substantially Similar Review The PBR Implementation (EX) Task Force adopted the NAIC support review and recommendation summarized by Kay Noonan, NAIC, on their 5/2/16 call. This recommendation recognizes that the supermajority requirements have been met with the enactment of substantially similar requirements to make the Valuation Manual operative this 1/1/17. Pending the enactment of a particular change to the SVL in Louisiana this recommendation and review will then be considered for adoption by the NAIC Plenary in early June. Enacting states can then make use of the NAIC determination as appropriate in making their determination and communication to companies of the 1/1/17 VM operative date.
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NAIC Spring Meeting Exec/Plenary Adoption of VM Amendments Included: VM Amendments that implement the 2017 CSO:
Provides use of the 2017 CSO for nonforfeiture. Shall be the minimum standard for policies issued on and after 1/1/20. May be used for policies issued prior to 1/1/20 and on or after 1/1/17, otherwise the 2001 CSO is to be used for these policies. Conditions provided for use of these CSO tables. Preferred version of these tables is not to be used for minimum nonforfeiture. Provides use of the 2017 CSO for valuation. Shall be the minimum standard for policies issued on and after 1/1/20. May be used for policies issued prior to 1/1/20 and on or after 1/1/17, otherwise the 2001 CSO is the minimum standard for valuation. Use of these CSO tables is subject to conditions.
Amendment providing VM-20 annual default costs based on 2014 data. 29
Status of VM-31 Changes Made in NAIC LATF Calls Prior to the Spring Meeting LATF Spring meeting report summarized LATF adoptions of VM amendments in calls leading up to the meeting which included adoption of updates to clarify, reorder, and revise VM-31. Key revision to VM-31 is the removal of the tables previously provided in VM-31. Instead VM-31 is to provide a copy of the PBR Blanks Supplement, Parts 1 & 2. Part 1 in particular was designed by the PBR Blanks (EX) Subgroup to be a replacement for these tables. LATF posted their adoption of the updated VM-31 on its website but has not forwarded to its parent committee for adoption as other amendments are expected. Any additional amendments to VM-31 are to use the updated version on the LATF website labeled as, “VM-31 Consolidated Changes 2/25/16”.
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NAIC LATF Status of Significant Valuation Manual Amendments VM Amendment Relating to Term Requires Deterministic Reserve (DR) when the VM-20, Section 3, Term Net Premium Reserve (NPR) is applied. Addresses LATF NPR Drafting Group concerns that the Term NPR may not be an adequate reserve if it were the only reserve. Requires the DR by not allowing use of the Deterministic Reserve Exclusion Test. LATF adopted this amendment on its call on April 28th.
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NAIC LATF Status of Significant Valuation Manual Amendments Exposure of VM Amendment to keep Term and ULSG Separate in the Determination of the Minimum Reserve This proposal relates to both “Minimum Reserve Aggregation” in VM-20, Section 2, and relates to “PBR (Stochastic) Aggregation” in VM-20, Section 7. The terms, “Minimum Reserve Aggregation” and “PBR Aggregation” are not defined terms in the Valuation Manual but are used here for convenience. More explanation for each of these terms along with issues that the exposure alleviates is provided on the next few slides followed by a description of the exposure.
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Minimum Reserve Aggregation Minimum Reserve Aggregation: VM-20, Section 2 Explanation: Summing corresponding reserves for each product (NPR, DR, SR), & taking the greatest based on totals. First Issue: Allocation formula to derive minimum reserve per policy & per product is based on NPR which can allocate the PBR excess to products which did not generate the excess. Second Issue: Certain examples of such aggregation appear to provide for a reduction in reserves where one product can subsidize another product’s PBR excess reserve as opposed to directly offsetting the other product’s risks.
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PBR Aggregation PBR Aggregation: VM-20, Section 7 Explanation: Following the guidance in VM-20, Section 7B3 to group policies together in running the Stochastic Reserve. Comment: Modeling products together may provide Stochastic Reserve reductions versus modeling separately due to offsetting of risks. Further study may be needed to determine any additional guidance regarding appropriate grouping of policies for this modeling.
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Summary of Exposure For “Minimum Reserve Aggregation” in VM-20, Section 2, Term and ULSG must be kept separate from other products in taking their own NPR plus any PBR excess to determine the minimum reserve. For the Stochastic “PBR Aggregation” in VM-20, Section 7, there are two options exposed for comment where the first is simply to keep term and ULSG separate and the second is to allow term and ULSG to be run together where a separate deterministic run for each product would be used to allocate the stochastic result proportionately to each product. This allows time to develop a more appropriate allocation method and time to study concerns regarding “Minimum Reserve Aggregation” and any additional guidance that may be needed for “PBR Aggregation”. This proposal is exposed for comment thru April 25th.
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Other Significant VM Efforts to Monitor There are two VM-G exposures to watch. One provides edits to VM-G from an American Academy of Actuaries Work Group and the other provides edits to VM-G from the ACLI. Both were exposed for comment thru May 8th. Leonard Mangini will comment more on these in his portion of this presentation. The Life Actuarial (A) Task Force (LATF) is working with ACLI and others to study and address any appropriate changes to the Term NPR. Efforts include an objective for the Term NPR to provide a reasonable progression of reserve patterns which serve as a floor to PBR. Some of the LATF concerns include zero terminal reserves for 10 year term through issue ages 55 and lower reserves with distortions in the pattern of later duration reserves due to post level term profits. There is an understanding that any adjustments require testing with the deterministic reserve which takes time. Given this, timing for any appropriate changes is for 2018 valuations.
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Regulatory Review NAIC Actuarial Support Existing resources – 2 FSAs and 1 near ASA 2016: Adding 2 new FSA positions. Required expertise is financial modeling, valuation, & financial reporting. Actuarial resources to support states and the Valuation Analysis (E) Working Group (VAWG). NAIC acquired the GGY Axis modeling software.
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Regulatory Review NAIC Modeling Software Training Strategy Includes: Coding Term, ART, UL, ULSG (12 – 15 products) Coding assets consisting of existing assets or assets to be purchased with positive cash flows. Coding of new business &/or in-force model records to generate liability cash flows. Coding all product, asset, & modeling assumptions & generating economic scenarios. Upon completion of training the goal is to have coded a standard portfolio that could be used for calibration of company models.
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Regulatory Review 2016 PBR Pilot 12 Participating Companies (names are confidential). All with term products with a few ULSG 12/31/15 valuation date assuming PBR in place then and for several years of issue. Commences mid-April for four months. Deliverables: 1. Application of VM-20 (Using current Term NPR) 2. Confidential VM-31 PBR Report (Consolidated version on LATF website) 3. PBR Blanks Supplement (As adopted by the PBR Review (EX) Working Group) Regulators will review confidential VM-31 PBR Report from September thru November with the domestic state and NAIC support using review procedures to date.
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Regulatory Review 2016 PBR Pilot The Pilot is expected to provide benefits for both participating companies and regulators with a focus on the process versus the numbers. In particular the Pilot will help NAIC support and regulators consider further development of review procedures and tools to support regulators in a consistent in depth review of PBR across states. The Pilot will further considerations regarding support for regulators which includes: NAIC acquisition of modeling software which will be tested during the Pilot along with a consideration for an approach for model validation. Disclosure in the PBR Blanks Supplement. Information in the confidential VM-31 PBR Report. Ongoing development of Financial Examination/Analysis procedures. Valuation Analysis (E) Working Group (VAWG) procedures.
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PBR Survey & Training The SOA and NAIC are working for a PBR Survey to companies focused on their planned use of PBR for 2017. This is a simplified survey that should take no longer than one hour to complete. The survey is planned to be sent out around July 1st. Survey responses will help regulators and the NAIC to gauge PBR resource needs for 2017. The American Academy of Actuaries is holding PBR intensive training & case studies (Called PBR Boot Camp) on June 6th thru the 8th. Another intensive training is planned for September 21st as this one was completely filled at the beginning of early registration.
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Session 69: PBR Implementation
Governance and Implementation Tuesday, May 17 2016
Leonard Mangini, FSA, FRM, MAAA President, Mangini Actuarial and Risk Advisory LLC
Liability Disclaimer, Copyright, Use of Slides Although I’ve attempted to capture the letter and spirit of the Valuation Manual, Code of Conduct, ASOPs, and Qualification standards faithfully‐ you have a personal professional duty to familiarize yourself with the original source material and apply professional judgment as to its specific application to your own work and those working under your direction as you perform covered Actuarial Services. The nature of your work, and other professional designations you hold, may require you to be bound by additional professional requirements from other organizations as well. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, legal, tax, or other professional advice, nor is it an Actuarial Opinion by Leonard Mangini, or Mangini Actuarial and Risk Advisory LLC. Please refer to your advisors for specific advice. The views expressed by the presenters are not necessarily those of Mangini Actuarial and Risk Advisory LLC. Much of the original source material on VM‐20/PBR and Professionalism is copyrighted material of the American Academy of Actuaries, Society of Actuaries, or National Association of Insurance Commissioners. This presentation paraphrases these for educational purposes to capture the intent of the regulations and standards of practice or results of SOA research, and every attempt has been made to identify and cite original sources. These slides may NOT be copied, redistributed, or otherwise furnished to any party without prior written consent of Mangini Actuarial and Risk Advisory LLC other than as required to comply with an audit of the attendee’s annual CPE compliance.
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Today’s Topics‐ Governance and Implementation • • • • • •
Flexibility Requires New Governance‐ Guidance Academy APF: VM Governance Roles/Responsibilities Changing VM‐G: Board and Senior Management VM‐G: Qualified and Appointed Actuaries VM‐30: Changes in AOMR, “Reliance” Model Audit Rule‐ Reporting Requirements
SOA Session 69 Mangini Actuarial and Risk Advisory LLC May 17, 2016
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Flexibility Requires Governance: VM‐G as Guidance As written, responsibility for actuarial/financial assumptions with Company As written, Guidance, not create new duties‐ just clarify existing duties VM Principle align ERM/ORSA context natural roles of Board, Management, Staff • PBR Assumptions, Methods, Models consistent with ERM • Board: Oversight • Management: Inform Board/Control • One or More Qualified Actuaries (QA) Calculations, Appointed Actuary (AA) Opines VM‐G Definitions: • Board: Operating Insurer Level • Senior Management (SM): Highest Ranking Officer for Profit/Risk/Reporting • VM specifically includes CEO, CFO, Chief Actuary, CRO as part of SM
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VM‐G: Board Guidance Board‐ Has Oversight and Decision Role Board‐ Establishes Processes: • Receive and Review Reports on Internal Controls • Interactions with Management to Resolve Issues • Take Action‐> Ensure Ability to Rely on PBR Valuation Function
Board‐ General Oversight: • Senior Management Processes to Correct Material Weakness Internal Controls • Infrastructure Implement/Oversee PBR‐ Policies, Procedures, Controls, Resources • Documented Active Board Review‐ in Board Minutes
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VM‐G: Senior Management‐ Guidance Senior Management‐ Oversight and Process Role: • • • • •
Adequate Infrastructure to Implement PBR Review PBR Assumptions, Methods, Models Consistency with Other Company Risk Assessment Consistency with ERM Tolerances, Mitigation, Emerging Experience Review and Address Material issues
Other Senior Management Responsibilities • Internal Controls that PBR Captures all Material Risks • Quality Implementation‐ Resources, Reserve Adequacy, Validate‐ Data, Assumptions, Models • Annual Board Report: Infrastructure, Valuation Risks, PBR Conservatism, SM Quality
• Formal Certification of Effectiveness Required by SVL
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Academy APF: Changes to Requirement for QA Responsibility formally assigned to one or more QA‐ Creating Duties • Overseeing PBR Valuation • Reviewing and Approving Assumptions, Internal Standards and Controls • Disclosing Issues to External Audit and Regulators • Preparing PBR Actuarial Report
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VM‐G: Qualified and Appointed Actuaries Discuss Implementation Implications of New Duties/Responsibilities
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VM‐30, PBR ASOP: Changes in AOMR, “Reliances” Scope and Qualifications • Opinions Issued on or after VM operative‐ i.e. impacts 12/31/2016 AOMR! • One Opinion for PBR /on‐PBR Business‐ AA must be familiar w/398 page VM
Significant Changes: • Inconclusive Opinion • Relying on Others • RAAIS‐ due 4/1/YY+1, only to domicile, others on request
PBR ASOP: • Detailed Static and Dynamic Model Validation
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Model Audit Rule‐ Reporting Requirements Model Audit Rule (MAR) Legislation‐ Effective 1/1/2010 • • • • •
Detailed Requirements‐ Controls, Reporting on Controls for Statutory Accounting Section 17: $500 Million Threshold on Report on Controls Must Report Material Weaknesses to Domicile‐ 60 Days of Audited Financials Does NOT prescribe HOW Management Reviews/Evaluates Controls QA inserted into this reporting requirement framework if Academy APF Adopted
Resources: NAIC Implementation Guide, Academy Practice Note • Implementation Guide‐ Clarifies MAR Content, Does Not Change Requirements • Practice Note‐ Guidance
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Questions? Leonard Mangini, FSA, FRM, FALU, MAAA President , Mangini Actuarial and Risk Advisory LLC
[email protected] (516) 418‐2549
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