How reliable are stochastic scenarios are in assessing reserving needs of companies selling variable annuities?
That was the subject of a recent discussion of the Life & Health Actuarial Task Force of the National Association of Insurance Commissioners, Kansas City, Mo. The task force has been working for several years to create a new actuarial guideline, Commissioners Annuity Reserve Valuation Method, or AG CARVM, which will establish reserving guidelines for VAs with guaranteed benefits..
The task force wants to create a more lasting way to reserve for risks in these guarantees to replace temporary solutions embodied in the NAIC’s current Actuarial Guideline 39 and recent revisions to Actuarial Guideline 34.
A stochastic approach is a major part of AG CARVM. A standard scenario to create a reserving floor has also become part of the proposal. Stochastic scenarios are becoming more popular in financial markets and in the financial planning communities as a way to assess the likelihood of particular outcomes.
During the recent task force discussion, Allan Elstein, a Connecticut regulator, argued that “stochastic results do not necessarily create reality.” He referred to a news report noting that stochastic results did not accurately predict the recent direction of stock prices.
In stochastic scenarios under CARVM, “bad” events that happen later in contract years are not being reflected, Elstein noted. Almost all of the loss scenarios in the stochastic examples occur early on, he continued. The reason that losses in later years are not being reflected is because gains precede losses and thus recognition of those losses for reserving purposes is deferred, he said.