SOA 2012 Life & Annuity Symposium
May 21-22, 2012
Session 74 PD, What Is New with the
ACLI/NAIC/FASB and Other Regulatory Bodies?
Moderator:
Donna R. Claire, FSA, CERA, MAAA
Presenters:
Donna R. Claire, FSA, CERA, MAAA
Henry W. Siegel, FSA, MAAA
Primary Competency
External Forces & Industry Knowledge
What is New With the
ACLI/NAIC/FASB and Other
Regulatory Bodies?
Session 74
Donna Claire and Henry Siegel
May 22, 2012
2012 Life and Annuity Symposium Session 74-What is New With the
ACLI/NAIC/FASB and Other Regulatory Bodies? May 22, 2012
1
NAIC Update
Donna Claire, FSA, CERA, MAAA
Claire Thinking, Inc.
2012 Life and Annuity Symposium Session 74-What is New With the
ACLI/NAIC/FASB and Other Regulatory Bodies? May 22, 2012
2
1
NAIC Update
A broad overview on some NAIC activities
including:
•
•
•
•
PBR
ULSG
Contingent Annuities
Life Risk Based Capital
2012 Life and Annuity Symposium Session 74-What is New With the
ACLI/NAIC/FASB and Other Regulatory Bodies? May 22, 2012
3
Principal Based Approach to Reserves
• Major activity of LATF in the last year
• PBR is an approach that determines reserves
using specific model-based approaches that
include the use of the company’s own
experience when credible, with the goal of
developing reserves that are reasonably
conservative, but not too high as to stifle
competitiveness.
2012 Life and Annuity Symposium Session 74-What is New With the
ACLI/NAIC/FASB and Other Regulatory Bodies? May 22, 2012
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2
Life Actuarial Task Force
• Updated Standard Valuation Law has been
passed by NAIC; on hold for Valuation Manual
– Will allow PBR
– Law is general, details will be in Valuation Manual
• An exposure draft of the Valuation Manual
suitable for testing has been passed by LATF
• Testing was done by Towers Watson
2012 Life and Annuity Symposium Session 74-What is New With the
ACLI/NAIC/FASB and Other Regulatory Bodies? May 22, 2012
5
Sections of Valuation Manual:
VM-00 Overview and VM-01 Definitions
VM-20 Life Reserving
VM-21 Variable Annuities: Is AG43
VM-22 General Account Annuities: Work started, will not
be in first Valuation Manual
• VM-25 Health Reserves and VM-26 Credit Life and
Disability: Work done; no changes to current rules
• VM-30 AOMR and VM-31 Reporting and Documentation
• VM-50 Experience Reporting and VM-51 Experience
Reporting Formats
•
•
•
•
2012 Life and Annuity Symposium Session 74-What is New With the
ACLI/NAIC/FASB and Other Regulatory Bodies? May 22, 2012
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3
Net Premium Reserve Framework
• A proposed Net Premium Reserve was incorporated
into VM20
– Developed by ACLI
– Based on a preliminary term approach in which the expense
allowance is expanded from the current CRVM
– Lapse is considered for products without cash surrender
values
– A higher interest rate is available for products without cash
surrender values
• Testing showed changes needed
2012 Life and Annuity Symposium Session 74-What is New With the
ACLI/NAIC/FASB and Other Regulatory Bodies? May 22, 2012
7
Next Steps in PBR
• Goal is to have a Valuation Manual approved
by NAIC in June, 2012
• Law can be changed in 2013/14
• Can be effective in 2014 if super majority of
states have passed it
2012 Life and Annuity Symposium Session 74-What is New With the
ACLI/NAIC/FASB and Other Regulatory Bodies? May 22, 2012
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4
Economic Scenarios
• Academy groups developed economic generator, regulators
revised assumptions
• Update may eventually be used for generator used for RBC C-3
Phases I and II
• Mean reversion for the new model is currently 4.75%, the mean
reversion for the existing RBC C-3 Phase I model is 6.25%
• Want to use same generator for capital (C3P3 as well as C3P1
and bond factors of C3P2)
• It is available on SOA website,
http://www.soa.org/research/software-tools/researchscenario.aspx
2012 Life and Annuity Symposium Session 74-What is New With the
ACLI/NAIC/FASB and Other Regulatory Bodies? May 22, 2012
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Life Mortality Table
• Work on 2014 Valuation Table is progressing
(2008 “VBT” is currently available)
• Will incorporate 2007-2009 experience
• Updated Underwriting Criteria scoring being
worked on
• This table will be used as basis for new CSO
2012 Life and Annuity Symposium Session 74-What is New With the
ACLI/NAIC/FASB and Other Regulatory Bodies? May 22, 2012
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5
Life Mortality Tables (continued)
• If company has credible experience, can use it
under PBR
• VM-20 defines how to blend own and industry
experience
• The Academy had published a Practice Note
on Credibility:
http://www.actuary.org/pdf/practnotes/life_c
redibility08.pdf
2012 Life and Annuity Symposium Session 74-What is New With the
ACLI/NAIC/FASB and Other Regulatory Bodies? May 22, 2012
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2012 Individual Annuity Table
• Updates a2000 Mortality table
• Mortality has improved (particularly for larger
amounts)
• Table is a generational table
• Has been exposed for comment by LATF
2012 Life and Annuity Symposium Session 74-What is New With the
ACLI/NAIC/FASB and Other Regulatory Bodies? May 22, 2012
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6
Guaranteed/Simplified Issue Valuation
Tables
• Data has been collected
• Targeting late 2012 for first draft of tables
2012 Life and Annuity Symposium Session 74-What is New With the
ACLI/NAIC/FASB and Other Regulatory Bodies? May 22, 2012
13
Nonforfeiture Update
• John MacBain chairs the Academy group
• LATF has gotten a status update and will
schedule calls after this phase of the Valuation
Manual project wraps up in June to consider
what actions to take
2012 Life and Annuity Symposium Session 74-What is New With the
ACLI/NAIC/FASB and Other Regulatory Bodies? May 22, 2012
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7
Universal Life With Secondary
Guarantees
• Secondary guarantees in UL will, for example,
state that the policy will remain in force as
long as premiums are at a certain level or the
shadow account meets certain minimums
• LATF issued a letter stating that these
products should be reserved following spirit of
law
• Some companies had been reserving on a
more liberal interpretation
2012 Life and Annuity Symposium Session 74-What is New With the
ACLI/NAIC/FASB and Other Regulatory Bodies? May 22, 2012
15
NAIC Actions on ULSG
• NAIC formed a joint working group of the Life
Insurance and Annuities (A) Committee and
Financial Condition (E) Committees
• Chaired by Texas
• Hired John MacBain to assist this group in
developing a plan
2012 Life and Annuity Symposium Session 74-What is New With the
ACLI/NAIC/FASB and Other Regulatory Bodies? May 22, 2012
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8
Preliminary framework on Addressing
ULSG Issue
• Figure out what to do with in force issues
• Until PBR comes in, new products under the
stricter version of AG38
• After PBR, covered by PBR rules
2012 Life and Annuity Symposium Session 74-What is New With the
ACLI/NAIC/FASB and Other Regulatory Bodies? May 22, 2012
17
Issues to be Addressed with ULSG
• How current products should be treated –
e.g., should reserves be set up using asset
adequacy testing?
• Should any assumptions be specified?
• What happens to companies that were using
the conservative approach to reserving?
2012 Life and Annuity Symposium Session 74-What is New With the
ACLI/NAIC/FASB and Other Regulatory Bodies? May 22, 2012
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9
Contingent Deferred Annuities
• These contracts guarantee payouts after a
certain number of years
• Can be viewed as longevity insurance
• Typically this wraps mutual funds not issued
by insurance company
• The NAIC has set up a new working group to
evaluate the solvency and consumer
protections of these products
2012 Life and Annuity Symposium Session 74-What is New With the
ACLI/NAIC/FASB and Other Regulatory Bodies? May 22, 2012
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Life RBC Capital Group
• Re-formed under Mark Birdsall (KS)
• Top priorities:
– Consider any changes needed for RBC C-3 Phase 2
based on the results of reviews of RBC C-3 Phase 2
reports
– Review the current RBC mortgage experience
adjustment factors
– Eventually incorporate RBC C-3 Phase III?
2012 Life and Annuity Symposium Session 74-What is New With the
ACLI/NAIC/FASB and Other Regulatory Bodies? May 22, 2012
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10
Risk-Based Capital C-1 Factor Review
• NAIC has new Life RBC C-1 factor review
subgroup
• Chair is Matti Peltonen (NY)
• Factors have not been updated since 1993
• Subgroup includes Nancy Bennett (Life Fellow
of Academy)
2012 Life and Annuity Symposium Session 74-What is New With the
ACLI/NAIC/FASB and Other Regulatory Bodies? May 22, 2012
21
Own Risk and Solvency Assessment
• NAIC ORSA Subgroup adopted a Guidance
Manual, and will be working on a model law
• They are working with 10-15 volunteer
companies to develop reports for reviews
• States are moving toward a risk solvency
framework in examinations
2012 Life and Annuity Symposium Session 74-What is New With the
ACLI/NAIC/FASB and Other Regulatory Bodies? May 22, 2012
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11
What’s Happening at the IASB
and FASB?
Henry Siegel
Life and Annuity Symposium
Los Angeles, May 2012
2012 Life and Annuity Symposium Session 74-What is New With the
ACLI/NAIC/FASB and Other Regulatory Bodies? May 22, 2012
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Major Insurance-Related Projects
• Insurance Contracts
• Financial Instruments
• Revenue Recognition
2012 Life and Annuity Symposium Session 74-What is New With the
ACLI/NAIC/FASB and Other Regulatory Bodies? May 22, 2012
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Insurance Contracts Basics
• Joint project between IASB and FASB
• Three Building Blocks (Usually)
– Cash Flows
– Discounting
– Margin(s)
• Premium Allocation Approach
• Presentation
• Transition
2012 Life and Annuity Symposium Session 74-What is New With the
ACLI/NAIC/FASB and Other Regulatory Bodies? May 22, 2012
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Cash Flows
• Current best estimate of future cash flows
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–
–
–
All cash flows, other than bifurcated derivatives
Always unlocked
May need to be stochastic but not always
For contracts with participating aspects, use best estimate
of payments
• Bifurcated derivatives are those that are not clearly and
closely related to the basic contract
– e.g. GMAB, some types of GMWB
• Expenses
– Acquisition Expenses an issue
– Overhead excluded
2012 Life and Annuity Symposium Session 74-What is New With the
ACLI/NAIC/FASB and Other Regulatory Bodies? May 22, 2012
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13
Discounting
Top down vs. Bottom Up
Need to avoid volatility
Use of OCI
May need to be stochastic more often than
currently
• For Par contracts, crediting rate/ dividends need
to be consistent with discount rate
• IAA is working on a monograph on this subject
•
•
•
•
2012 Life and Annuity Symposium Session 74-What is New With the
ACLI/NAIC/FASB and Other Regulatory Bodies? May 22, 2012
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Margins
• IASB wants two margins
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–
–
–
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Risk Margin and Residual Margin
Consistent with Solvency II
Residual Margin designed to avoid gains at issue
Residual Margin runs out over coverage period
Risk margin applies to claim reserves
• FASB wants one margin
–
–
–
–
Avoid gain at issue
Doesn’t believe risk margin can be determined in a useful way
Margin runs out over coverage period
No margin on claim reserves for contracts using the PAA per
IASB – margin remains for claim reserves
• IAA is working on a monograph on this subject
2012 Life and Annuity Symposium Session 74-What is New With the
ACLI/NAIC/FASB and Other Regulatory Bodies? May 22, 2012
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14
Premium Allocation Approach
• Similar to Unearned Premium Reserve
• Mainly applies to policies with one year
duration or less
– Mostly P&C but group insurance also possible
• Some companies want to apply to longerduration policies
2012 Life and Annuity Symposium Session 74-What is New With the
ACLI/NAIC/FASB and Other Regulatory Bodies? May 22, 2012
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Presentation Issues
• Originally boards wanted to show only margin
run off
– Analysts argued for inclusion of Premiums,
Benefits and Expenses
– Recently IASB concluded that premium should
exclude the part that goes into a deposit
• E.g. UL, term-certain life annuity, and cash values
• FASB has not taken a position
• May need to disaggregate services (e.g. stop
loss plus claim payment contracts)
2012 Life and Annuity Symposium Session 74-What is New With the
ACLI/NAIC/FASB and Other Regulatory Bodies? May 22, 2012
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15
Use of Other Comprehensive Income
• Goal is to avoid earnings volatility
• Change in reserves due to change in discount rate
shown in OCI
• For par contracts, similar approach but changes
to discretionary payments maybe in cash flows
– Assets and Liabilities need to be measured
consistently
– Cash flows and discount rate need to be consistent
2012 Life and Annuity Symposium Session 74-What is New With the
ACLI/NAIC/FASB and Other Regulatory Bodies? May 22, 2012
31
Transition
• Original proposal in ED was flawed
– Would have shown losses for very long time on inforce business
• Now moving toward full retrospective
approach where possible
• Estimates when not possible to go back
2012 Life and Annuity Symposium Session 74-What is New With the
ACLI/NAIC/FASB and Other Regulatory Bodies? May 22, 2012
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Financial Instruments
• Boards are working jointly on an impairment model for financial
assets
– Developing a three-bucket expected loss approach for estimating
impairment
– Overall objective of the model is to reflect the deterioration in the
credit quality of financial assets
• Classification and Measurement
– IASB deferred mandatory effective date of IFRS 9 to January 1, 2005
– Boards are working together to reduce key differences between the
classification and measurement model the FASB is developing and the
model in IFRS 9
– Exposure drafts expected in the second half of 2012 for both FASB and
IASB.
• Derivatives and Hedging
• Boards are working separately on this project
2012 Life and Annuity Symposium Session 74-What is New With the
ACLI/NAIC/FASB and Other Regulatory Bodies? May 22, 2012
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Revenue Recognition
• Does not apply to insurance
• Mainly relevant for service businesses (e.g.
claim payments or mutual funds)
• Essentially recognizes revenue when services
are provided
2012 Life and Annuity Symposium Session 74-What is New With the
ACLI/NAIC/FASB and Other Regulatory Bodies? May 22, 2012
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Questions?
2012 Life and Annuity Symposium Session 74-What is New With the
ACLI/NAIC/FASB and Other Regulatory Bodies? May 22, 2012
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