Upcoming Developments in Annuity Valuation

August 31, 2015

Guillaume Briere-Giroux, FSA, MAAA, CFA

Chris Conrad, FSA, MAAA

Agenda

I. Annuity valuation actuary’s radar

II. AG 43 issues refresh

III. CCAR primer

IV. Group discussion and audience polling

Annuity valuation actuary’s radar

Contingent deferred annuities

C3 Phase 2 and AG 43

CCAR Revisions of AG 33 for non-elective benefits

VM-22

Index-linked variable annuities

Variable annuity captives

2012 IAR valuation table

Potential changes to valuation rates

ORSA

AG 43 issues refresh Select observations1 Commentary

1 Counterintuitive impact of hedging • Increases in TAR

• Asymmetry across hedging strategies

2 Standard scenario dominates more than what may have been intended

• Survey showed prominence of standard scenario as driver of

reserves

• Dependence of results on hedging strategy

3 Statutory sensitivity is not aligned with risk fundamentals

• Use of greatest present value can cause distortions relative to long

term economics

• Impact of hedging in standard scenario vs. stochastic calculations

Other highlighted complicating factors included treatment of reinsurance, taxation, and seriatim vs. aggregate calculations of reserves. An all encompassing observation was that the “volatility of capital requirements has increased with the potential for undue, pro-cyclical changes in results”.

1Source: Observations on emerging variable annuity statutory accounting results, Oliver Wyman 2010

Polling Question - AG 43 and C3 Phase 2 In your opinion, which of the following is the most problematic for AG 43 and C3 Phase 2?

6

1 2 3 4 5 6

28%

35%

2%4%

19%

12%

1. Standard scenario

2. Hedge treatment

3. CTE measure / greatest present value of accumulated deficiency

4. Pro-cyclicality

5. Taxation

6. Other

Polling Question - AG 43 and C3 Phase 2 If your company writes VA business, does the standard scenario dominate in the AG 43 calculation?

7

1 2

44%

56%

1. Yes

2. No

Polling Question - AG 43 and C3 Phase 2 If your company writes VA business, does the standard scenario dominate in C3 Phase 2 calculation?

8

1 2

58%

42%

1. Yes

2. No

CCAR annuity primer CCAR requires robust and granular nine quarter forecasts

Need Description

1 Realistic projections of economics

• Explicit projection of dynamic hedging strategy and other

management actions (e.g., credited rate setting)

• Modeling of existing assets and reinvestments (general account

business and assets backing guarantee reserves)

2 US Statutory financials

• AG 43 reserves revaluation

• C3-Phase 2 and / or rating agency capital

• Cash Flow Testing, potentially C3 Phase 1

3 US GAAP financials

• FAS 133 / 157 for embedded derivatives

• SOP03-1 for life contingent benefits

• Dynamic unlocking of DAC and SOP 03-1 (including assumptions)

• Income statement, balance sheet and profit by source analysis

4 Economic scenarios • Real world scenarios for AG 43, Cash Flow Testing and SOP 03-1

• Risk neutral scenarios for hedging and FAS 133

5 Other

• Corporate taxes

• New business

• Reinsurance

Polling Question – CCAR Prior to today, were you aware of CCAR?

11

1 2

55%45%

1. Yes

2. No

Polling Question – CCAR How likely do you think is it that “CCAR like” requirements will emerge for non-SIFIs within three to five years (e.g., from state regulators, rating agencies or shareholder expectations)?

12

1 2 3

19%25%

56%

1. Very likely

2. Somewhat likely

3. Not likely

Group discussion and audience polling

Polling Question – VM-22 For which of the following products could current reserving methodology be improved (choose all that apply)?

15

1 2 3 4

27%

63%

27%29%

1. SPIAs

2. Jumbo Annuities

3. Deferred Annuities

4. GLIBs

Polling Question – VM-22 In your opinion, should VM-22 be formulaic of principles-based?

16

1 2 3

13% 11%

77%1. Formulaic

2. Principles Based

3. Depends

Polling Question – VM-22 If principles-based, should it use the Representative Scenarios Method (RSM), deterministic, or stochastic?

17

1 2 3 4

52%

7%

30%

11%

1. RSM

2. Defined Deterministic

3. Stochastic

4. Depends

Polling Question – Valuation rates Are the current annuity valuation rates working well?

19

1 2

74%

26%

1. Yes

2. No

Polling Question – Valuation rates Should there be multiple SPIA valuation rates, e.g., by age, gender, duration bucket, etc.?

20

1 2

22%

78%

1. Yes

2. No

Polling Question – Valuation rates Should valuation rates be fixed at issue or ‘unlocked’?

21

1 2 3

18%

36%

46%

1. Set at Issue

2. Unlocked

3. Depends

Polling Question – Valuation rates How often should valuation rates be updated?

22

1 2 3 4

43%

0%

15%

43%

1. Yearly

2. Quarterly

3. Monthly

4. More frequently than monthly

Polling Question – Valuation rates Is the current time horizon for averaging the yield index (Moody’s) appropriate?

23

1 2

67%

33%

1. Yes

2. No

Polling Question – Future of annuity valuation Of the following, which upcoming development will have the biggest impact on your company or firm?

25

1 2 3 4 5 6

2%

21%

2%

25%

9%

42%

1. AG 33 changes

2. AG 43 and C3 Phase 2

3. VM-22

4. ORSA

5. CCAR

6. Other

Polling Question – Future of annuity valuation Have you increased or expect to significantly increase staffing levels to meet upcoming annuity valuation requirements?

26

1 2

55%45%

1. Yes

2. No

Polling Question – Future of annuity valuation Have you made or expect to make significant technology and / or software investments to meet upcoming annuity valuation requirements?

27

1 2

30%

70%

1. Yes

2. No

Polling Question – Future of annuity valuation Overall, do you think that annuity valuation requirements are headed in a sustainable direction with sufficient balance between transparency, accuracy, auditability, consistency and comparability?

28

1 2

61%

39%

1. Yes

2. No

Upcoming Developments in Annuity Valuation

August 31, 2015

Guillaume Briere-Giroux, FSA, MAAA, CFA

Chris Conrad, FSA, MAAA