Guaranteed issue valuation Table discussion Mary Bahna-Nolan, MAAA, FSA, CERA Chairperson, Academy Life Experience Committee and SOA Preferred Mortality Project Oversight Group (“Joint Committee”) Life Actuarial (A) Task Force Conference Call – February 2, 2018 ©2018 Society of Actuaries. All rights reserved.

Three items from LATF regarding the Guaranteed Issue (GI) tables Definition of GI in response to CA DOI submission/request for change In response to Reinsurance Group of America’s comment letter, follow up to see what could be done to reconcile differences in mortality levels and concern of submitter that business may not truly meet the definition of GI What would reserves look like using 1980 CSO Ultimate tables rather than the proposed GI CSO Table? Would this cover the loading concern for certain blocks of business?

The NAIC Joint Committee previously proposed both a basic (unloaded) and loaded form of a GI table Data from 11 contributing companies; The GI proposed tables were a good fit for data submitted to the study but data was heavily weighted to direct distribution The A/E with the expected basis equal to the basic GI table ranged from 79% to 250.1% To cover the mortality of 70% of the contributing companies, a loading or margin of approximately 56% would be required; to cover one additional company, a loading of nearly 118% would be needed The existing (and much lower) margin proposed in the exposed GI loaded table covered ~98% of the exposure within the study During the exposure period, one commenter raised concerns that the mortality level may not be sufficient for all GI forms of insurance. Further analysis was performed by the SOA to confirm the table is a good fit for the data submitted and verified that the data submitted was indeed guaranteed issue per the definition provided.

LATF requested further analysis to determine the impact to GI reserves of alternate table structures (e.g., 1980 CSO Ultimate tables) or whether a different loading level would produce reserves to cover a wider range of experience Using a model office with a single year of issues, both mean and mid-terminal reserves were compared for the following: Originally proposed table: GI loaded table (2017 GI basic table with 2017 CSO loading) 1980 CSO Ultimate 2001 CSO Ultimate 2017 CSO Ultimate 2017 GI basic table with 55% level loading 2017 GI basic table with 75% level loading GI product was representative of competitive products in the market, including gender specific, uni-smoke, demographic mix and benefit features such as return of premium for deaths occurring in early durations. The model office assumed $1 million of premium issued under a mix of business with 19% of the issues on annual mode (thus, mean reserves and mid-terminal reserves are the same) and 81% on a monthly mode.

The mortality pattern and level for GI business is very different from the fully underwritten business underlying the CSO tables The GI with 2017 CSO loaded mortality rates (& other loadings) are significantly higher than both the 2001 CSO and the 2017 CSO Ultimate. This pattern recognizes the anti-select mortality associated with GI issues in the early years post issue.

While the mortality pattern and level for GI business is very different from the fully underwritten business underlying the CSO tables, the impact on reserves is less dramatic Despite the mortality differential between the various tables, the mean reserves do not differ significantly between the various tables, with the exception of the first 5-10 years.

Mid-terminal reserves with modal unearned premium show a similar pattern as the mean reserves, though the reserve differentials are smaller The higher the mortality level, the higher the net premium; this increases the reserves in early years but reduces them in later years. While there is significant variation in the reserves in the first 10 projection years, there is much less of a difference in later years, even with the higher mortality levels.

GI development considerations While a higher margin could be used, it would then be nearly double the level of mortality of certain carriers It is difficult to know or quantify the specific mortality for this segment of the market

Considerations for GI Valuation (and Non-forfeiture) Basis (1 of 2) Without further guidance for GI mortality, reserves and non-forfeiture for GI business will be based on the 2017 CSO plus any additional asset adequacy reserves beginning in 2020 Some companies have already begun implementation of the 2017 CSO and have indicated it would be problematic to implement a different underlying basis. Though the 2001 CSO might not be problematic for reserves, it might be for cash values, for companies that have already begun implementing the 2017 CSO. Introducing a new GI-specific table would lead to multiple implementations for GI carriers as they implement the 2017 CSO then the GI tables a few years later (e.g., 2017 CSO in 2020; new GI basis in 2023)

Considerations for GI Valuation (and Non-forfeiture) Basis (2 of 2) Despite the mortality differentials, the reserves do not vary significantly after the first 10-15 projection years The reserves using either the 2017 CSO table or the 2001 CSO table will understate the reserve in the early durations as the mortality ignores the anti-select early duration mortality The reserve using the exposed GI-specific CSO loading will likely result in a lower reserve than either the 2017 CSO or the 2001 CSO in later durations. A substantial loading to the GI basic experience (in excess of 55%) may result in excessive reserves for certain large carriers for certain years

Recommendation While a specific valuation table for GI business is preferable, it is not necessarily practical given the timing and level of differentiation from one of the existing mortality basis. Therefore, one of three approaches is recommended: Keep the reserve bases as the 2017 CSO Ultimate, but add a percentage loading or scalar to the reserve that grades off over 10 years to reflect the anti-select mortality pattern of GI-issued business exhibited in the underlying industry study. Multiplier to be finalized if LATF chooses this option. Keep the reserve basis as the 2017 CSO Ultimate and determine any excess reserves via asset adequacy testing. Require reserving actuary to use professional judgement in adding additional margin to table if he/she determines the mortality level is inadequate for his block of business.

Contact Information Mary Bahna-Nolan, MAAA, FSA, CERA Chairperson, Academy Life Experience Committee and SOA Preferred Mortality Project Oversight Group (“Joint Committee”) Ian Trepanier Life Policy Analyst American Academy of Actuaries Trepanier@actuary.org