Shifting to principles-based reserving methods for life insurance policies could increase reserve requirements for some universal life and whole life polices, according to authors of a new PBR study.
The authors, actuaries at Milliman Inc., Seattle, prepared the study for the Society of Actuaries, Schaumburg, Ill., which is trying to help the Life and Health Actuarial Task Force, an arm of the National Association of Insurance Commissioners, Kansas City, Mo., and other organizations grapple with principles-based reserving issues — and discuss the kinds of resources, such as additional computing time, that insurers and their actuaries will need to implement a PBR system.
Advocates of a PBR approach want to shift toward reliance on actuarial judgment and modern statistical forecasting methods, and away from reliance on static formulas.
Advocates say a principles-based approach could ensure that reserves reflect the risks insurers and their products really face. Critics worry that some insurers could use the new approach to cut reserves to unrealistically low levels.
The LHATF has scheduled a teleconference on VM-20, a life products reserving valuation manual draft, for Thursday.
The LHATF has posted the SOA/Milliman study on the principles-based approach to reserving on its section of the NAIC website.
The actuaries who worked on the study reviewed case studies submitted by participating life insurers.
“The objective of this research is to serve as a field test for the proposed principle-based approach to statutory reserves and required capital,” the actuaries write in
The actuaries say they hope their research will give the working groups and the life insurance industry as a whole a look at modeling results based on actual data from insurers’ in-force blocks of business.
The actuaries compared how various blocks of business meet the current statutory minimum reserve requirements and how well-reserved they would look in a PBR universe.
“When compared to current statutory minimum reserve requirements, this research test bed suggests a wide range of possible outcomes,” the actuaries write in their study.
Factors influencing that range include how well the premiums support benefits, expenses and profit; the maturity of a block; the level of margins used in the valuation; and the characteristics of the asset portfolio supporting the policies, the actuaries write.
Applying a cash value floor can “mute” the value of margins, the actuaries write.
“Determining the direction and ultimate impact to the entire modeled block of margins that are established on each individual risk factor will be difficult,” the actuaries warn.
When the actuaries tested how term blocks might do under a wide range of conditions, they found that PBR reserve amounts varied widely from the comparable statutory reserve amounts.
The gaps ranged from “0% for a relatively newer, less competitive, 30-year level premium term product to 82% for a more mature, competitive 20-year level premium term product,” the actuaries write.
Overall, the current statutory reserve levels for recently issued term policies are high enough that the proposed PBR requirements would result in no additional reserving requirements, the actuaries write.
When the actuaries looked at blocks of universal life policies with secondary guarantees, the found that 1 of the 6 UL blocks tested might need more reserves.
The actuaries found that 1 of the 4 blocks of participating whole life policies might need more reserves to meet PBR standards.
The actuaries also asked actuarial task force members who provided the case study modeling results about how well the modeling process really worked.
One reaction was that the practice of rounding up to the next higher underwriting criteria scores table appeared to be both conservative and subject to manipulation.
“Such a requirement may lead to underwriting criteria that just make it to the next lower UCS table,” the actuaries who wrote the study suggest. “A weighted average approach would be better at reflecting the incremental mortality improvements that should accompany the gradual tightening of underwriting standards.”
The actuaries also found strange problems cropping up when companies had to combine use of company date with industry-wide data when they had too little in-company experience to provide the “credible” data needed to handle some categories of business.
One insurer reported having better than underwriting results than the industry as a whole. It could use its own data for most categories of life insurance business, but it had too little experience to back its highest level of preferred business and ended up having to use industry experience for that category.
As a result, “valuation mortality rates for the most preferred class ended up being higher than [for] the next most preferred class,” the Milliman actuaries write. “This result is counter-intuitive and would be difficult to manage going forward.”
To meet PBR requirements, the actuarial task force members had to feed 1,000 scenarios into statistical modeling systems.
The sheer number of calculations involved with that process required use of a grid computing or distributed processing approach, and the actuaries who needed those computing resources had to compete for computing resources with the accountants who were preparing company financial statements, the Milliman actuaries write.
Most actuarial task force members “had trouble getting grid computing time for their research project since it took a back seat to financial reporting deadlines,” the Milliman actuaries write.