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September 09, 2007 at 04:00 PM
A discussion among regulators of how a new guideline for reserving for variable annuities should be crafted included talk about how reliable stochastic scenarios are in assessing reserving needs of companies.
The Life & Health Actuarial Task Force has been working for several years to create a new actuarial guideline, AG CARVM, which will establish reserving guidelines for VAs with guaranteed benefits. LHATF is a task force of the National Association of Insurance Commissioners, Kansas City, Mo.
The reason for the work on the draft is to create a more lasting way to reserve for risks in these guarantees to replace “temporary solutions” embodied in the current Actuarial Guideline 39 and recent revisions to Actuarial Guideline 34.
A stochastic scenario 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 also becoming more popular in financial markets and in the financial planning communities as a way to assess the likelihood of particular outcomes.
“Stochastic results do not necessarily create reality,” said Allan Elstein, a Connecticut regulator. He referred to a recent news report in which stochastic results did not accurately predict the direction of stocks.
In the CARVM scenarios, Elstein noted that “bad” events that happen later rather than in early contract years are not being reflected in stochastic scenarios. 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, he said, is because gains precede losses and defer recognition of those losses for reserving purposes.
Tom Campbell, a life actuary with Hartford Life, Hartford, Conn., and a representative for the American Academy of Actuaries, Washington, argued that a stochastic approach involves a broad range of scenarios that would cover losses in later periods.
