A.2 PBR for Life Products

Question 1

VM 20 min reserves calculation

Answer 1

NPR = required for all policies under VM 20, calculated net of reins credits

reserve = NPR + max(0 ,max(DR,SR) - (NPR - DPA))
- DR, SR can be 0 depending on the results of the exclusion tests

Question 2

Calculate and describe NPR

Answer 2

Reserve NPR + max(0, max(DR,SR) - (NPR - DPA))
- where DR and SR can be 0 if they pass the exclusion tests

NPR depends on the policy type

1. Term and ULSG:
   - NPR >= max(cx, CSV) for each policy
2. other individual life: WL, UL w/o SG:
   - points back to the pre-VM formula based standards

Term insurance:
NPR = PVFM(t) - PVNP(t) - EA
where EA = 0 when t > 0
- PV reflects withdraws and lapses
- Adjusted gross premiums = 0 when t = 0
= 90% * Face when t < 5
= GP when t >= 5
- 135% cap on post shock net premiums with regard to the PV of PS benefits... this is to prevent steep premium slopes from reducing the reserves

ULSG
- calculate the same as UL CRVM with the following modifications:
1. calc level GMP such that GMF = 0 at maturity
2. EA =
= GP + 0.25% * Face @ t = 0
= 10% * GP @ t < 5
= 0 @ t >= 5
- NPR for ULSG is calculated the same as term but also adjusted for the FV / GMF ratio
NPR = (PVFM(t) - PVNP(t) - EA) * (FV / GMF)
where EA = 0 when t > 0 and ratio capped at 1

Question 3

describe components of the DR and how to calculate various PVs

Answer 3

Two methods to calculate the DR:
Prospective Reserve
1. project assets and liability CFs using a prescribed single IR scenario
2. determine discount rate using asset CF from (1). NII and realized capital gains over GA assets and NOP net CF
3. PV the liability CF using the discount rates
4. calculate the DR using the PV determined in (3)
DR = PVFB + PVFE - (PVGP + PV loan pmts + PV XSA) - PIMR
- PIMR = amount of PT IMR

Retrospective method
DR = a - b
a = starting asset amount that results in liquidation of all projected future benefits and expenses by end of projection horizon
b = allocated PIMR

• Deterministic economic scenario: use scenario 12 of the 16 stochastic exclusion scenarios

Question 4

Describe the SR process and calc single scenario

Answer 4

Steps:

1. project CF under a range of stochastically generated scenarios
2. calc scenario reserve for each stochastically generated scenario:
   a. PV the negative of the projected statement value of assets at each future projection w/ 1-year treasury * 1.05
   b. sum amounts across all model segments for each projection year
   c. scenario reserve = sum of starting assets across all model segments and the max of the values above
3. rank scenarios from high to low
4. calc the CTE 70
5. Determine any additional amount needed to capture any material risk not reflected in (1)
6. SR = (4) + (5) - PIMR

stochastic economic scenario

• based on prescribed economic scenario generator
• the number of scenarios depends ton the nature of insurers assets/liabilities

Question 5

describe the exclusion tests

Answer 5

Small Company Exception - company wide exception, allows formula based standards

1. < $300m ordinary life premium
2. total adj capital >= 450% RBC
3. AA has provided an unqualified opinion for the prior year
4. ULSG policies issued in 2020+ meet definition of non material SG

stochastic reserve test:
1. perform SERT, show the ratio < 6%
SERT = (b - a) / c
a = adjusted DR using prescribed baseline economic scenario
b = largest adjusted DR under any of the 15 other stochastic exclusion scenarios prescribed
c = PV of benefits net reins
- use anticipated experience, no margins
- asset and IR rates specific to scenario
- no mortality improvement
- basically the SR is shown to not materially increase the reserves

Deterministic exclusion test

• always calc the DR when: group fails SET, Term, and UL with material SG
• to pass DET: sum of future valuation NPs < sum gtd GPs
• valuation NP based on SVL
• gtd GP is based on the gtd GP in the contract
• UL: use GMP

Question 6

understand how reins is reflected

Answer 6

General Considerations:

• include retrocessions
• assume the current laws and regs are in effect throughout projection period
• for reins that doesnt qualify for reins credit: only reflect impact on surplus if it is unfavorable to the insurer

Reins Ceded:
NPR = NPR before Reins - Reins Credit

Projecting Reins in CF:

• reflect explicitly the reins agreement in CF
• may need stochastic analysis (stop loss)
• consider counterparty actions
• financial distress = establish risk margin for default

Question 7

CF model for DR and SR

Answer 7

Cash Flow model for DR and SR

• comply with ASOPs
• projected far enough into the future where no material liab
• ignore FIT
• project both liab and CFs
• use explicit assumptions for all material contract and asset features
• NGEs: reflect the insurers past practices/policies

starting assets for each model segment:

• starting assets = estimated reserve + PIMR
• include due, accrued II
• include all SA assets in the model segment
• include derivatives allocated to the model segment
• include GA assets selected on a consistent basis from year to year
• starting assets between 98% to 102% of reported reserve

Reinvestment assets and disinvestments

• reinv net CF in a manner consistent with company practice
• strategy shouldnt produce a reserve lower than alternate investment strategy of 50/50 mix of A & AA corp bonds

Cash flows from invested assets
requirements for fixed income assets:
- cf should be consistent with contractual provisions of each asset and each scenario
- can only group assets if it doesnt understate reserves
- prescribed asset default rates
- reflect uncertainty in CF timing

requirements for equity assets:
- allocate specific assets to each inv category
- modeled assets should be consistent with i
investment policy

Question 8

Clearly defined hedging strategy requiremetns

Answer 8

• Risks being hedged
• Risks NOT being hedged
• Hedge objectives
• Financial instruments used in the strategy
• Hedge trading rules
• Metrics for measuring hedging effectiveness
• Criteria used to determine hedge effectiveness
• Frequency of measuring hedge effectiveness
• Conditions under which hedging will not take place
• Person(s) responsible for implementing the hedging strategy
• Any known basis, gap, or assumption risk with hedging strategy
• Circumstances under which hedging strategy will not be effective in hedging the risks

Question 9

Assumptions for VM 20

Answer 9

• prudent best estimates for non-prescribed assumptions
• greater uncertainty = larger margin
• SR should use estimates consistent with DR
• stochastically model IR and equity return
• use own company if relevant and credible
• review assumptions annually
• sensitivity testing to understand materiality

PH ehaviors:

• reflect material drivers in PH behaviors (age, gender, duration, AV, SCs)
• base on actual and historic experience for the policy group
• model PH reaction to increase in value of product options

Expense assumptions:

• consistent assumptions for DR and SR
• spread capital expenditures over a reasonable #of years
• reflect inflation
• dont assume future expense improvements until realized
• fully allocated expenses