This document provides an overview of topics related to principles-based reserving (PBR) for life insurance products. It begins with a summary of key changes under PBR, including updates to product exclusion tests, reserve methodology, and reporting requirements. It then summarizes results from a Society of Actuaries survey on companies' awareness and preparedness for implementing PBR. Key areas discussed include mortality assumption setting, implications for product development, and resource needs. The document concludes with an invitation for questions and contact information for follow up.

1. Tim Cardinal
FSA, MAAA, CERA, MBA
March 23, 2016
Chicago Actuarial Association
He Jiang
Research Assistant
University Of Illinois

2. It’s “Official”
pending
substantially similar

3. What’s NEW ???

4. Bypass product exclusion tests
Premium threshold
RBC threshold
No material ULSGs
Reserve methodology = CRVM
Reporting requirements
Companywide Exemption

5. SET ratio is now 6.0% (Stochastic Exclusion Test)
Use of company’s Asset Adequacy models to
calculate ratios
SET
4% Floor
Nonforfeiture rate ≥ 4%
To comply with Internal Revenue Code

6. Deterministic Reserve
Permitted alternative methodology
Direct Iteration Method
Mortality Tables
2017 CSO
2015 VBT

7. Clarification of deferred premium asset
Clarifications to policy loan cash flows
Pre-tax IMR
Mortgage risk classifications
Investment spreads
Mortality margins
Underwriting Criteria Score
Other
Other & Updates

8. https://www.soa.org/files/research/exp-study/2015-mipbr-report.pdf
 Published June 2015, conducted ~ June 2014
 53 respondents - 15 expected to be exempt
Overview/Awareness
 SOA PBA Implementation Guide
 29 aware, 8 familiar with
https://www.soa.org/Files/Research/Projects/research-2013-pba-implementation-guide.pdf
 ASOPs
 26/30/33 had read exposed PBR for Life Products / exposed Modeling /
Credibility ASOPs
 Timeframe: 12-24 months from beginning steps to implement
 13% / 34% had informed Board / Senior Management of increased
responsibilities under PBR
SOA-NAIC Survey

9. Resources
 Nearly all believe system updates are needed to implement PBR
 30% / 40% substantial updates needed to pricing / valuation
 26/30/33 had read exposed PBR for Life Products / exposed Modeling /
Credibility ASOPs
 Majority anticipated a moderate increase in staffing, reallocation of
existing staffing, and/or increased use of consultants and software
 16% / 0 % had had developed training plans for actuarial / non-actuarial
staff in preparation for implementing PBR
 28 /15 anticipated purchasing software / using home grown
 Majority had NOT determined cost of implementation/ongoing costs
Survey Highlights

10. Mortality Assumption Setting and Modeling
 Most anticipated changes to assumption setting process
 Credibility, documentation, margin setting and approval
 Most indicated completing mortality studies at least annually
 Somewhat prepared to complete studies to extent required by PBR
 More than half had NOT determined any of the pieces needed to
perform the process needed to calculate VM-20 mortality
 Only half reported modeling documentation was adequate
Survey Highlights

11. Survey Highlights
Product Development Implications
 Fair amount of uncertainty re: PBR impact on product offerings
 Very few had discussed design/pricing implications with sales & marketing
 < 40% had started discussions between pricing and valuation

12. Resources I

13. Resources II

14. 20 Year Level Term
ART renewal
Face = $1 million
Issued to male age 40 nonsmoker
Post-level gross premium is valuation mortality, year 21 gross premium = $4,970
Valuation Basis
2017 CSO M/F S/NS ALB Ultimate 5% semicontinuous, annual mean reserve
First year valuation benefit cost = $1,425
Any deviations from these parameters are provided just in time with the
experiment description.
Term NPR Lab Policy
A few excerpts from:
PBA Training I: Overview and Term
Term Net Premium Reserve (NPR) Exploration Lab
Copyright © 2015 Actuarial Compass LLC. All Rights Reserved
Part II

15. So your intuition would say it looks like this...
And as we raise our level period Gross Premium we would expect….?
600
1,100
1,600
2,100
2,600
3,100
5 10 15 20 25
NPR
(in $ by Policy Year)
NPR is just like Triple X, just a smaller hump. Right?

16. We compare 7 trial results using gross premiums: $300, $400, $500, $600,
$700, $800, and $900. No other variables are being changed.
Hypothesis
1. Terminal reserves for the 7 trials will ____ (in order of trials 1 to 7).
(A) be equal
(B) increase
(C) decrease
(D) increase then decrease
(E) decrease then increase
NPR Experiment 1 - Initial Premium

17. NPR Experiment 1 - Initial Premium
600
1,100
1,600
2,100
2,600
3,100
5 10 15 20 25
NPR
(in $ by Policy Year)
300
400
500
600
700
800
900
Half cx

18. This experiment varies the initial level period gross premium. We compare 4
trial results using gross premiums: $600, $1,200, $1,800, and $2,400. No
other variables are being changed.
Hypotheses
1. Terminal reserves for the 4 trials will ___ (in order of trials 1 to 4).
(A) be equal
(B) increase
(C) decrease
(D) increase then decrease
(E) decrease then increase
NPR Experiment 2 - Initial Premium Part II

19. 600
1,100
1,600
2,100
2,600
3,100
3,600
4,100
5 10 15 20 25
NPR
(in $ by Policy Year)
600
1,200
1,800
2,400
NPR Experiment 2 - Initial Premium Part II

20. 60%
70%
80%
90%
100%
110%
120%
130%
140%
150%
160%
5 10 15 20
NPR Ratio To (Trial 600)
(in % by Policy Year)
600
1,200
1,800
2,400
NPR Experiment 2 - Initial Premium Part II

21. We compare 7 trial results using different gross premiums: $2,025,
$2,050, $2,075, $2,100, $2,125, $2,150, and $2,175. No other variables
are being changed.
Hypotheses
1. Terminal reserves for the 7 trials will ___ (in order of trials 1 to 7).
(A) be equal
(B) increase
(C) decrease
(D) increase then decrease
(E) decrease then increase
3. The maximum $2,175 NPR over all policy years is _________ the
maximum $2,025 NPR.
(A) 75%-85%
(B) 100%
(C) 105%-115%
(D) 140%-150%
Homework: NPR Experiment 3 - Initial Premium Part III

22. DR Experiment 2 - Bühlmann Credibility Factor
Hypotheses
1. For the 10 year block in policy years 3-8, (trial 94-95%’s NPR+DPA) /
(trial 83-87%’s NPR+DPA) is in the range _______.
(A) 0-5% (B) 5-10% (C) 10-15% (D) 15%+
3. For the 10&20 year block, the number of years using a credibility
factor of 28-32% instead of 93-100% increases the minimum reserve
is in the range _______.
(A) 1-3 (B) 4-6 (C) 7-9 (D) 10-12
Experiments 2 explores mortality margins and credibility factors using the
Bühlmann credibility method. We compare 11 trials. No other variables are
being changed. Margins vary by attained age. The margins at ages 0-45 for
the trials are:

23. 0
200
400
600
800
1,000
1,200
1,400
1,600
1 3 5 7 9
DR+DPA and NPR
(in $ by Policy Year)
33-37% 48-52% 58-62% 68-72%
78-82% 83-87% 90-91% 92-93%
94-95% 96-97% 98% NPR
Bühlmann Credibility Factor – 10 Year Term

24. 40%
60%
80%
100%
120%
140%
160%
180%
1 3 5 7 9
DR+DPA: Trial N / Trial 83-87%
(in % by Policy Year)
33-37%
48-52%
58-62%
68-72%
78-82%
83-87%
90-91%
92-93%
94-95%
96-97%
98%
Bühlmann Credibility Factor – 10 Year Term

25. 0
1,000
2,000
3,000
4,000
5,000
6,000
1 3 5 7 9 11 13 15 17 19
DR+DPA and NPR
(in $ by Policy Year)
33-37% 48-52% 58-62%
68-72% 78-82% 83-87%
90-91% 92-93% 94-95%
96-97% 98% NPR
Bühlmann Credibility Factor – 10&20 Year Term
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
1 3 5 7 9 11 13 15 17 19
DR+DPA and NPR
(in $ by Policy Year)
33-37% 48-52% 58-62%
68-72% 78-82% 83-87%
90-91% 92-93% 94-95%
96-97% 98% NPR
20 Year Term

26. 90%
91%
92%
93%
94%
95%
96%
97%
98%
99%
100%
1 3 5 7 9 11 13 15 17 19
DR+DPA: Trial N+1 / Trial N
(in % by Policy Year)
33-37%
48-52%
58-62%
68-72%
78-82%
83-87%
90-91%
92-93%
94-95%
96-97%
98%
Bühlmann Credibility Factor – 10&20 Year Term

27. Part III: Discussion Topics
Assumption Setting and Input
Models and Uses
Output
Governance / Regulatory
PBA Strategy / Planning

28. Contact Information
Tim Cardinal
tcardinal@actuarialcompass.com
513.607.3019
Questions …