A team of actuaries wants to give state insurance regulators a new way to see what long-lived annuity holders and pension plan participants are doing to a life insurer’s financial strength.
The Longevity Risk Task Force, an arm of the American Academy of Actuaries, is looking at how to build longevity risk adjustments into life insurers risk-based capital (RBC) ratios.
Members of the Longevity Risk Subgroup, a panel at the National Association of Insurance Commissioners, heard an update about the task force project earlier this month, during a conference call meeting.
Paul Navratil, the chairperson of the actuarial academy’s Longevity Risk Task Force, and others on the task force, say in a written presentation prepared for the NAIC that they see a life insurer’s RBC ratio, or LRBC ratio, as a tool regulators can use to identify weakly capitalized companies.
“We took a practical approach in developing an initial longevity risk factor for LRBC which is not intended to precisely reflect all drivers nor to align to an internal view of economic capital for all companies,” according to the task force presentation.
The task force said it tried to come up a longevity risk factor that was easy to calculate and consistent with the existing LRBC framework.
The task force is starting by looking only at annuity products that are already paying income, and at the group annuities used to fund pension risk transfers. The task force is not yet looking at the longevity risk embedded in products such as variable annuities and long-term care insurance.
The task force started with population life expectancy change data for the period from 1900 through 2013, adjusted to reflect the impact of World War I and World War II, the baby boom, and decline in the volatility of total U.S. population mortality.
The task force also considered a variety of high-stress scenarios, such as possibility that mortality improvement for people ages 85 and older could be 40% higher in th future than in the past.
The resulting longevity risk charge could leave the life RBC for a life insurer with little longevity exposure, or balanced exposure, about the same, according to an example shown in the presentation.
The task force shows the longevity risk charge could reduce the life RBC ratio at an insurer with a great deal of longevity risk on its books by about 20%.
A link to the task force presentation is available here, in the agenda and materials packet for the Longevity Risk Subgroup conference call held March 5.
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