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Evolution of RBC System in the USA. Lou Felice. Presentation Agenda. Overview of Current RBC System Milestones and Developments Since the Launch of the RBC System Key Areas and Challenges of Current Reforms Differences between RBC and Solvency II in Terms of Capital Requirements

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presentation agenda
Presentation Agenda

Overview of Current RBC System

Milestones and Developments Since the Launch of the RBC System

Key Areas and Challenges of Current Reforms

Differences between RBC and Solvency II in Terms of Capital Requirements

RBC in Context of Group-wide Supervision

current u s rbc framework structure
Current U.S. RBC – Framework / Structure

RBC Is Part of Regulatory Safety Net

  • Licensing in Each State
  • Restrictions on and Regulatory Approval of Key Risk Transactions
  • Statutory Accounting and Reporting, CPA Audit and Actuarial Opinion
  • RBC, Other Intervention Tools and Financial Analysis
  • Corporate Governance and ERM (ORSA)
  • Risk-Focused Financial Examinations
us solvency framework
US Solvency Framework
  • Primary goal is to ensure financial health of insurers for purposes of protecting policyholders
    • Work with companies to remedy areas of concern
    • More severe interventions if company continues to deteriorate e.g. regulators will run off or liquidate the insurer if necessary to ensure protection of existing policyholders
    • Provide a consistently applied set of standards
  • Additional goals include availability and affordability of insurance, stable and competitive markets
current rbc formula regulatory purpose use
Current RBC Formula Regulatory Purpose / Use
  • Rules Based, Formulaic / Factor Driven
    • Some company results adjust factors for Life
    • Some modeling used for interest rate and market risk
    • Industry Averages used for some risks
  • Reflects Unique Risks Inherent in Operating an Insurance Company (Compared to Banks, etc.)
  • Reflects Risk profile of Company Type (Life v. P&C) and Specific Company (e.g. Investment Strategy and Insurance Lines of Business)
  • Not All Risks Are Accounted for; Material Risks by Industry
  • Provides Regulatory Authority for Timely Action
overview of naic rbc formulas
Overview of NAIC RBC Formulas
  • Formula vs. Full Modeling Approach
  • Signaling Mechanism between Regulators and Insurers to Identify Poorly Capitalized Companies (Different Levels)
    • Unlike Banking RBC that also Has:
      • “Well Capitalized”
      • “Adequately Capitalized”
naic rbc system
NAIC RBC System
  • Four formulas:
    • Life, Fraternal (copy of Life), P & C, and Health
  • NAIC Risk-Based Capital for Insurers Model Act serves as a guide
  • RBC law adopted in each state makes the system operational and consistently applied
  • RBC Law incorporates the formulas by reference so Law need not be changed when formula changes
  • NAIC produces the RBC formulas but the content is maintained and modified by State regulators
overview of formula construction
Overview of Formula Construction

Generic Component Information

  • Asset Risk – Affiliated Investment Risk
  • Asset Risk – Default Risk / Market Risk
  • Asset Risk – Credit / Other
  • Underwriting/Insurance Risk
  • Other Types of Risk (Varies by Formula)
    • Business Risk (Life & Health)
    • Interest Rate Risk (Life)
overview of formula construction cont
Overview of Formula Construction (Cont.)

Asset Risk – Investments

  • Bonds = Default on Principal and/or Interest
  • Preferred Stock = Default and Past Dividends
  • Common Stock = Decrease in Fair Value
  • Mortgages = Default on Principal and/or Interest
  • Real Estate = Decrease in Fair Value
  • Schedule BA Assets = Risk Similar to Underlying Characteristics
overview of formula construction cont1
Overview of Formula Construction (Cont.)

Asset Risk – Receivables (Credit Risk)

  • Risk of Non-Recovery of Receivable Amounts

Asset Risk – Other

  • Investment Concentration Risk = Additional Risk of High Concentrations in Single Exposures
overview of formula construction cont2
Overview of Formula Construction (Cont.)

Underwriting/Insurance Risk

Reserve Risk = Obligations from Past Business Are Understated (Underestimated Reserves)

Premium Sufficiency Risk = Premiums Are Inadequate to Cover Claims and Expenses for Policies Written (Under-Priced)

overview of formula construction cont3
Overview of Formula Construction (Cont.)

Other Types of Risk (Varies by Formula)

  • Business Risk (Life and Health) =
      • Primarily Litigation and Guaranty Fund Risk
      • Life Formula Adds a Risk Charge for Separate Account Reserves
      • P&C and Health Formulas Add Growth Risk
  • Interest Rate Risk/Market Risk (Life) =
      • Risk of Losses Due to Changes or Mismatch in Interest Rate Levels (See Presentation Section on C-3 Interest Rate Risk)
      • Risk of market fluctuation in asset values vs. liability cash flows
overview of formula construction cont4
Overview of Formula Construction (Cont.)

Detail in the Formulas was Developed to Focus on the Areas of Most Material Risk for Each Formula

Life – Asset Risks

P&C – Underwriting Risks (Pricing and Reserving)

life industry distribution of risk components
Life Industry Distribution of Risk Components

Life RBC Components:

  • C-0 Asset Risk - Affiliates 15%
  • C-1cs Asset Risk - Common Stock 16%
  • C-1o Asset Risk - All Other 33%
  • C-2 Insurance Risk 18%
  • C-3a Interest Rate & Market Risk 10%
  • C-3b Health Credit Risk 0%
  • C-3c Market Risk 2%
  • C-4a Business Risk 5%
  • C-4b Business Risk Admin. Expenses 1%
p c industry distribution of risk components
P/C Industry Distribution of Risk Components

Property/Casualty RBC Components:

    • R0 – Asset Risk Affiliated Insurance 15%

Company Assets

  • R1 – Asset Risk Fixed Income Investments 2%
  • R2 – Asset Risk Equity Investments 25%
  • R3 – Credit Risk 5%
  • R4 – U/W Risk Reserve 34%
  • R5 – U/W Net Premiums Written 19%
overview of formula construction cont5
Overview of Formula Construction (Cont.)

Health RBC Components:

    • H0 = Asset Risk – Affiliated Company Investments 11%
  • H1 = Asset Risk – Other Invested Assets 15%
  • H2 = Insurance/Underwriting Risk 60%
  • H3 = Credit Risk 4%
  • H4 = Business Risk 10%
how does the formula work data sources and calculation
How Does the Formula Work? Data Sources and Calculation
  • Financial Amounts:
      • Automated Data Pulls from the Statutory Annual Statement
      • Manual Data Entry from Company Records
  • Multiplied by Risk Factors
  • Equals Risk Charges
  • Covariance Calculation
    • Groups Correlated Risk Charges into Same Component Recognizing Independence vs. Correlation of the Risks
overview of formula construction cont6
Overview of Formula Construction (Cont.)

Covariance Calculation (Continued):

  • Square Root of Sum of Component Amounts Squared = Adjustment to Reflect the Remote Likelihood of Losses from Multiple Formula Components Occurring Simultaneously (Uncorrelated)
  • Combination of Risks < Sum of Each Component Risk
overview of formula construction cont7
Overview of Formula Construction (Cont.)

(C1o+C3a)2+(C1cs+C3c)2+(C2)2+(C3b)2+(C4b)2

C0+ C4a+

R0 +

(R1)2+(R2)2+(R3)2+(R4)2+(R5)2

(H1)2+(H2)2+(H3)2+(H4)2

H0 +

Covariance Calculation:

Life RBC

Property/Casualty RBC

Health RBC

how does the formula work the ratio and action levels
How Does the Formula Work?The Ratio and Action Levels
  • The RBC formula calculates Total Adjusted Capital (Capital and Surplus from the Statutory Balance Sheet Adjusted for Certain Items)
  • The RBC formula also calculates a minimum capital level (Authorized Control Level RBC)
  • The other Action and Control Levels are calculated from the ACL RBC:
    • Company Action Level = 200% of ACL
    • Regulatory Action Level = 150% of ACL
    • Authorized Control Level (ACL) = 100% ACL
    • Mandatory Control Level = 70% of ACL
overview of formula construction cont8
Overview of Formula Construction (Cont.)

Total Adjusted Capital (TAC):

  • Capital & Surplus from Liabilities Page
  • Adjustments
    • AVR (Life and Life Subs)
    • Dividends (Life & Life Subs)
    • Hedging Credit (Life)
    • Non-US Insurance Subsidiaries (Life)
    • Non-tabular Discount (P/C & P/C Subs)
    • Tabular Discount (P/C & P/C Subs)
    • Credit for Capital Notes (Subject to a Limit)
  • = Official TAC
overview of formula construction cont9
Overview of Formula Construction (Cont.)

Total Adjusted Capital (Continued):

  • Tax Sensitivity Total Adjusted Capital
    • Total Adjusted Capital + Additional Adjustments
      • DTA, DTL
      • Subsidiary DTA, DTL
    • = FYI TAC
  • Additional Sensitivity Tests
    • Remove Surplus Notes
    • Additional Charge for Off-Balance Sheet Items
overview of formula construction cont10
Overview of Formula Construction (Cont.)

Action/Control Levels:

Authorized Control Level RBC (ACL RBC)

= 50% of Calculation after Covariance

  • Company Action Level

= 200% of ACL RBC

  • Regulatory Action Level

= 150% of ACL RBC

  • Authorized Control Level RBC
  • Mandatory Control Level

= 70% of ACL RBC

overview of formula construction cont11
Overview of Formula Construction (Cont.)

Comparison of Total Adjusted Capital (TAC) to Action Levels:

  • “Official” TAC, NOT (Tax) Sensitivity TAC
  • Level of Action Indicators
      • None
      • Company Action Level
      • Regulatory Action Level
      • Authorized Control Level
      • Mandatory Control Level
  • RBC Ratio = TAC/ACL RBC
overview of rbc model laws
Overview of RBC Model Laws

Section 3 - Company Action Level Event:

  • TAC >= Regulatory Action Level RBC but
  • TAC < Company Action Level RBC

OR

  • Trend Test Triggered

=

  • Insurer Submits RBC Plan to Commissioner
overview of rbc model laws cont
Overview of RBC Model Laws (Cont.)

RBC Plan:

  • Identify Conditions
  • Proposed Corrective Actions
  • Current + 4 Year Financial Projections
  • Key Assumptions for Projections
  • Quality of & Problems with Insurer’s Business
  • Submitted within 45 Days of Company Action Level Event

Commissioner Response to RBC Plan (60 Days):

  • Plan to be Implemented, or
  • Unsatisfactory (Revised RBC Plan or Reg. A.L. Event)
overview of rbc model laws cont1
Overview of RBC Model Laws (Cont.)

Section 4 - Regulatory Action Level Event:

  • TAC >= Authorized Control Level RBC but
  • TAC < Regulatory Action Level RBC

=

  • RBC Plan (within 45 days) to Commissioner AND
  • Commissioner Examination or Analysis AND
  • Commissioner’s Order for Corrective Actions AND
  • Experts to Review RBC Plan at Insurer’s Expense
overview of rbc model laws cont2
Overview of RBC Model Laws (Cont.)

Section 5 - Authorized Control Level Event:

  • TAC >= Mandatory Control Level RBC but
  • TAC < Authorized Control Level RBC

=

  • RBC Plan (within 45 days) to Commissioner AND
  • Commissioner Examination or Analysis AND
  • Commissioner’s Order for Corrective Actions AND
  • Experts to Review RBC Plan at Insurer’s Expense

OR

  • Place Company under “Regulatory Control”
overview of rbc model laws cont3
Overview of RBC Model Laws (Cont.)

Section 6 - Mandatory Control Level Event:

  • TAC < Mandatory Control Level RBC

=

  • Place Company under “Regulatory Control”

Section 7 – Hearings (Insurer’s Right to Challenge)

  • Adjusted RBC Report
  • Unsatisfactory RBC Plan or Revised RBC Plan that Resulted in a Regulatory Action Level Event
  • Notice of Failure to Adhere to RBC (or Revised) Plan with Substantial Effect on Company Action Level Event
  • Corrective Order from Commissioner
milestones and development
Milestones and Development
  • Formula Implementation
    • 1993 = Life RBC Formula
    • 1994 = P/C RBC Formula
    • 1998 = Health RBC Formula
  • Sensitivity Tests Expanded over Time
  • C-3, Phase II Project for Life RBC
    • Incorporated stochastic modeling into the Risk Charge for Annuities
  • Trend Tests
milestones and development1
Milestones and Development
  • Sensitivity Tests Expanded over Time
    • Increases RBC risk charges for affiliated investments, restricted assets, contingent liabilities and guarantees, and long-term leases
    • Added tax sensitivity adjustment to TAC
      • Back out Deferred Tax Assets (DTAs)
      • Add back Deferred Tax Liabilities (DTLs)
      • Same adjustments for subsidiary amounts
milestones and development2
Milestones and Development
  • Trend Tests
    • Life RBC
      • TAC > 200% ACL and < 300% ACL; AND
      • Trending downward for prior 2 years (e.g., 1st prior year 270% and 3rd prior year 230%)
    • P/C RBC
      • TAC > 200% ACL and < 300% ACL; AND
      • Combined Ratio > 120%
    • Health RBC
      • TAC > 200% ACL and < 300% ACL; AND
      • Combined Ratio > 105%
challenges and current reforms
Challenges and Current Reforms

Incorporating Catastrophe Risk Charge

Considering Calibration of Formulas

Assessing Asset Risk Charges

Assessing Underwriting charges (P&C)

How to Incorporate Operational Risk

Role of Scenario Testing (Stress Testing)

differences between rbc and solvency ii
Differences between RBC and Solvency II
  • Accounting Differences
    • SII market consistent balance sheet gives a going concern view of solvency position
    • US statutory balance sheet gives more of a winding up basis
  • Capital Requirement Calculation Differences
    • SII uses independent MCR and SCR calculations for an insurer
    • RBC uses a single formula for a specific insurer to generate 4 action/control levels
differences between rbc and solvency ii cont
Differences between RBC and Solvency II (cont.)

Capital Requirement Calculation Differences (cont.)

  • RBC uses separate formulas by industry type – life (& fraternal), property/casualty, health
  • SII SCR is a single formula with sub-components utilized based upon insurer type
differences between rbc and solvency ii cont1
Differences between RBC and Solvency II (cont.)

Capital Requirement Calculation Differences (cont.)

  • RBC is not based on an overarching calibration target; only specific calibration at individual risks level
  • SII SCR is calibrated to an overall value at risk with a confidence level of 99.5%
  • RBC covers a specified list of material risks at the industry level
  • SII SCR takes into account all quantifiable risks, while the MCR is a linear formula based on a set of risk factors applied to individual company liabilities
differences between rbc and solvency ii cont2
Differences between RBC and Solvency II (cont.)

Use of Internal Models

  • Life RBC allows some risk factors to be modified by insurer/industry experience; partial models are currently limited to life/ annuity products with guarantees subject to interest rate/market fluctuation risks
    • Models are not approved, but regulators set prescribed statistical parameters and time horizons and may apply a standard model that acts as a floor on capital
  • SII MCR requires a standardized approach, but insurers can choose between the standard approach or the use of an internal model for either specific risk modules or for all its risks for SCR
differences between rbc and solvency ii cont3
Differences between RBC and Solvency II (cont.)

Use of the Capital Requirement

  • RBC has some influence on insurers’ risk management (e.g. Reserves reduced for reinsurance, but not for collateral); addressed mainly through other supervisory tools
  • SII is designed to provide incentives for risk management
  • Capital add on may be required by regulator, but it is not part of the RBC capital amount
  • SII capital add on increases SCR
differences between rbc and solvency ii cont4
Differences between RBC and Solvency II (cont.)

Use of the Capital Requirement in the U.S.

  • Other oversight tools are used with RBC
    • Many prioritization and analysis tools focus on specific activities within the insurer; these are addressed to prevent a future capital problem
  • Hazardous Financial Condition Regulation in addition to RBC Specific Legal Action
    • For example, a company with 1000% RBC ratio could still trigger a Hazardous Financial Condition trigger by having a large drop in surplus
differences between rbc and solvency ii cont5
Differences between RBC and Solvency II (cont.)

Own Risk & Solvency Assessment (ORSA)

  • US – exemption for insurers under $500 million in premiums (commissioner can still require)
  • SII – required of all insurers and groups
  • US – legal requirement tied to analysis and regulatory oversight with more discretion left to the company to determine/justify risk assumption and mitigation methods
  • SII – more prescriptive legal requirement linking risk and capital management (including how the risk profile deviates from SCR assumptions)
rbc and group wide supervision
RBC and Group-Wide Supervision
  • RBC assesses risk charges on each legal entity insurer for ownership of parent, subsidiaries and affiliates; but it does not establish specific capital requirements for non-insurance entities
    • RBC aggregation does not recognize diversification benefits, but those benefits tend to disappear when groups are stressed
  • US system focuses on understanding the risks outside of the insurance entities and how they may impact the insurers
rbc and group wide supervision1
RBC and Group-Wide Supervision
  • US does not support a consolidated approach to a group capital calculation
    • How do you construct a reasonably accurate group capital requirement that works for the many different group structures, types of businesses included, differing legal system requirements, etc.?
    • Where does the group capital reside and how is the priority of distribution established in a liquidation when it resides at the holding company (and issues of fungibility)?
rbc and group wide supervision2
RBC and Group-Wide Supervision
  • US does support a legal entity based approach to assessing group capital which includes and understanding and assessment of group-wide risks that may adversely impact the legal entities as a result of group-wide activities occurring outside of the legal entities but within the broader group
    • Perhaps use simple but effective ratios and scenario (stress) tests to perform group capital assessments
    • US system will use ORSA Summary Reports to see the group’s material risks (including in stressed environment) and how the capital objective is structured to account for those risks (including in stressed environment)
reserves p c life

Reserves- P/C- Life

ASSAL – November 2012

Lou Felice

ssap no 55 unpaid claims losses and loss adjustments expenses
SSAP No. 55—Unpaid Claims, Losses and Loss Adjustments Expenses

Claims, losses, and loss/claim adjustment expenses shall be recognized as expense when a covered or insured event occurs.

A covered or insured event:

  • Occurrence
    • The occurrence of an incident which gives rise to a claim or the incurring of costs.
  • Claims Made
    • Reporting to the entity of the incident that gives rise to a claim.
insurance data organization
Insurance Data Organization
  • Accident Date
    • The date on which the loss occurred.
  • Report Date
    • The date on which the loss is first reported to the insurer.
  • Recorded Date
    • The date on which the loss is first entered into the statistical records of the insurer.
who sets the reserves
Who Sets the Reserves?
  • Case Reserves: Claims Representatives
  • IBNR/Bulk: Actuaries & Company Management

SSAP 55: “Management’s Best Estimate”

    • By line of business and in Aggregate
    • Reserve will NOT be accurate with certainty.
    • All reasonable outcomes to be considered – not all possible outcomes
    • If all points within a range are probable (RARE), record the midpoint.
management s best estimate
Management’s Best Estimate

"Management's best estimate" is the value of the ultimate settlement amount, undiscounted except for some small amounts of fixed and reasonably determinable claim values that can be discounted. It can be viewed that margin exists equal to the difference in the best estimate reserve and a discounted reserve, but there is not to be conservatism in the estimate. Financial reporting in Schedule P via loss development triangles provides a means to test for implicit margins/conservatism in a company's reserves, showing development in accident year incurred values.

what costs are considered
What Costs are Considered?

Generally, the amount necessary to settle unpaid claims…

SSAP 55:

  • Reported losses
  • Incurred but not reported claims (IBNR)
    • Can include “Development on Known Claims”
  • Loss adjustment expenses
    • Defense and Cost Containment (DCC)
    • Adjusting and Other (AO)
loss adjustment expenses lae
Loss Adjustment Expenses (LAE)
  • DCC
    • Defense, Litigation, Medical Cost Containment
    • Cost of Experts …(potentially testify in court)
    • In DEFENSE of Claim:
      • Private investigators, appraisers
      • Attorney Fees – (Duty to Defend)
  • AO: All other LAE
    • Claim Adjusters
    • In Determination of Coverage:
      • Private investigators, appraisers
      • Attorney Fees – (Litigation in determining coverage)
how are reserves estimated
How Are Reserves Estimated?

SSAP 55

  • Loss Reserve Projections by line of business
    • Not Just for Company in TOTAL…it’s by line
  • Results of More than One Method Should be Considered
slide59

How Are Reserves Estimated?Loss Development Analysis: Triangle

Loss Development = Change in Loss Over Time

how are reserves estimated are they right
How Are Reserves Estimated?Are They Right?

Compare:

  • Indicated Reserve: Actuarial Estimate
  • Carried Reserve: Amount on the Books

Are They Adequate or Inadequate?

Same as…Are They Redundant or Deficient?

salvage and subrogation
Salvage and Subrogation

Salvage: Car value when it’s totaled.

Subrogation: Paid claim but reimbursed by at-fault person.

  • Received: Adjust Paid Losses for amounts received.
  • Anticipated: If choose to anticipate recoverables, then estimate & deduct from the liability for unpaid claims or losses. (Required to maintain data & perform actuarial tests to support reasonableness.)
discounting
Discounting
  • Time Value of Money
  • No discounting, unless authorized
    • See SSAP 54 and 65
  • Fixed and reasonably determinable payments

(Issue Paper No. 65)

Example: Workers compensation

        • Tabular indemnity reserves
        • Long-term disability claims
catastrophe reserves
Catastrophe Reserves
  • Catastrophe Loss Reserves Are

established only AFTER a

catastrophe has occurred

          • Any reserves for the “Potential for a CAT” are Special Surplus Funds

Hail

Earthquake

Tornado

Wind

actuarial opinion
Actuarial Opinion

In the Statement of Actuarial Opinion, the Appointed Actuary must address the risk of material adverse deviation. This gives the regulators better knowledge of the possibility for unfavorable reserve development impacting the solvency of a company. What does (or could) impact the management best estimate is the actuary's best estimate and/or range of estimates in the Actuarial Opinion Summary. Significant difference between the actuary's and the management's estimates leads to regulator/management discussion, so management is often significantly influenced by the actuary's best estimate.

life insurance policy reserves
Life Insurance Policy Reserves
  • Excess of the present value of future benefits over the present value of future net premiums
    • Based on an interest rate – minimum determined annually (largely set by regulation)
    • Based on a mortality table – changed every 10 – 15 years
    • Cash value floor
    • Zero Lapses in calculation
life insurance reserves1
Life Insurance Reserves
  • Determination of future benefits
    • Face amount
    • Indexed (Cost of Living)
    • Universal / Variable Life
life insurance reserves2
Life Insurance Reserves
  • Net premiums
    • Based on the interest and mortality of the reserve
    • Level percentage of the guaranteed gross premiums
    • Other patterns
      • Net level premium reserves (NLP)
      • Commissioners Reserve Valuation Method (CRVM)
      • CRVM graded to NLP
    • May limit period of insurance
life insurance reserves3
Life Insurance Reserves
  • Deficiency Reserves
    • Present value of the excess of net premiums over guaranteed gross premiums
    • 1976 – Difference between actual reserve and minimum reserve based on maximum interest rate and specified mortality table
    • 1990’s – Allowed to modify specified mortality with actuarial certification
deferred annuity reserves
Deferred Annuity Reserves
  • The greatest present value of all possible future guaranteed benefits streams over future considerations. (CARVM) – discount at interest only.
    • Surrenders
    • Partial Withdrawals
    • Annuitizations
    • Death Benefits
heath reserves
Heath Reserves
  • Contract Reserves Similar to Life
  • Claims Reserves Similar to P&C
principles based valuation project
Principles-Based Valuation Project

Why is it needed?

  • Good public policy
    • Requires understanding of the real economic condition of the company.
    • Improves the price of products to consumers
  • Eliminate flaws in current methodology
    • Eliminates need to constantly develop new rules
    • Focused on “what could happen” instead of “what happened”
  • International
    • More consistent with international reserving initiatives and accounting if the NAIC moves in that direction.
    • Allows U.S. to compete in the global insurance market
svl pbr requirements include
SVL PBR Requirements Include:

Quantification of benefits, guarantees, and funding at a level of conservatism for unfavorable events that have a reasonable probability of occurring.

Quantification of significant tail risk.

Assumptions, risk analysis, financial models, and management techniques consistent with company’s overall risk assessment process.

Provide margins for uncertainty such that the greater the uncertainty the larger the margin.

Prescribed formulaic component may be included.

life pbr requirements in vm
Life PBR Requirements in VM
  • Found in VM-20
  • Life PBR Scope:
    • Variable and Non-Variable Individual Life Contracts Issued on and after the Operative Date of the Valuation Manual
    • Option Provided to Use Three Year Transition Period.
    • Excludes Preneed and Credit Life Products.
  • VM-20 PBR is the greatest of three reserves*:
    • Net Premium Reserve (NPR) – prescribed formulaic
    • Deterministic Reserve (DR) – single economic scenario
    • Stochastic Reserve (SR) – multiple economic scenarios

* Exemption criteria apply depending on product. Product may be exempted from SR or both DR & SR.

net premium reserve npr
Net Premium Reserve (NPR)

A non-PBR prospective calculation

Intended to be a floor for the PBR reserve

May ultimately be the basis for the tax reserve

NPR is developed for Term

NPR revisions for Universal Life with secondary guarantees currently in discussion.

NPR is not developed yet for other products and would default to current reserve requirements until developed.

ACLI will work to develop NPR for other products.

deterministic reserve dr
Deterministic Reserve (DR)
  • A PBR reserve calculation which models cash flows over a single economic scenario.
  • Cash flows include projected benefits, expenses, premiums and related amounts.
  • Assume you have blocks of business which can be modeled together ( i.e. – only one “model segment”)
  • The Deterministic Reserve is the present value of the projected benefits, expenses, and related amounts less the present value of the projected premiums and related amounts.
stochastic reserve sr
Stochastic Reserve (SR)
  • A PBR reserve which models cash flows using stochastically generated economic scenarios.
  • Assume you have blocks of business which can be modeled together (i.e. – only one “model segment”)
  • For each economic scenario starting assets (& reinvestment assets) are projected and increased/reduced at each future year by the projected the cash flows to find any future deficits.
  • The largest present value of a future deficit is added to starting assets to produce a reserve for that economic scenario.
  • Calculate the average of the largest 30% of the economic scenario reserves (referred to as the 70th percentile Conditional Tail Expectation or CTE 70).
  • SR = CTE 70 + any additional amount for material risk not reflected.
pbr transition exclusions
PBR – Transition & Exclusions
  • Transition period from VM operative date
    • Provides up to 3 years to apply VM-20 PBR
    • Must continue to apply VM-20 once elected
    • Current requirements apply during use of 3 year transition.
  • Products not subject to VM-20 continue with current requirements.
    • Includes Preneed life and Credit life insurance.
  • Products subject to VM-20 can be excluded from the rigor of PBR requirements via exclusion tests.
    • Stochastic & Deterministic exclusion tests.
stochastic reserve exclusion tests
Stochastic Reserve Exclusion Tests

Products can be excluded from stochastic reserves if:

  • Certification provided by qualified actuary of no material interest rate risk or asset return volatility risk; or
    • Does not apply to certain products such as universal life with secondary guarantees.
  • Stochastic exclusion ratio test is passed; or
  • Demonstration provided that reserves will not increase under stochastic requirements.
deterministic reserve exclusion test
Deterministic Reserve Exclusion Test
  • Products can be excluded from the deterministic reserve requirements if the sum of net valuation premiums are less than the sum of the corresponding guaranteed gross premiums.
  • This exclusion test cannot be used for:
    • Products which are required to calculate the stochastic reserve.
    • Universal life products with a secondary guarantee.
exemption doing business only in one state
Exemption - Doing Business Only in One State

The SVL provides an option the Commissioner may consider during legislative adoption to exempt specified products of a domestic company that does business only in that state from the requirements of the Valuation Manual.

Any products exempted will apply current reserve requirements in addition to any requirements established by the commissioner by regulation.