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What Will Money Cost?

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Questions about how to incorporate interest rate uncertainty in insurance reserve calculations came up during a recent meeting of a National Association of Insurance Commissioners subgroup.

Members of the Principles-Based Reserving Scenarios Subgroup, part of the NAIC’s Life and Health Actuarial Task Force, talked about ways to handle interest rates while reviewing Section 6.G of the VM-20 valuation manual.

The VM-20 manual would establish requirements for principles-based reserving, which encourages a shift toward use of actuarial judgment and risk-based valuations to set reserves, and away from reliance on rigid reserving formulas.

Subgroup members discussed ideas for handling products designed in such a way that the main risk is believed to be interest rate risk.

Concepts that surfaced included “mean reversion parameters,” underlying volatilities, and an interest rate scenario generator proposed by the American Academy of Actuaries, Washington.

The AAA generator is designed to generate real-world risk scenarios for principles-based reserving calculations. The generator also creates sets of scenarios designed to capture the risk of certain products by showing whether they are affected by high, low, or volatile interest rates.