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The Product Development Section Presents
The New Valuation Manual and the Life Product
Development Actuary Seminar
May 10, 2017 | Sheraton Seattle Hotel | Seattle, WA
Presenters:
Carrie Lee Kelley, FSA, MAAA
Leonard Mangini, FSA, FALU, FRM, MAAA
Sean M. Pena, ASA, MAAA
Douglas L. Robbins, FSA, MAAA
Kimberly M. Steiner, FSA, MAAA
Chris Whitney, FSA, MAAA
The New Valua+on Manual and the Life
Product Development Actuary Seminar:
SOCIETY OF ACTUARIES
An.trust No.ce for Mee.ngs
Ac+ve par+cipa+on in the Society of Actuaries is an important aspect of membership. However, any Society ac+vity that arguably could be
perceived as a restraint of trade exposes the SOA and its members to an+trust risk. Accordingly, mee+ng par+cipants should refrain from
any discussion which may provide the basis for an inference that they agreed to take any ac+on rela+ng to prices, services, produc+on,
alloca+on of markets or any other maIer having a market effect. These discussions should be avoided both at official SOA mee+ngs and
informal gatherings and ac+vi+es. In addi+on, mee+ng par+cipants should be sensi+ve to other maIers that may raise par+cular
an+trust concern: membership restric+ons, codes of ethics or other forms of self-regula+on, product standardiza+on or cer+fica+on. The
following are guidelines that should be followed at all SOA mee+ngs, informal gatherings and ac+vi+es:
• DON’T discuss your own, your firm’s, or others’ prices or fees for service, or anything that might affect prices or fees, such as costs,
discounts, terms of sale, or profit margins.
• DON’T stay at a mee+ng where any such price talk occurs.
• DON’T make public announcements or statements about your own or your firm’s prices or fees, or those of compe+tors, at any SOA
mee+ng or ac+vity.
• DON’T talk about what other en++es or their members or employees plan to do in par+cular geographic or product markets or with
par+cular customers.
• DON’T speak or act on behalf of the SOA or any of its commiIees unless specifically authorized to do so.
• DO alert SOA staff or legal counsel about any concerns regarding proposed statements to be made by the associa+on on behalf of a
commiIee or sec+on.
• DO consult with your own legal counsel or the SOA before raising any maIer or making any statement that you think may involve
compe++vely sensi+ve informa+on.
• DO be alert to improper ac+vi+es, and don’t par+cipate if you think something is improper.
• If you have specific ques+ons, seek guidance from your own legal counsel or from the SOA’s Execu+ve Director or legal counsel.
2
Presenta.on Disclaimer
Presenta(ons are intended for educa(onal purposes only and do not
replace independent professional judgment. Statements of fact and
opinions expressed are those of the par(cipants individually and,
unless expressly stated to the contrary, are not the opinion or
posi(on of the Society of Actuaries, its cosponsors or its commi=ees.
The Society of Actuaries does not endorse or approve, and assumes
no responsibility for, the content, accuracy or completeness of the
informa(on presented. A=endees should note that the sessions are
audio-recorded and may be published in various media, including
print, audio and video formats without further no(ce.
3
The New Valua.on Manual and the
Life Product Development Actuary
Overview of Product Development Processes that Might Change
Wed, May 10, 2017
5
Liability Disclaimer, Copyright, Use of Slides
Although we’ve aIempted to capture the leIer and spirit of the Valua+on Manual and ASOPs,
faithfully- you have a personal professional duty to familiarize yourself with the original source
material and apply professional judgment as to its specific applica+on to your own work and those
working under your direc+on as you perform covered Actuarial Services. The nature of your work,
and other professional designa+ons you hold, may require you to be bound by addi+onal
professional requirements from other organiza+ons as well.
This material has been prepared for general informa+onal purposes only and is not intended to be
relied upon as accoun+ng, legal, tax, or other professional advice, nor is it an Actuarial Opinion by
Leonard Mangini, Arnold Dicke, Tim Cardinal, Steve Stockman, or their respec+ve firms Mangini
Actuarial and Risk Advisory LLC, AADicke LLC, or Actuarial Compass LLC. Please refer to your
advisors for specific advice. The views expressed by the presenter are not necessarily those of
Mangini Actuarial and Risk Advisory LLC, AADicke LLC, or Actuarial Compass 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 Na+onal Associa+on of Insurance
Commissioners. This presenta+on paraphrases these for educa+onal purposes to capture the
intent of the regula+ons and standards of prac+ce or results of SOA research, and every aIempt
has been made to iden+fy and cite original sources.
These slides may NOT be copied, redistributed, or otherwise furnished to any party without prior
wriIen consent of Mangini Actuarial and Risk Advisory LLC, AADicke LLC, or Actuarial Compass LLC
other than as required to comply with an audit of the aIendee’s annual CPE compliance.
The New ValuaLon Manual and the Life PD Actuary May 10, 2017
6
Cynics View: Product Development in the “Good Old Days”
Pricing/Product Development Interact With MarkeLngà Brilliant Idea
Product Almost Ready for Marketà Hey We Need Some Reinsurance!
Modeling?:
• AssumpLons: We have ours, ValuaLon has theirs, Capital worries about tail risk
• Reinsurance is ProporLonal (Coinsurance) or Replaces AssumpLons (YRT)
• Reserves pop out of our actuarial soWware system
Agent Roll-Out MeeLng in 10 Daysà Call Up ValuaLon to Kick the Tires
ValuaLon Does Whatever They Do
Roll-Out Product
Tell Admin and ERM You Have a New Product
Big Success- Pat Ourselves on the Back
Get Around to DocumenLng Stuff…When Things Are Slow
VM and the PD Actuary ©2015-7 Mangini Actuarial and Risk Advisory LLC May 10, 2017
PBR Valua.on Is Easy!
VM and the PD Actuary ©AADicke LLC and Mangini Actuarial and Risk Advisory LLC May 10, 2017
PBR Valua.on Is Easy!
Just 28 Simple Steps…
VM and the PD Actuary ©AADicke LLC and Mangini Actuarial and Risk Advisory LLC May 10, 2017
PBR Valua.on Is Easy- Just 28 Simple Steps!...Slide 1
Determining Which Reserve Requirements Apply to Various Blocks of Policies
1. Determine which policies are in scope of VM-20 (all but credit life, pre-need and industrial life)
2. Determine if company qualifies (and wants to apply) for the company-wide exemp+on (Y or N)
3. If YES, use VM-A/VM-C for all policies w/2017 CSO, (may use 2001 CSO un+l 2020)
4. If NO, during 1st 3 years , determine which blocks to value under VM-20 (irreversible decision),
other blocks are valued under VM-A/VM-C (pre-PBR CRVM) , 2017 CSO may be Elected
Apply Exclusion Tests
5. Calculate NPR for all VM-20 policies (NPR= VM-A/VM-C w/2017 CSO except for Term/ULSG)
6. For ALL blocks of VM-20 policies, decide which SET test to use (SERT, Demo, Cer+fica+on) for each
block (any block passing NY 7 or VM-20 16 on a stand-alone basis can be cer+fied)*
7. For any block for which SERT to be applied, build CF Model as per VM-20 Sec+on 7.B.2, with
an+cipated experience or using Cash Flows from Asset Adequacy Tes+ng
8. IF SET is Failed or NOT applied, SR or DR MUST be calculated (if CDHS- then deemed to fail)
9. For “Other” policies, if SET passed then apply DET
10. For Term and ULSG and “Other” (where DET is Failed), DR must be calculated
* SET must be applied separately for Term, ULSG, “Other”. Cannot be grouped for SERT if “significantly different risk profile”
VM and the PD Actuary ©2016-17 AADicke LLC and Mangini Actuarial and Risk Advisory LLC May 10, 2017
PBR Valua.on Is Easy- Just 28 Simple Steps!...Slide 2
Modeling policies requiring a DR or SR:
11. Determine Model Segments- VM Sec+on 7A- align with insurer’s asset segmenta+on
plan, investment strategy, how allocate investment income for statutory report
12. Build CF model- seria+m of in scope inforce or grouped cells as per VM Sec+on 7.B.2
13. Determine an+cipated experience assump+ons for each non-stochas+c, non-
investment risk factor (if not already determined for SERT), unless its PBE is prescribed
14. Determine PBE assump3ons- add margins to an3cipated experience assump3ons*
15. Select star+ng assets for each segment
16. Determine investment expense and default assump+ons, by model segment
17. Calculate SR using VM-20 Sec+on 5 methodology (if required)
18. Calculate DR using VM-20 Sec+on 4 methodology
19. Calculate aggregate modeled reserve = ∑ max (SR, DR) over all model segments
20. If aggregate star+ng assets are either < 98% of aggregate modeled reserve or
> max (102% of aggregate modeled reserve, aggregate NPR),
provide assurance that min reserve is not understated (or re-select star+ng assets)
* Mortality is a lible more complicated
VM and the PD Actuary ©2016-17 AADicke LLC and Mangini Actuarial and Risk Advisory LLC May 10, 2017
PBR Valua.on Is Easy- Just 28 Simple Steps!...Slide 3
Apply Sec.on 2 Aggrega.on
22. Due and Deferred Premium Asset, DDPA: offse`ng statutory asset
where “surplus reduc+on” is max[ ANPR - DDPA, DR, SR]
ANPR= aggregate NPR= ∑ ( NPR) - ∑ ( SSAP61 reinsurance credits)
DR*= DR + DDPA (axer reinsurance) , SR*= SR +DDPA (axer reinsurance)
VM and the PD Actuary ©2016-17 AADicke LLC and Mangini Actuarial and Risk Advisory LLC May 10, 2017
PBR Valua.on Is Easy- Just 28 Simple Steps!...Slide 4
Apply Sec.on 2 Alloca.on
23. Allocate within each of these 7 groups based on post-reinsurance NPR
24. Min Reserve for group of policies = ∑ ( Allocated min reserve) for policies in group
25. REPEAT ENTIRE PROCESS (starLng from Step 6) excluding ceded reinsurance to
determine the Pre-Reinsurance Ceded” minimum reserve
26. Use allocated post- and pre-reinsurance-ceded reserves to develop minimum reserve
by product type reported in VM-20 Reserve Supplement
Perform Recalcula.ons for PBR Actuarial Report
27. Repeat DR CalculaLon without material margins and without all margins to quanLfy
impact of material margins and of aggregate margins on MR for PBR Actuarial Report
28. At least once every 3 years, (or if material change in risk profile) calculate stand-alone
SR for each product and compare to the minimum reserve for those products
VM and the PD Actuary ©2016-17 AADicke LLC and Mangini Actuarial and Risk Advisory LLC May 10, 2017
Step 25: Reinsurance
VM-20 Sec.on 8 (CF Model for DR and SR) must reflect reinsurance cash flows
• Based on Ceding Company assumpLons
• AssumpLons for cedant and reinsurer different- unless companies agree to share
• Reinsurer’s Reserve for Assumed Business—using Reinsurer’s assump3ons
ANPR is sum of individual policy NPRs less SSAP 61R credit
PBR Reserve is calculated before and aWer reinsurance
• Pre- and post-reinsurance-ceded minimum reserves MAY be on different bases—
e.g. SR for post- and DR for pre-reinsurance, both SR but different scenarios in CTE 70
Reinsurance Takeawaysà:
• PBR eliminates mirror reserving!
• Early Product Development process CooperaLon with mul3ple external par3es
• Need to examine underlying risk drivers in product designs for “quirky” behavior
VM and the PD Actuary ©2016-17 AADicke LLC and Mangini Actuarial and Risk Advisory LLC May 10, 2017
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Reinsurance Process Conclusion
I guess we’re calling our reinsurers earlier in the process!
VM and the PD Actuary ©2016-17 Mangini Actuarial and Risk Advisory LLC May 10, 2017
Step 14: Prudent Es.mate (PBE) Assump.ons
VM and the PD Actuary ©AADicke LLC and Mangini Actuarial and Risk Advisory LLC May 10, 2017
VM-G: Governance Guidelines…
• PBR Assump+ons, Methods, Models must be consistent with company’s risk
management processes
• Board must exercise oversight, review summary results, process documenta+on,
ac+ons to rely on processes
• Management must provide info to Board, review results, implement necessary
controls, ensure adequate resources, competent staff, and maintain func+onality
• Qualified actuary: legal requirement oversight over PBR calcula(on; reviews and
approves assump(ons, methods, models, controls; PBR Actuarial Report
• Appointed Actuary legally opines on PBR, non-PBR reserves
àNeed to call in Valua.on and Risk Management earlier…!
VM and the PD Actuary ©2016-17 AADicke LLC and Mangini Actuarial and Risk Advisory LLC May 10, 2017
Documenta.on of Assump.ons in Pricing
DocumentaLon for Reserves- that’s ValuaLon’s Problem- Right?...
VM and the PD Actuary ©2016-17 Mangini Actuarial and Risk Advisory LLC May 10, 2017
Documenta.on of Assump.ons in Pricing
Documenta.on for Reserves- that’s Valua.on’s Problem- Right?...
• Where did ValuaLon and Risk Management get their experience studies?
• Who set the anLcipated experience assumpLons (without margins)?
• Who decided on the material risks to use in pricing as inputs?
• Who analyzed underwriLng and risk classificaLon? Who complied with ASOP 12?
• Who applied credibility theory to input data? Who complied with ASOP 25?
• Who spoke to reinsurers and decided on assumpLons gross and net?
It may have been YOU or your staff in Pricing and Product Development!
VM and the PD Actuary ©2016-17 Mangini Actuarial and Risk Advisory LLC May 10, 2017
VM and the PD Actuary ©2016-17 Mangini Actuarial and Risk Advisory LLC May 10, 2017
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Revised Actuarial Standard of PracLce 23
Data Quality
Applies to any actuary using dataà clearly when preparing/reviewing PBR Report
ASOP recently revised:
• Defines appropriate data as data suitable for intended purpose. Requires disclosure if
regulaLon/ other circumstances require use of “unsuitable data”
• “Data” now defined to include data mathema.cally derived from other data
• Actuarial Services provided on or aRer April 30, 2017 that “create data” relied on or
used by others MUST apply data quality ASOP 23 as if they were the end users!
• Requires actuaries using data to document limitaLons and impact of uncertainty or bias
in data on actuarial work product
à QA legally charged with verifying appropriateness of assumpLons may rely on you
à ASOPs 21: Auditors and State Examiners are end users of data, may ulLmately rely on you
à VM requires uncertainty reflected in larger margins and NOT in assumpLons themselves
VM and the PD Actuary ©2016-17 Mangini Actuarial and Risk Advisory LLC May 10, 2017
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VM-30- New AOMR Requirements
AOMR…I’m a Pricing Actuary…Not the Appointed Actuary…
Stop Already!
VM and the PD Actuary ©2016-17 Mangini Actuarial and Risk Advisory LLC May 10, 2017
VM-30- New AOMR Requirements- Reliance on Others
VM-30 SecLon 3.A.6:
“In forming my opinion on [specify types of reserves], I relied upon data, assumpLons,
projecLons, or analysis prepared by [name and Ltle each expert providing the data,
assumpLons, projecLons, or analysis] as cerLfied in the abached statements. I evaluated that
data, assump3ons, projec3ons, or analysis for reasonableness and consistency. I also
reconciled data to the extent applicable to [list applicable exhibits and schedules] of the
company’s current annual statement. In other respects, my examina3on included review of the
assump3ons projec3ons, and analysis used and tests of the assump3ons, projec3ons, and
analysis I considered necessary. I have received documenta3on from the experts listed above
that supports the data, assumpLons, projecLons, and analysis.”
à Opinions for 12/31/17 Appointed Actuary can’t “merely rely” on others in AOMR,
regardless of whether valuaLon is being performed using PBR or “Old CRVM”:
Probably will be coming to YOU for documenta3on and support of assump3on se\ng,
projec3ons and analysis and will be reviewing and tes3ng Pricing’s work to the extent
that it was used in helping set PBR valua3on assump3ons!
VM and the PD Actuary ©2016-17 Mangini Actuarial and Risk Advisory LLC May 10, 2017
Pricing Sohware and Modeling Implica.ons
Margins, the VM-31 PBR Actuarial Report, and Internal Stakeholders
• Intent of Exhibits in PBR Actuarial Report is to show “dollar amount” of margins so relaLve
size compared to minimum PBR Reserve is transparent to various stakeholdersà can
judge degree of conservaLsm embedded in PBR reserves
• Opera9onally, must repeat DR calculaLon without material margins and without all
margins to quanLfy impact of material margins, aggregate margin in reserves
• Combined with need to have Pre- and Post- Reinsurance model runs to quanLfy
reinsurance reserve credit highlights importance of model run-Lme issues
Takeawaysà
• Simple models to streamline mulLple pricing and valua3on iteraLons, VM-31
• ValuaLon must be conversant, aligned on reinsurance, involved early in PD, may need to
train your colleagues on the intricacies of your treaLes and involve in negoLaLon
• QA, ERM must be involved closely and early in model risk management
VM and the PD Actuary ©2016-17 Mangini Actuarial and Risk Advisory LLC May 10, 2017
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Who should Maintain Models?
Each FuncLonal Unit?
Centralized Teams with Pricing, ValuaLon and ERM clients?
VM and the PD Actuary ©2016-17 Mangini Actuarial and Risk Advisory LLC May 10, 2017
25
Internal Hedging: Company Asset Segmenta.on
And ERM Plans Impact PBR Reserves
VM and the PD Actuary ©2016-17 Mangini Actuarial and Risk Advisory LLC May 10, 2017
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Strategic Decision: “Internal Hedging” and Risk Offsets
Company Asset Segmenta.on and ERM Plans Impact PBR Reserves
• VM S7.A: Requires aligning model segments for DR/SR with insurer’s asset
segmentaLon plan and how investment income allocated in statutory financials
• VM S5: Governs permibed aggregaLon of SR for Risk Offsets
• Term
• ULSG
• Other
VM and the PD Actuary ©2016-17 Mangini Actuarial and Risk Advisory LLC May 10, 2017
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Final Product Development Process in a PBR World?
Pricing/Product Development Interact with ValuaLon and RM from the Start
Keep in Contact with Tax Department, not just worried about 7702 issues…
Document Data, Credibility, AssumpLons, Inputs, Decisions, Models as You Go
Reinsurers called in Early: Provide you with AssumpLons? Reserve Credit Info?
Investment Department, CFO, and ERM to OpLmize AggregaLon Offsets?
VM and the PD Actuary ©2016-17 Mangini Actuarial and Risk Advisory LLC May 10, 2017
Contact Informa+on
Leonard Mangini, FSA, FRM, CLU, FALU, MAAA
President , Mangini Actuarial and Risk Advisory LLC
E-mail: leonard@manginiactuarial.com
Web: www.manginiactuarial.com
Mobile: (516) 418-2549
30
The New Valua+on Manual and the Life
Product Development Actuary Seminar:
The Role of the Company, Management, Qualified Actuary,
Appointed Actuary in PBR Governance under VM-G
Leonard Mangini, FSA, FRM, CLU, FALU, MAAA
President, Mangini Actuarial and Risk Advisory LLC
May 10,2017
Liability Disclaimer, Copyright, Use of Slides
Although we’ve aIempted to capture the leIer and spirit of the Valua+on Manual and ASOPs,
faithfully- you have a personal professional duty to familiarize yourself with the original source
material and apply professional judgment as to its specific applica+on to your own work and those
working under your direc+on as you perform covered Actuarial Services. The nature of your work,
and other professional designa+ons you hold, may require you to be bound by addi+onal
professional requirements from other organiza+ons as well.
This material has been prepared for general informa+onal purposes only and is not intended to be
relied upon as accoun+ng, legal, tax, or other professional advice, nor is it an Actuarial Opinion by
Leonard Mangini, Arnold Dicke, Tim Cardinal, Steve Stockman, or their respec+ve firms Mangini
Actuarial and Risk Advisory LLC, AADicke LLC, or Actuarial Compass LLC. Please refer to your
advisors for specific advice. The views expressed by the presenter are not necessarily those of
Mangini Actuarial and Risk Advisory LLC, AADicke LLC, or Actuarial Compass 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 Na+onal Associa+on of Insurance
Commissioners. This presenta+on paraphrases these for educa+onal purposes to capture the
intent of the regula+ons and standards of prac+ce or results of SOA research, and every aIempt
has been made to iden+fy and cite original sources.
These slides may NOT be copied, redistributed, or otherwise furnished to any party without prior
wriIen consent of Mangini Actuarial and Risk Advisory LLC, AADicke LLC, or Actuarial Compass LLC
other than as required to comply with an audit of the aIendee’s annual CPE compliance.
The New VM and the PD Actuary © Mangini Actuarial and Risk Advisory LLC May 10, 2017
32
Agenda: VM-G and PBR Governance
The New VM and the PD Actuary © Mangini Actuarial and Risk Advisory LLC May 10, 2017
33
The Roles of the Regulator and Company
Under the Revised SVL
The New VM and the PD Actuary © Mangini Actuarial and Risk Advisory LLC May 10, 2017
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Background: Standard ValuaLon Law
“The commissioner shall annually value, or cause to be valued, the reserve liabiliLes
(hereinaWer called reserves) for all outstanding life insurance contracts, annuity and
pure endowment contracts, accident & health contracts, and deposit-type
contracts of every company issued on or aWer the operaLve date of the…manual.”
à Except for insolvency or authorized control, usually the Commissioner causes
the Company to value reserves. The Company has the responsibility for selecLng
assumpLons, methods and models used in a PBR ValuaLon.
à Commissioner can hire independent actuary to do valuaLon if not saLsfied with
the Company’s work in establishing reserves
VM and the PD Actuary ©2016-17 AADicke LLC- used with permission May 10, 2017
2016 Valua+on Actuary Symposium August 2016
VM-G: Company Assigns ResponsibiliLes to
One or More Qualified Actuaries
In carrying out the responsibility for each group of policies and contracts
subject to a principle-based valuaLon, the company shall assign to one
or more Qualified Actuaries certain responsibiliLes listed later in VM-G
LATF requested comments on whether Qualified Actuaries assisLng or
advising the Company regarding its responsibility to establish principle-
based reserves under VM-20 represent the interest of the Company or
the interest of the Commissioner.
Under VM-G, one or more Qualified Actuaries are essenLally overseeing
work that has been assigned to the Company by the Commissioner.
So whose interest does the Qualified Actuary represent?
VM and the PD Actuary ©2016-17 AADicke LLC- used with permission May 10, 2017
2016 Valua+on Actuary Symposium August 2016
ACLI Response to LATF Request
Points to legal status of employeesà have duty to their employer
Also the Actuarial Code of Conduct- “Principal” is employer or client
Code of Conduct outlines responsibiliLes of Actuary to his/her Principal
• Precept 5: Must idenLfy Principal in communicaLons
• Precept 7: Must disclose conflicts of interest
• Precept 10: Must cooperate with others (including Commissioner) in Principal’s interest
VM and the PD Actuary ©2016-17 AADicke LLC- used with permission May 10, 2017
AAA Life PracLce Council Response
Interest NOT clearly definedà response doesn’t speak directly to LATF’s request
Points to Code of Conduct and ASOPs
Code of Professional Conduct:
• Precept 1: must fulfill profession’s responsibility to public, uphold profession’s reputaLon
and must NOT provide services that violate or evade the law
• Precept 3: must saLsfy applicable ASOPs
• Precept 7: “Actuarial CommunicaLon” must be clear and appropriate to circumstances
and intended audience (interests of Company, Commissioner could be served differently)
ASOP 41 (CommunicaLons): defines “Intended User”: Any person whom actuary
idenLfies as able to rely on the actuarial findings (clearly includes Commissioner)
If assumpLons or methods chosen by someone other than the actuary, 3 choices:
• If actuary finds them “reasonable,” no disclosure is required
• If “significantly conflict” with what actuary finds reasonable, disclose fact and who set them
• If the actuary is unable or not qualified to judge reasonableness, disclose that fact
VM and the PD Actuary ©2016-17 AADicke LLC- used with permission May 10, 2017
Two PracLcal Ways to View PBR AssumpLon Seyng!
1) Company sets assumpLons
• Do the actuaries (QAs, AAs, others) agree? If not, document and disclose per ASOP 41
• QA under VM-G ensures complies with VM
• AA under VM-30 tests and opines on whether ensuing reserves are truly adequate
à Range: Low and High?? à Actuaries pick what they feel comfortable with
Both are defensible implementaLons since ulLmately the Company has chosen the assumpLons,
models and methods; a QA and AA have fulfilled their legal roles and ASOP disclosure duLes; and if
the two parLes don’t agree there is documentaLon about how and why for intended users!
VM and the PD Actuary ©2016-17 Mangini Actuarial and Risk Advisory LLC May 10, 2017
2016 Valua+on Actuary Symposium August 2016
The Board’s Role
Under the Revised SVL
The New VM and the PD Actuary © Mangini Actuarial and Risk Advisory LLC May 10, 2017
42
VM-G DefiniLon of the Board
VM-G Sec.on 1.C.2: The term “board” and “board of directors” means:
(a) the board of an insurance company that has not been designated to be part of a
group of insurance companies, or
(b) the board of a single company within a group of insurance companies that is
designated by the senior management of any holding company of all the insurance
companies in such group of insurance companies, or a commibee of such board,
consisLng of members of such board, duly appointed by such board and authorized
by such board to perform funcLons substanLally similar to those described in this
secLon
43
VM-G: Guidance for the Board
VM-G Sec.on 2: Commensurate with materiality of PBR reserves in to overall
company risk and consistent with oversight role, Board is responsible for:
• Overseeing processes of Senior Management to idenLfy/correct material weaknesses
• Overseeing infrastructure (policies, procedures, controls, resources) to implement PBR
• Receiving/Reviewing Qualified Actuaries Reports/CerLficaLons under VM-G SecLon 3.A.6
• InteracLng with Senior Management to resolve quesLons
• DocumenLng Board acLons related to PBR in Board Minutes
44
Senior Management’s Role
Under VM-G
The New VM and the PD Actuary © Mangini Actuarial and Risk Advisory LLC May 10, 2017
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VM-G DefiniLon of Senior Management
46
VM-G: Guidance for Senior Management
VM-G Sec.on 3: Responsible for direcLng implementaLon and ongoing operaLon
of PBR valuaLon funcLon:
• Ensuring infrastructure (policies, procedures, controls, resources) to implement PBR
• Reviewing PBR AssumpLons, Methods, Models for consistency with other risk processes
• Reviewing and assessing significant unusual issues and findings of PBR valuaLon and
sensiLvity tests
• Ensuring adopLon of internal controls that all material risks accounted for, comply with
VM and actuarial standards; annual evaluaLon of controls à report to Board
• Adequate resources for modeling with skill and competence, process to ensure SVL
compliance, process to validate data for non-prescribed assumpLons, process to ensure
appropriate model input assumpLons, process to find and limit material errors/weakness,
and adequate reporLng on controls
• Annual report to Board on infrastructure adequacy, PBR vs. ERM, knowledge and
experience of Senior Management that monitor and control PBR
48
“Qualified Actuary” vs. Appointed Actuary
VM-01 definiLons:
The term “qualified actuary” means an individual who is qualified to sign the
applicable statement of actuarial opinion in accordance with the American
Academy of Actuaries qualificaLon standards for actuaries signing such
statements and who meets the requirements specified in the ValuaLon Manual.
The term “appointed actuary” means a qualified actuary who is appointed or
retained in accordance with the ValuaLon Manual to prepare the actuarial
opinion required in SecLon 3A of the Standard ValuaLon Law (VM-05).
Qualified Actuary is assigned responsibility for a group of policies
• VM-Gà Legal responsibiliLes, not merely guidance
VM and the PD Actuary ©2016-17 AADicke LLC- used with permission May 10, 2017
2016 Valua+on Actuary Symposium August 2016
Qualified Actuary Legal DuLes
VM-G SecLon 4:
Oversee calculaLon of PBR reserves for that group of policies
Verifying compliance with VM
• AssumpLons, methods, models
• Company documented internal standards for processes and
• Controls over those processes
CerLfy that AssumpLons are Prudent EsLmates with appropriate margins
Provide Summary Report to Board and Senior Management
• ValuaLon Process
• ValuaLon Results
• General Level of ConservaLsm
• Materiality of PBR to total reserves of company
• Significant or unusual findings
Prepare PBR Actuarial Report under VM-31
50
QA InteracLons with External Audit and Regulators
51
Model Audit Rule- ReporLng Requirements
QA thrown into “Controls World” fortunately enters into an Exis.ng Framework
• Model Audit Rule (MAR) LegislaLon- eff. 1/1/2010 (or when domicile adopts)
• Detailed Requirements- Controls, ReporLng on Controls for Statutory AccounLng
• SecLon 17: $500 Million Direct/Assumed Premium Threshold on Report on Controls
• SecLon 17.D.5: Defines two terms- “Significant” and “Material Weakness”
• Former- warrant abenLon of governance, Laber- reasonable probability of material misstatements
• Insurer MUST report “Material Weakness” to domicile within 60 days Audited Financials
• Model Law DOES NOT prescribe parLcular framework for review/evaluaLon of controls
• MAR Guide indicates most SEC registrants adopt COSO Internal Control-Integrated framework and
that COSO ERM-Integrated framework and PCAOB Guidance for Smaller Companies are relevant
Available Resources:
• NAIC Audit Rule Implementa.on Guide (MAR Guide)- clarifies MAR (without changing contents)
• Academy MAR Prac.ce Note (Nov 2010)- guidance preparing documentaLon/controls for reserves
The New VM and the PD Actuary © Mangini Actuarial and Risk Advisory LLC May 10, 2017
52
Contact Informa+on
Leonard Mangini, FSA, FRM, CLU, FALU, MAAA
President , Mangini Actuarial and Risk Advisory LLC
E-mail: leonard@manginiactuarial.com
Web: www.manginiactuarial.com
Mobile: (516) 418-2549
53
VM-20 Mortality Assumption Example
The New Valuation Manual and
Life Product Development Actuary Seminar
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Agenda
Prescribed Mortality
Potential Challenges
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Introduction to VM-20 Mortality
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Introduction to VM-20 mortality
Company experience
Prudent Estimate Margin
Mortality Industry tables
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Mortality for VM-20 Products
VM-20 § Application
3.C.1 - Mortality for Ordinary Life policies to be used in the Net Premium Reserve
calculation
Net
Premium Company may elect either the 2001 CSO or 2017 CSO for issues on or after 1/1/2017 but before
1/1/2020
Reserve
2017 CSO for issues on or after 1/1/2020
Conditions for use of the 2017 CSO Preferred Structure Table
Modeled
Reserves
Section 9.C - Prudent estimate mortality
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Prudent Estimate Mortality
Assumptions
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Prudent estimate mortality assumptions
Overview of basic components
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Prudent estimate mortality assumptions
Step by step process
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VM-20 prescribed approach to set mortality assumptions
Breaking down by step
1 Mortality segment
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Step 1: Mortality segment
Getting started
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Step 2: Company experience rates
Tools and data necessary
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Step 2: Company experience rates
Example
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Step 2: Company experience rates
Example
Relative Experience
Risk Class Raw A/E Weight Factor Factor
Best NS 59% 45% 80% 62%*
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Step 3: Prescribed mortality margin
Example
… … … … … … … ….
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Step 4: Applicable industry table
Selecting the right one
Company experience grades into the applicable industry table over time
The industry table is the 2015 VBT for issues on or after 1/1/2017
A modified industry table may be permitted for limited situations where an industry basic
table is not appropriate: simplified underwriting or substandard lives
The underwriting criteria scoring procedure may be used to select the appropriate
industry table for mortality segments
The SOA’s RRTool can be used to determine the appropriate RR tables
Actuaries may apply judgement to adjust up or down two tables to account for factors not
recognized in the tool
Historical mortality improvement is allowed based on the prescribed mortality
improvement table
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Step 4: Applicable industry table
Example
Residual NS 120
≤45 20.4%
46 - 47 20.2%
48 - 49 20.0%
… …
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Step 5: Prudent assumption
Sufficient data period
Sufficient data period is the last duration of experience with more than 50 claims
The sufficient data period impacts how long company experience can be used
before grading to the industry table
1 43 6 132
2 57 7 114
3 75 8 84
4 118 9 52
5 147 10 31
Credibility over exposure period = 72%
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Step 5: Prudent assumption
Determine grading parameters
20-39% 10 2 8*
40-59% 20 4 12*
60-79% 35 7 17*
80-100% 50 10 25*
* The maximum # of years in which the assumption must grade to 100% of an applicable industry table shall be the lesser
of
(a) the appropriate number of years stated in the chart above, or
(b) the number of years of sufficient data + 15 times the credibility percentage applicable to column (1) in the above chart
Note: Different grading parameters specified in VM-20 for valuations prior to 1/1/2017
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Step 5: Prudent assumption
Summary of parameters
Item Value
Credibility 72%
Last Duration with Sufficient Data 9
Max Yrs to be Sufficient 35
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Step 5: Prudent assumption
Summary of rates FNS, Issue Age 32, Preferred NS
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Step 5: Prudent assumption
Summary of rates FNS, Issue Age 32, Preferred NS
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Potential Challenges
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Potential challenges
Form of company experience table
table.
40%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
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Potential challenges
Aggregation for credibility
How to interpret
Weighted average segment level assumptions should not result in an overall
assumption less than would have been assumed on the aggregate data; the
relationship between developed tables should make sense (NS/SM)
Credibility impacts
margins and sufficient data period
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Potential challenges
Appropriate amount and type of experience
Balance between
Using all available experience (to increase credibility and sufficient data period)
Using experience that is relevant to the particular block of business
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Potential challenges
Projecting Mortality
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Summary
Prescribed mortality for the NPR is very similar to other formulaic reserve regimes
Prudent estimate assumptions are principles based, with prescribed methods and
margins
There are many key considerations in developing your prudent estimate assumptions
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Contact
One Alliance Center, 3500 Lenox Road, Suite 900, Atlanta, GA 30326-4238
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Reinsurance Considerations for Product Development
under PBR
The New Valuation Manual and Product Development Seminar
Seattle – May 10, 2017
1 Background
2 Case study
3 Discussion to date
5 Conclusion
The reserve credit for reinsurance under PBR is significantly different from the
formulaic approach that insurers have become accustomed to
© 2017 Oliver Wyman 2
Background
The actuary should assume that the counterparty is likely to act efficiently
The assumptions used may differ between the ceding and assuming company
VM-20 Additional (outside the cash flow model) stochastic analysis may be required for
certain types of reinsurance (i.e. stop-loss)
Considerations are similar to those for liability modeling
A cohort of new business with $50MM of first year premium consisting of 10-,
20- and 30-year term products was projected for 30 years
The NPR uses the 2017 CSO and a valuation interest rate of 4.5%
Reserve DR scenarios are re-generated at each valuation date
assumptions Starting assets at each valuation date use the ‘direct iteration’ approach
The cohort is assumed to pass the Stochastic Exclusion Test (SET)
Assumptions used and products modeled are for an illustrative term portfolio
intended to be reasonably representative of products offered in the market today
© 2017 Oliver Wyman 4
Case study
The gross NPR and DR for this cohort of new business are shown below
200
Gross NPR
Gross DR
150
Reserve ($MM)
100
50
0
0 10 20 30
Duration (Years)
The DR starts much higher than the NPR, but the gap closes over time, partially
because mortality improvement to date is reflected at future valuation dates
© 2017 Oliver Wyman 5
Case study
200
Net NPR
Reserve ($MM)
100
50
0
0 10 20 30
Duration (Years)
Net NPR
Reserve ($MM)
100
50
0
0 10 Duration (Years) 20 30
The difference in net reserves under the YRT scenarios modeled is driven by
the level of margin in the VM-20 mortality assumption
The result below is for 35-year-old male, preferred non-tobacco, time 1 valuation
9 100%
6
60%
5
4
40%
3
2
20%
0 0%
0 10 20 30
Duration (Years)
The gross and net reserves resulting from a hypothetical internal YRT
arrangement are shown below for illustrative purposes
6.0 6.0 6
6 5.8
5.0 (2.0)
(2.8) (2.3)
(1.0)
4.0 4.0
4 4
3.5
Reserve ($MM)
Reserve ($MM)
3.2
2.8 2.8
2.3
2 2
1.0
0 0
NPR DR SR Final PBR NPR DR SR Final PBR
The results of the NAIC’s PBR company pilot project showed that seven
companies reported a reduction in post-reinsurance reserves, one reported
an increase and three only reported pre-reinsurance reserves
– Mike Boerner, Chair of the NAIC’s Principle-Based Review (EX) Working Group
The following impacts are expected because of PBR and the associated
reinsurance considerations
Key takeaways
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Agenda
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Introduction to PBR assumptions
Focus on two assumption sets
Prescribed assumptions
Methods consistent with prior formulaic
include mortality, lapse, reserve calculations
and discount rates
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Prescribed Assumptions
The Details
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Prescribed components – Interest rates
Section 3.C.2 of VM-20 details required interest rates for the NPR calculation
Interest rates are fixed based on calendar year of issue
Same formula as current statutory reserves, but for products with no non-forfeiture
value, the rate is increased by a minimum of 1.5% or a factor of 125%
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Prescribed components – Lapse rates
ULSG lapse rates are determined based the expected funding level of secondary
guarantees
Lapse rates are 0% in the calculation of the ULSG floor (calculated as UL w/o SG)
Term product lapse rates are prescribed and vary by duration and size of the
premium jump (for post level term period lapse rates)
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Prudent Estimate Assumptions
Guidance
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General guidance on prudent estimate assumptions
Section 9 of VM-20 – Anticipated Experience
2 Anticipated experience
5 Sensitivity testing
6 Annual review
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General guidance on prudent estimate assumptions
Section 9 of VM-20 – Margin
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Specific liability assumptions
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Policyholder behavior assumption guidance
Generic
Vary by characteristics that will have a material impact on the modeled reserves
Appropriate for scenarios that drive the modeled reserve
Based on experience for block of business or similar
Reflect historical experience only where experience is relevant to risk being modeled
Reflect impact of policyholder options
Appropriate level of granularity
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Policyholder behavior assumption guidance
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Corporate – Expenses and taxes
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Assets
VM-20 requires the use of prescribed asset default costs and spreads
Company assets are mapped to PBR credit rating and assigned a weighted average life
(WAL)
Annual default costs are determined as NAIC published default costs with spread
adjustments
Long-term spreads are determined using an NAIC published spread table
Additional adjustments are made for investment expenses and option adjusted spreads
Embedded options should be properly modeled
Revenue sharing may be reflected if certain stipulations are met
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Assumption related to product features
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Term specific considerations
Level period
Assume policyholder efficiency improves over time
Company experience
Analyze later durations in the level term period to ensure consistency with low lapse rates
observed in industry data
A simple increase may not be appropriate for margins
Shock Lapse
Company and industry experience
Capture appropriate characteristics such as premium jump
Appropriate margin will be determined by whether the company has profits or losses in post level
term period
Post level term profits are limited
Term Conversions
Companies should rely on their own experience where credible
When using industry experience company should make adjustments for product differences and
company experience
Model the liability of the conversion policy, considering materiality
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Example step 1: Risk characteristics
Determining appropriate factors
$200K-$500K 6.0%
20 Year Term
Lapse Experience by Risk Class $500K+ 6.0%
Risk Class Lapse Rate
Preferred 5.0%
Experience seems to vary by level
Standard 6.7% term period, face amount, and risk
class suggesting that lapse rates
Substandard 9.0% should vary by these factors.
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Example Step 1: Risk Characteristics (cont.)
Determining Appropriate Factors
40-49 5.0%
50-59 5.2%
60-69 5.8%
Experience seems to be similar for all issue ages except 20-29. Judgement
must be used to determine if sufficient credibility exists to suggest that the
assumption should differentiate.
Experience doesn’t suggest material differences by gender.
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Example step 2: Company experience assumption
Assumption by duration for 20-year term
Company Experience
Policy Year
Company Industry
Credibility
CW Lapse Smoothed The primary
Experience Experience Rate Lapse Rate
drivers of lapse
1 10.3% 6.3% 99.3% 10.3% 10.5% rates are level
2 8.2% 6.3% 96.0% 8.1% 8.0% term period and
3 5.4% 5.6% 84.0% 5.4% 5.5% duration. Likely
4 4.3% 4.8% 75.3% 4.4% 4.5% most companies
5 4.7% 4.3% 71.3% 4.6% 4.5%
will only have
… … … … … …
credibility by
duration and
11 4.3% 2.9% 16.7% 3.1% 3.0%
product in
12 4.6% 2.8% 10.7% 3.0% 3.0%
aggregate. One
13 4.1% 2.8% 5.3% 2.9% 3.0%
approach is to
14 3.8% 2.7% 2.0% 2.7% 3.0% credibility weight
15 5.8% 3.0% 0.7% 3.0% 3.0% duration based
… … … … … … on experience.
Total 5.8% 4.8%
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Example step 2: Company experience assumption
20-year term assumption for other risk factors
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Step 3: Margin
Approach
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Step 3: Margin
Level of Credibility
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ULSG specific considerations – Policyholder behavior
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Pricing Specific Considerations
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Assumption unlocking
Assumptions for the modeled reserve may change at each valuation date
This increases the volatility of earnings for products
Pricing sensitivities will be more complex to model
Changes in the best estimate assumption likely mean changes in your prudent estimate
assumptions
Pricing actuaries will need to be comfortable with wider ranges of pricing results
May initially need more sensitivities to understand how reserves change
Need to understand sensitivities and outer loop projections
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Implementation
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Questions
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Contact
Kim Steiner
Director
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Documentation
The New Valuation Manual and Life Product
Development Actuary Seminar
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Agenda
Importance of Documentation
VM-31: The Actuarial Report
VM-50/51: Experience Reporting
Pricing Considerations
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The need for documentation in a PBR world
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The importance of documentation
Internal
Pricing-specific How are the VM-20 validation models different from the
pricing models for VM-20?
Are their pricing specific models or simplifications to models
that need to be documented?
Are there adjustments to the VM-20 assumptions that are
pricing specific?
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The importance of documentation
External
Documentation will also be necessary to satisfy auditors and regulators
Consistent and timely documentation updates will ensure that judgement decisions
are not overlooked in documentation
Aligning internal documentation with VM requirements will save time and effort
throughout the process
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VM-31: The Actuarial Report
The Requirements
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VM-31: The Actuarial Report
Background
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VM-31: The Actuarial Report
Key risks
Reliances on data and other individuals
Description of methods for assumptions, margins, and significant changes
from prior year
Asset modeling methodology
Description of risk management approach
Description of rationale for determining if a decision was material
Certification
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VM-31: The Actuarial Report
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VM-31: The Actuarial Report
List of key risks and experience reporting elements the company is using
to monitor changes in experience from year to year
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VM-31: The Actuarial Report
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VM-31: The Actuarial Report
Sources of data
Determination of assumption, including methods used for less than fully
credible data
Description of anticipated experience assumptions
Margin methods and determination
How NGEs are impacted by policyholder behavior
How lapse and mortality assumptions are adjusted for anti-selection
Expense assumption allocation methods
Asset assumption methodology
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VM-31: The Actuarial Report
Margin Impact
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VM-31: The Actuarial Report
Best Practices
Robust document
Material judgements
Level of detail
Timely documentation
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VM-50 / 51: Experience Reporting
The Requirements
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VM-50: Experience reporting requirements
Companies with more than $50M direct premiums are required to report
experience
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VM-51: Experience report formats
Mortality
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Communication with other areas
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How pricing memos will change
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Questions
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Contact
Kim Steiner
Director
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