■ ■ How is the marketplace likely to change?
■ ■ Are the vendors prepared? Would the company prefer to help
vendors make decisions about approaches, or wait until other
companies have worked out the kinks?
■ ■ What would the home-state regulator prefer? How much
interaction do I have with the regulator today, and how much
will he or she want to understand about my decision process?
■ ■ What will the financial analysts expect? (This is probably more
important to large companies, but if your company is contemplating mergers or acquisitions, this question may come into play.)
When making decisions about PBR implementation, companies
might consider what resources they currently have available that
could be leveraged to create PBR valuations. Actuaries will likely
want to review asset adequacy testing models and determine
what changes would be necessary for PBR. Companies subject
to Actuarial Guideline 48 have probably already leveraged this
capability. Are stochastic models available for life products? If not,
then which parts of the variable annuity models can be leveraged?
If a company decides to use a phased-in approach, the choice
of which products to roll out first is not necessarily an easy one. In
general, VM- 20 requires a calculation of three different reserves:
a net premium reserve (NPR), a deterministic reserve (DR), and
a stochastic reserve (SR). The reserve used for statutory financial
statement purposes is the largest of the three. However, the actuary
may choose to demonstrate that certain products can be excluded
from the DR or SR calculation. Exclusion testing is a new process;
a company may wish to do some research in this area before
modeling begins, even if the company believes its products pose
little to no interest rate or investment risk.
Companies may be concerned that certain aspects of PBR
are not yet final. While term insurance and universal life with
secondary guarantees (products that may have captives as part of
the financing arrangements) have well-defined reserve methods
within VM- 20, indexed universal life and variable life without
secondary guarantees do not. Actuaries may use their judgment
on how to apply VM- 20 techniques to these products, but there
is some risk that VM- 20 will be amended to require calculations
different than what the actuary would choose today.
Even for methods that are well-defined in VM- 20, the actuary
may use professional judgment in setting assumptions, methods,
and modeling techniques. Industry practice is evolving, and not all
questions the actuary may consider will be addressed in the PBR
or modeling practice notes. Each company will have its own view
of appropriate internal controls and risk management practices.
As reserve methods become more complicated, documentation
and disclosures become increasingly important. VM- 31, PBR
Report Requirements for Business Subject to a Principle-Based
Reserve Valuation, specifically requires a report describing not
only the results of the calculations, but also the means by which
the actuary determined that reserves met the requirements of
the Valuation Manual. The actuary verifies that the assumptions,
methods, and models are appropriate for statutory reserves. The
actuary is encouraged to review VM- 31 disclosure requirements
before modeling begins. The VM- 31 PBR Actuarial Report will
contain a description of risks, rationale for selecting assumptions,
and the development behind assumptions. The overview section
of the PBR Actuarial Report is submitted to regulators on an
annual basis, while the remainder of the report is submitted
upon regulatory request. Accordingly, along with the prescribed
disclosures, the actuary will likely need to maintain work papers
and documentation of decisions being made.
If you think this sounds like a lot of decision points, you’re right!
Fortunately, there are a number of resources available. Practice
notes are being created and updated, which provide additional
useful resources for actuaries. In particular, the Academy created a
Model Governance Practice Note, a Model Governance Checklist,
and a draft PBR Practice Note. The Academy has made PBR-related
information easy to find, with a special web hub to summarize
items related to PBR.[ 1]
Another review for planning purposes is the SOA’s PBA
Implementation Guide and case studies (Roadmap). Project
managers may find this document to be particularly helpful. While
this Roadmap was created by the Smaller Insurance Company
Section, it will provide helpful information for companies of all
sizes. The follow-up report—PBA Implementation: Beginning
Tales—is also well worth reading.
If you wish to venture from home, the Academy has created an
intensive PBR Boot Camp, during which an actuary can receive
up to 24 hours of continuing education specific to PBR. The SOA
ValAct Symposium and the SOA Annual Meeting will also have
an emphasis on PBR when discussing life insurance topics.
All actuaries should also be familiar with the actuarial standards
of practice (ASOPs) we will need to apply as we set reserves. In
addition to exposure drafts of ASOPs on PBR, modeling, and assumption-setting, several existing ASOPs may also apply to PBR.
For more information, please refer to a very thoughtful article
concerning ASOPs in the March/April 2017 issue of Contingencies
titled “PBR—Who, What, and How.”
■ ■ Taxes. Taxes have an important impact on financial results, and
must be considered in any operational or strategic decisions. The
Treasury Department and the IRS have not yet ruled on tax treatment for products using PBR as a statutory reserve methodology.
Treasury has ruled that products using the 2017 CSO mortality
table for CRVM reserves and cash surrender value calculations
will meet the definition of life insurance. Treasury has not yet
made a decision as to which reserve calculation will be allowed
for tax purposes. NPR is more similar to CRVM methods than DR
or SR. In contrast, the DR and SR are more similar to generally
accepted accounting principles (GAAP) methods than CRVM. It
is possible that Treasury will rule that the entire statutory reserve
is to be used for tax purposes, that only NPR will serve as the
basis for tax reserves, or that some other method is to be used.
Companies are encouraged to consult with tax attorneys as they
consider tax implications.
How to Survive—and Thrive—Amid Regulatory Change