A.2 PBR for Life Products

Question 1

ASOP 52: Regulatory Requirements

Answer 1

• Actuaries calculating PBRs should be familiar with applicable laws (SVL, VM)
• Assign responsibility to a qualified Actuary
• QA oversees PBR calc and verifies assumptions, methods, models reflect VM reqs

Question 2

ASOP 52: Exclusion Tests

Answer 2

• contracts grouped together must have similar risk profiles. provisions, demographics, etc
• SET: satisfied if QA certifies the policies are not subject ot material IR risk or asset return risk
• separate CF model for each segment

liability modeling (SR and DR)

• do not reflect costs that are not specific to the contracts, such as PH divs, regulatory risks, fraud, etc
• ph behaviors should be consistent with NGEs (dyamic lapses)
• SR and DR calculated no earlier than 3 months before the val date

Question 3

ASOP 52: Assumptions for SR and DR

Mortality, investment experience, PH behavior, expenses

Answer 3

• use company experience if relevant and credibile
• else use industry data
  sensitivity testing for to determine assumptions with most impact on reserves

mortality:
- based on insurers UW and mortality experience
- shorter exposure periods = less credibility
- exposure periods: 3-10 years
- combine to improve cred
- only reflect mortality trends if they INCREASE reserves
PH behavior on mortality
- effects of lapses on mortality?
- Anti-selection from increases in premiums

Investment Experience

• modeled investment strategy should be similar to insurers actual strategy
• reflect CF variability due to shifts in IRs(such as prepayments, calls)

PH behavior

• embedded option utilization, impact of ITM level
• surrenders will decline dramatically before a cliff
• scenario dependent assumptions
• assume behavior becomes more rational over time
• marketing factors affect premium payments
• Emphasis on DBs vs. savings or tax advantages
• Emphasis on premium payment flexibility
• Policy illustrations showing premiums for a limited period
• Automatic electronic payment
• Bonuses for higher premiums
• Non-guaranteed elements

Question 4

ASOP 52: Margins on Assumptions

Answer 4

• Margins should be applied to NON-stochastic assumptions
• do not include margins on stochastic assumptions such as IRs used for SR
• magnitude of margin should reflect the degree of risk
• account for fluctuations
• cumulative effect of margins should be appropriate in aggregate. correlations can reduce the amount needed on individual margins
• sensitivity testing can help understand margin requirements

Question 5

ASOP 52: recognition of Reins CF in DR, SR

Answer 5

• The ceding company and reins are not required to use the same assumptions + margins
• Each company’s actuary should consider:
– Aspects of the reinsurance agreements
– Actions either party could take that might affect cash flows
• Consider whether company actions might depend on economic scenarios
– NGEs: consider limits on reins ability to change treaty
terms
– Ceding company actions that might affect expected mortality
– Assume parties will exercise their options to their advantage
– Consider how the above items are impacted by each scenario modeled
– Consider whether DR appropriately reflects risk associated with stop-loss agreements

• Establish a counterparty risk only if there is knowledge that the counterparty is impaired