NAIC VA Reserve and Capital Reform Poojan Shah SOA Antitrust - - PDF document

Equity-Based Insurance Guarantees Conference

• Nov. 5-6, 2018

Chicago, IL

NAIC VA Reserve and Capital Reform Poojan Shah

SOA Antitrust Compliance Guidelines SOA Presentation Disclaimer

Sponsored by

Poojan Shah, FSA, CERA, CFA, MAAA

2018 EBIG Conference

November 6th, 2018 (1030 – 1200 hours)

NAIC VA Reserve and Capital Reform

2

Background

• The current AG43 (reserving) and C3P2 (capital) standards are complex and have several

shortcomings.

 Application of the standards across companies is inconsistent  Introduces significant volatility in funding requirement  Motivates the use of captives

• The NAIC has commissioned an initiative to identify and propose changes to the current
• frameworks. The goal is to satisfy the following overarching objectives:

 Ensure robustness of funding requirements  Promote sound risk management  Promote comparability across insurers and products  Preserve current statutory construct where feasible  Minimize implementation complexity

3

Current VA Framework Overview

CTE 70 Best Efforts Hedging CTE 70 Adjusted Hedging AG43 Stochastic AG43 Standard Scenario Reserves CTE 90 Best Efforts Hedging CTE 90 Adjusted Hedging C3P2 Stochastic C3P2 Standard Scenario Total Asset Requirement (TAR) Total Funding Requirement

MAX MAX MAX Weighted Avg. Weighted Avg. Volatile Min E-factor = 30%

• Assumptions
• RW Scenarios
• Assumptions
• Methodology

4

Recommendations: Standard Scenario

Basic Adj Rsv (AG33) PV Accumulated Net Revenue (ANR)

+

• Prescribed market paths

 Initial Shock: -13.5% AG43; -20% C3P2  ANR is discounted at:

 Locked-in valuation rates (AG43)  10-year CMT + 50 bps; 3% floor (C3P2)

• Non-guaranteed revenue sharing not projected
• Hedges run off over the first year
• Current assumptions unchanged since

framework creation

• Aggregation not permitted in AG43

Current Recommended

• Allow company specified market paths

 Final Reported Reserve = Stochastic Reserve + Additional Reserve  Additional Reserve (cannot be less than 0) =

• Std. Scenario Amt. – CTE (70) Adjusted – Buffer
• Same revenue sharing guidance as stochastic
• Model hedges identical as CTE adjusted
• Behavioral assumptions aligned with industry

experience

• Aggregated modeling

Starting Assets GPVAD

+

5

Recommendations: Stochastic

• No adequate guidance on generating interest

rates and separate account returns

• Working reserves (CSV) are part of the GPVAD

calculation

• Maximum allowable credit for CDHS: 70%
• Allowed to reflect companies’ own spread and

default cost assumptions for calculating net investment income on General Account assets

• Non-guaranteed revenue sharing for AG43

linearly grades to 50% over 6 years

 Cap = 0.25% of separate account value per annum after the sixth projection year

Current Recommended

• Use VM20 generator for interest rates and

separate account returns

• Remove working reserves from GPVAD

calculation

• Maximum allowable credit for CDHS: 95%
• Prescribed spread and default cost assumptions

for calculating net investment income on General Account assets

• Non-guaranteed revenue sharing linearly grades

to 80% over 5 years

 No cap

6

Proposed VA Framework Overview

CTE 70 (Pre-Tax) Best Efforts CTE 70 (Pre-Tax) Adjusted: No Hedge

• r No Rebalancing

AG43 Stochastic (Min of 5% weight to Adjusted) AG43 Additional Standard Projection Amount Reserves CTE 98 (Post-Tax) Best Efforts CTE 98 (Post-Tax) Adjusted: No Hedge

• r No Rebalancing

CTE 98 Reported (Min of 5% weight to Adjusted) C3 = 25% of (CTE 98 + Additional Standard Projection Amount x (1 – Tax) – Reserves)

SUM

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Disclosure Requirements

• Stochastic Scenarios – only for funds generated using a proprietary ESG

 Disclose Sharpe ratio and correlations

• Best Efforts Hedging (CDHS)

 Compare CDHS modeling vs. actual experience over past 12-36 months

 Explicit hedging: Project hedges along realized market path, and compare to actual experience  Implicit hedging: Compare actual experience with fair value movements in hedged liability  Low error factor permitted only if the modeled hedge performance is close to actual

 Position of Best Efforts CTE relative to fair value (FAS 133) and unhedged CTE

 Necessitate further discussions with regulators if BE CTE < min (FV, unhedged CTE)

• Standard Scenario

 Compare projected cumulative decrement pattern using company vs. prescribed assumptions

 How do mortality, annuitization, lapses, etc. contribute to AV run off over the projection path?  Under CTE approach for determining standard scenario, analyze average of worst 30% of scenarios

8

Modeling/Operational Challenges

• Standard Scenario behavioral assumptions

 Modeling Challenges:

 Moneyness based on GAPV  Withdrawal delay cohorting

 Attribution analysis to understand impact of each assumption change

• Stochastic scenario generation

 Map all funds to a combination of funds from the VM-20 generator  Allow usage of proprietary generator only if it does not materially reduce TAR

 Disclose Sharpe ratio and correlation

• Companies reflecting CDHS must make further disclosures

 Actual vs. Projected Best Efforts hedge gain/loss  Position of Best Efforts CTE relative to fair value and unhedged CTE