Actuarial Guideline 43 - Hause Actuarial Solutions

1 Actuarial Guideline 43 Actuarial Guideline 43 Kansas City Actuaries Club Kansas City Actuaries Club --June 24, 2009 June 24, 2009 John Froehle, FSA, MAAAC onsulting Actuary, Actuarial Resources CorporationAG 43: Implementation Issues AG 43: Implementation Issues and Preliminary Resultsand Preliminary ResultsHere are the topics for the first half of this presentation. Timing and Scope for AG 43 Stochastic Modeling with Comparison to C-3 PII Standard Scenario with Comparison to C-3 PII Hedging and CDHS Alternative Methodology Actuarial Certification and MemorandumHere are the topics for the for the second half of this presentation. Case Study: AG 43 Variable Annuity Reserves Products (VA One, VA Two, VA Three) : Specs, In-Force Stochastic Model: Assumptions and Scenarios Results: Stochastic CTE, Standard Scenario Amount Time permitting, Stochastic Scenario Requirements and AlternativesShort BreakTiming and Scope of New RequirementsDecember 30, 2009 December 30, 2009AG 34 and AG 39 Become Ineffective for Statutory ReservesTax Reserves Pre - 2009 Tax Reserves Pre - 2009 Requirements in effect when contract AG 34 / AG 39 December 31, 2009 December 31, 2009AG 43 effective for all business issued on or after Jan.

2 1, 1981--------------------------------Note : RBC applies to same bus as AG 43 regardless of when issued Tax Reserves 2009 IssuesTax Reserves 2009 IssuesTax Reserves currently unknown January 2008 Treasury Notice 2008-18 looked favorably on Standard ScenarioFutureFutureAG 43 as Poster Child for PBR Eventually added to Valuation Manual as VM-21 Stochastic Modeling with Stochastic Modeling with Comparison to CComparison to C--3 PII3 PIIG eneral Stochastic Modeling Requirements Stochastic scenarios Company-generated or Academy Pre-packaged Sufficient number of scenarios: no material impact from using more of them Meet Calibration Criteria Integrated ALM model Model Assets, Dynamic Re/Disinvestment Sufficient projection period: no material impact from extension Prudent Estimate assumptions Starting Assets Best Guess of reserve you are computing but no strict requirement Model all SA assets, all hedge assets, GA assets can be negative Projection of accumulated deficiencies.

3 Working reserve - assets Working Reserve: CSV or PV of income paymentsSummary Comparison of AG43 and C-3 Phase IIActuarial Guideline XLIIIB efore TaxCTE 70No SS AggregationRevenue Sharing Limited1 New CDHS recognition 212345 New assumption disclosure3 New assumption guidance467C-3 Phase IIAfter TaxCTE 90SS Aggregation PermittedPrudent Revenue SharingOriginal CDHS recognition12345 Original disclosureOriginal guidance67(1) See section (E) of Appendix 1, (2) See of Appendix 7, (3) See section of Appendix 9, (4) See Section of Appendix 9 Additional Differences from C-3 Phase 2 Role of Reinsurance C-3 PII TAR computed net of reinsurance AG 43 Reserves computed both gross and net Discount Rates.

4 PV Accumulated Deficiencies C-3 PII TAR: Forward rates if not using an integrated model Otherwise, forward rates or the rates generated by that model (after-tax 1YT) AG 43 Reserves: the same interest rates at which positive cash flows are invested which are (a) forward rates, (b) C-3 Phase I 200 scenarios, or (c) stochastic model rates developed for this purpose Integrated Model: GA Assets and Interest-Rate Risk C-3 PII TAR: Appendix 6 alternatives for i-rate risk including C-3 PI factors AG 43 Reserves: Full ALM model, GA asset modeling appears requiredStandard Scenario with Comparison Standard Scenario with Comparison to Cto C--3 PII3 Basic Reserve and Basic Adjusted Reserve Basic Reserve apply requirements.

5 Prior to adoption of AG 43 ignoring any guaranteed death ..or living benefits in excess of account values assume a return on separate account assets based on the year of issue statutory valuation rate less appropriate asset based charges, including charges for any guaranteed death ..or living benefits )C): no less than the Cash Surrender Value Basic Adjusted Reserve (BAR) To this will be added the MAX PV negative accumulated net revenue. It s like the Basic Reserve but ..free partial withdrawal provisions shall be disregarded when determining surrender charges and )C) shall not apply No CSV floor of Standard Scenario ReserveAG 43, section : Standard Scenario Reserve is Basic Reserve for contracts w/o guaranteed benefits ( use existing CARVM reserves) On a seriatim basis, Max{ CV, a+b-c} wherea)Basic Adjusted Reserveb)Max{0,GPV of Accumulated Net Revenue (ANR)}.

6 Starting at 0 and using Discount Rate as accumulation rate Adding in Prescribed Margins Subtracting direct contract benefits in excess of AVs less individual reinsurance recoveries plus reinsurance premiumsc)Allocation of approved hedges and aggregate reinsurance But limited to the GPV of -ANRORC omparison of AG 43 & C-3 PII Standard Scenario ComponentsItemAG XLIIIC-3 PIIA ccumulated Net RevenueBefore Tax w. PV at DRAfter Taxw. PV at DR (1- tax rate)Discount Rate (DR)Pre-Tax SVL Rate(s)10-Yr CMT + 50 bps(3% DR 9%)Basic Adjusted ReserveCARVM w/o free withdrawals & w/o CSV FloorWorking Reserve: CSV or PV Income PaymentsRevenue SharingGuaranteed includedNot includedMortality Rates70% of 1994 VA MGDB thru age 85, increase 1% per year to age 11580% of 1994 VA MGDB thru age 95, increase 1% per year to age 115 Surrender Charge PeriodLengthy Calculation to Determine Surrender Charge Amortization Period Not as well definedAG 43 & C-3 PII Standard Scenario MarginsMax{ GMDB explicit charges, 20 bps AV}Guaranteed Net Revenue Sharing40 bps Fixed AV40 bps Fixed AVMin{65 bps AV, 50% of charges over those in SC period} +50% of charges (excl GNRS) over those in SC period (excl GNRS)

7 +Additional Margins After Surrender Charge Amortization PeriodMax{ GMxB explicit charges, 20 bps AV}Max{ GMLB explicit charges, 20 bps AV}10 bps AV +20 bps AV +Margins During Surrender Charge Amortization Period*C-3 PIIAG XLIIIItem* C-3 PII refers to Surrender Charge Period whereas AG 43 defines a Surrender Charge Amortization PeriodAG 43 & C-3 PII Standard Scenario Drops & ReturnsDrops & Returns Compared: AG 43/ RBCC lassesProjection PeriodsInitialYear 1 Years 2 5 Year 6+Equity Class Bond Class Balanced Class Fixed Accounts and General Account Max{ guar rate} current rateMax{ guar rate} current rateMax{ guar rate} current rateAG 43 & C-3 PII Standard Scenario Benefit Election RatesOverriding Rule.

8 Election of any VAGLB prohibited if another VAGLB has larger current value75% or contract minimum50% or contract minimum25% or contract minimumWithdrawals do reduce other ITM benefits100%75% or contract minimum50% or contract minimumWithdrawals do not reduce other ITM benefits60 < x+t-150 x+t-1 60x+t-1 < 50 Guaranteed Minimum Withdrawal Benefit At Last Election DateITM Any Time After Waiting PeriodGuaranteed Minimum Accumulation Benefit 20% ITM10% ITM < 20%ITM < 10%At Last Election DatePrior to Last Election DateGuaranteed Living Benefits other than GMWBC ontractholder Election Rates Compared:AG 43/RBCAG 43 & C-3 PII Standard Scenario Lapse Assumptions Any Other GuaranteedLiving Benefits ITM Any Guaranteed Minimum Accumulation Benefit ITM 20% ITM10% ITM< 20%ITM < 10%Rates that Vary by In-The-Moneyness All Guaranteed Living Benefits OTM Death Benefit Only ContractsAfter Surrender Charge PeriodDuring Surrender Charge PeriodCategoryLapse Assumptions Compared:AG 43/RBCITM: AG 43: ITM = 100% * ((Current Value of the guaranteed living benefit /Account Value) - 1) C-3 PII.

9 ITM = Max {1 (Account Value/ Value of Guaranteed Benefit at time of exercise of benefit), 0}, where the maximum is determined over all future possible benefit payout start datesAlternative MethodologyAlternative MethodologyAlternative MethodologyAG 43 Appendix 4 ) The Conditional Tail Expectation Amount determined using the Alternative Methodology for a group of contracts with GMDBs shall be determined as the sum of amounts obtained by applying factors to each contract inforce as of a valuation date and adding this to the contract s Cash Surrender Value. C-3 PII Modeling Methodology A company may choose to develop capital requirements for Variable Annuity contracts with no VAGLBs, by using the Alternative Method, as defined in Appendix 8 of this report instead of using scenario testing if it hasn t used scenario testing for this purpose in previous years.

10 From the 2008 RBC instructionsAG 43 Appendix 3 ) A Standard Scenario Reserve shall be determined for each of the contracts falling under the scope of the Guideline by applying section ). This includes those contracts to which the Alternative Methodology is applied. Hedging and CDHS Hedging and CDHS Modeling of HedgesInstrumentsCurrently HeldCosts and benefits shall be includedPositions Expectedto be Held Costs and benefits shall be included if CDHS Hedging Strategy meets requirements of Appendix 7 Strategy ChangesTo the extent hedging strategies change over time, document and include effective date of UseState statutes, laws and regulations still govern use of derivative instrumentsClearly Defined Hedging Strategy Risks being hedged Objectives Risks not being hedged Financial instruments being used Trading rules and permitted tolerances Metric(s)