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The Representative Scenarios Method (RSM) Field Test Phase 1: Fixed Annuities

The Representative Scenarios Method (RSM) Field Test Phase 1: Fixed Annuities. Slides prepared by Steve Strommen, FSA, CERA, MAAA Blufftop LLC March, 2015. Outline of field test phase 1:. Motivation: Some belief that reserves under CARVM are overly conservative for GLIBs Purpose:

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The Representative Scenarios Method (RSM) Field Test Phase 1: Fixed Annuities

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  1. The Representative Scenarios Method (RSM)Field Test Phase 1:Fixed Annuities Slides prepared by Steve Strommen, FSA, CERA, MAAA Blufftop LLC March, 2015

  2. Outline of field test phase 1: • Motivation: • Some belief that reserves under CARVM are overly conservative for GLIBs • Purpose: • Test the application of RSM and formulaic floors to blocks of recently issued fixed annuities with GLIBs. • Participants: • Two companies with blocks of annuities • Consultants to carry out the modeling and reserving • Kansas (Mark Birdsall) as manager and coordinator

  3. Characteristics of business modeled • Both Company A and Company B sell fixed indexed annuities with GLIBs. • Significant differences in the generousness of guaranteed benefits (strength of guarantees) • Company B’s business includes more generous GLIB levels, making GLIBs more likely to be in-the-money.

  4. Reserve methodology tested • Two-part formulaic floor reserve • Floor 1 excludes “listed benefits” like GLIBS • Floor 2 reflects election of the “listed benefits” • Modeled reserve using the Representative Scenarios Method (RSM)

  5. Comparative reserve levels$millions

  6. Comparative margins in modeled reserves$millions

  7. Lessons learned in phase 1 • RSM produced modeled reserves in the same ballpark as full stochastic modeling • May need to separate “investment returns” into two separate risk drivers (interest rates and equity returns) • Aggregate margin under the cost of capital method is larger than under the percentile method for a new block of business with many years before expiry.

  8. Other lessons learned in phase 1 • Projection of capital to calculate cost of capital • Should be in proportion to PV of remaining benefit-only cash flows (exclude future premium cash flows) • Monthly sum indexing • Sensitive to scenario volatility • Little volatility within each RSM scenario • Results not representative unless “monthly sum” indexing is simulated as “annual point-to-point”

  9. Next steps – phase 2 • Phase 2 involves study of RSM application to other products using a case-study approach • Variable annuities with listed benefits • Level premium term life insurance • Universal life insurance with secondary guarantees • Long term care insurance • RSM discussion being split into two separable issues: • General methodology • Identification of risk drivers and their distributions • Form of the aggregate margin • Cost of capital or percentile will both be studied

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