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Principle-Based Reserves Doug Van Dam, FSA, MAAA PolySystems, Inc. Presentation Outline. PBR – Statutory (40 minutes) Background Impact Key Dates Calculations Company Planning Still in Progress The other PBR – GAAP (10 minutes) Q&A. Background. GOAL of PBR - Statutory.
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“Right-size” reserves based on the risk in the product
Some products don’t fit well in the current static valuation methods
Reserves will reflect current and anticipated future economic conditions
On the other hand, regulators want a conservative minimum reserve
ACLI and companies are concerned about impact on tax reserves
Revised Standard Valuation Law
Revised Standard Non-forfeiture Law
Consolidate in one document PBR and non-principle-based valuation requirements
Promote uniformity among states
Efficient, consistent, and timely updates
Mandate experience reporting
Enhance industry compliance
Demonstrate that the stochastic reserve is less than the max of Deterministic and Net Premium Reserves
Show that main risks which would cause the Stochastic Reserve to “win” have been removed
Use your cash flow testing model to show asset adequacy
A qualitative risk assessment concludes that the group of policies does not have material interest rate risk or asset return volatility
Demonstrations must be within 12 months prior to valuation date
Pass if the sum of guaranteed gross premiums is greater than the sum of valuation net premiums
Universal life with secondary guarantees must calculate the Deterministic Reserve
CTE 70 of greatest present value of accumulated deficiencies, captures tail risk.
Calculated in the aggregate, allowing for risk offsets (although still floored at NPR and DR).
Requires ALM model.
Actuary is supposed to set up additional amount to capture material risk not captured elsewhere.
External VM 20 documentation requirements are substantial and still not well understood.
Internal documentation is just as important as external.
Document process and report on results.
Automate via production reports.
Will likely need new reports for VM 20, but leverage existing reports where possible.
Good version control is key.
All of your in force
Will rely on well controlled valuation process that can assist in explaining period to period movement
Depending on the business it may or may not include stochastic projections
Principles-based approach with additional guidance
Reflects the economics of insurance contracts
Based on insurance contracts, not insurance companies
Residual Margin is the plug so that there is no profit at issue
Residual Margin is re-measured for changes in future assumptions. Current year experience flows through income statement
Similar to IASB Residual Margin – it is the plug so that there is no profit at issue.
The FASB is not in favor of running experience changes through the margin.