D.2 VM 20 results

Question 1

the 4 broad categories of reserve change

Answer 1

• Reserve change = quantifiable difference in reserves between two dates
  1. Economic Assumptions
• changes in the underlying economic scenario model generator
• Reference yield curve
• Mean reversion target and strength
• IR volatility
• Starting asset portfolio
• asset spreads and asset default charges
• equity assumptions
• Investment strategy changes

2. non-economic assumptions
   -experience assumptions - updating baseline assumptions
   -methodology changes
   prevailing reserve types
   -NGEs
3. Demographics of the inforce block
   - Time passage
   - Terminations
   - NB
   - Accounting value changes
   - Misc - benefit elections, rider additions
4. risk mitigation programs and mgmt actions
   - reins
   - selling LOBs or assets

Question 2

reserve change type: volatility vs anticipated

Answer 2

Volatility = derived from unexpected changes/results
Anticipated = expected results that should not drive volatility

Question 3

Construct a VM20 attribution analysis

Answer 3

• Demographic changes
• non economic changes
• economic changes
• risk mitigation

Question 4

VM20 vs MCEV

Answer 4

VM20 vs MCEV

• MCEV measures shareholder value
• VM20 measures PH obligations with solvency focus
• MCEV has a broader scope
• not relevant to VM20: risk allowance for NHR, income taxes, SH contribution and divs, business acquired or divested
• relevant to VM20: NB value expected existing business contributions; unwinding of discount rate, release of risk allowance, TVOG
• Operating variances
• changes in assumptions
• economic variances
• non-operating variances

Question 5

VM20 vs AG 43

Answer 5

• both are PT
• similar CTE for stochastic reserves
• same DR calcs

impact from equity market

• major contributor of AG 43 reserve volatility
• similar to VUL and IUL
• Insurers quantify by unwinding each fund on seriatim basis

Impact from IRs

• IR movements impact VA bond funds and discount rates
• VM20 impacted on the SR and DR components
• NB impact
• change in assumptions
• Unexplained = end balance - beginning balance - all items quantified in other steps
• derivatives and hedging assets
• reinsurance