1. PBR – The Latest Developments
A presentation to Actuaries’ Club of Hartford & Springfield
By Kim Steiner
May 22, 2018
© 2018 Willis Towers Watson. All rights reserved.

2. Agenda Background 3 Potential Challenges 8 Valuation Manual Updates 19
Conclusions 21
© 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

3. Background
© 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

4. Minimum reserve under VM-20
The maximum of three components is the minimum reserve under VM-20
Deterministic Reserve
A gross premium reserve that uses the company investment strategy under a prescribed economic scenario. Present values use discount rates based on projected net earned rates.
Stochastic Reserve
Up to 10,000 scenarios from prescribed ESG. Calculate Greatest Present Value of Accumulated Deficiencies for each scenario. Discount rate is 105% of one-year Treasury rates. Stochastic Reserve based on CTE (70).
VM-20 Minimum Reserve
Net Premium Reserve
A “formulaic” type reserve intended to serve as the “floor” reserve for any specific policy. Separate calculation for ULSG vs. term products. Defaults to current CRVM for other products.
Just a quick introduction to level-set
VM-20 is prospective, applying to new business only, with the exception of some ULSG products
Exclusion tests can provide relief from having to calculate the deterministic and stochastic reserve
© 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

5. What you need to know PBR was effective January 1, 2017
Companies have a three year transition period to implement PBR, PBR is mandatory beginning January 1, 2020
Implementation during the transition period can occur by product
Companies may move to the 2017 CSO table without implementing PBR
Small companies may be exempt from PBR
As of July 20, 2017 the Valuation Manual has been adopted by 47 states
AK, MA, and NY have not adopted
NY has announced it will adopt PBR in 2018
MA has introduced legislation to adopt PBR
© 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

6. Implementation status
The SOA released its “Report of the Society of Actuaries 2016 Mortality & Other Implications of PBR (VM-20) Survey – Part 2”
72 companies participated in the survey
15 survey respondents indicated that they would be adopting PBR for some policies in 2017
10 expect to value only term plans
4 expect to value only UL plans
1 expects to value both term and UL
The leading reasons for delaying adoption were:
Electing the three year transition period
Use of the small company exemption
Uncertainty about the tax reserve impact
15 respondents intend to ceded business to captives after January 1, 2017
32 respondents plan to use the 2017 CSO for valuations in 2017, while 19 intended to use the 2017 CSO for determining minimum cash values
Still unclear how the industry view will change with tax reserve clarity
© 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

7. Implementation Why it is necessary to start now
The clock is ticking on the three year transition period
The implementation process requires more time and resources than expected. Additionally, PBR calculations involve a significant amount of additional work, in particular setting up models, developing/updating prudent estimate assumptions (especially mortality), preparing the PBR Actuarial Report, and in simply doing the recurring work for each valuation date. Additional resources may be required, in addition to training current resources
Significant thought must be given to assumption setting and implementation strategy – the absence of this can lead to suboptimal reserve levels
A strong implementation plan is needed to layout the order of implementation and necessary implementation steps – this requires significant thought and analysis
Robust experience studies are necessary to support development of prudent estimate assumptions
Coordination among many areas is required – valuation, pricing, experience studies, IT to name a few
PBR puts a lot more “pressure” on models – additional model development and governance may be required
© 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

8. Potential Challenges
© 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

9. Potential challenges Form of company experience table
An aggregate % of an underlying table may not properly capture emerging experience.
Our recommendation:
Where available consider using a company specific table, with adjustments, instead of an industry table.
Note: Figures are illustrative, not based on any company experience
© 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

10. Credibility impacts margins and sufficient data period
Potential challenges
Aggregation for credibility
What the manual states
The regulations allow for the setting of assumptions for mortality by segments; this does not necessarily require setting of credibility on a segment level
9.C.4.b - “Credibility may be determined at either the mortality segment level or at a more aggregate level if the mortality for the sub-classes (mortality segments) was determined using an aggregate level of mortality”
How to interpret
Aggregation for credibility is allowed. Weighted average segment level assumptions should not result in an overall assumption less than would have been assumed on the aggregate data; the relationship between developed tables should make sense (NS/SM)
Credibility impacts margins and sufficient data period
© 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

11. Potential challenges Appropriate amount and type of experience
Balance between
Using all available experience (to increase credibility and sufficient data period)
Using experience that is relevant to the particular block of business
Questions to determine the relevance of available experience
Similar risk class structure?
Similar underwriting era?
Any significant underwriting concessions during data period?
Similar product design?
Similar distribution channel?
Should conversions, PLTP, and/or other special business be included?
© 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

12. Potential challenges Projecting mortality
The assumption will change as your company collects experience
Credibility will improve as the company collects more claims data
Sufficient data period will also be increasing
Additional years of historical mortality improvement will be allowed
Considerations in how to project the assumption
What is a reasonable estimate of future claims experience? Best estimate mortality?
What changes will be necessary to the inner and outer loop projection?
How material are these changes to my profit metrics?
What simplifications can be made?
© 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

13. Potential challenges RR Scoring RR Tool Selecting the RR table
What to do about underwriting criteria not included?
What if company markets or distribution channels are outside industry norms?
How to handle business not subject to full underwriting?
Can you adjust for non-tobacco criteria?
Selecting the RR table
What if RR score and prevalence don’t line up with company experience?
What can I use as a basis for adjustments?
What do I need to document?
© 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

14. Potential challenges Non Guaranteed Elements NGE Determination
Determine how assumptions will impact the level of NGEs
Include COIs, crediting rates, etc.
Modeling NGEs
Would the company make changes in response to the modeled prudent estimate assumptions?
When would the change be made?
Can the change to NGE be justified?
© 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

15. Potential challenges Reinsurance Guidelines Modeling Reinsurance
Assumes that the counterparty is a reasonable entity
What contractual tools does the reinsurer have to adjust for poor performance?
Modeling Reinsurance
When would these actions occur?
What actions would the ceding company take?
Can they be justified?
© 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

16. Potential challenges Term Business Level Term Product Conversions
Analyze later durations in the level term period to ensure consistency with low lapse rates observed in industry data
A simple increase may not be appropriate for margins
Capture appropriate characteristics such as premium jump
Appropriate margin will be determined by whether the company has profits or losses in post level term period
Conversions
Companies should rely on their own experience where credible
When using industry experience company should make adjustments for product differences and company experience
Model the liability of the conversion policy, considering materiality
© 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

17. Potential challenges ULSG Business Lapse Premium Persistency
Consider the value of guarantees
Dynamic policyholder behavior
Robust experience studies
Canadian Term to 100 experience
Premium Persistency
Level and persistency
Robust premium experience studies
Run required sensitivities
Funding scenarios
© 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

18. Impact on your business
Product profitability and competitiveness will be impacted by underlying factors of PBR (e.g., products with more credible experience have the potential for lower reserves)
May result in changes to the level of post level term premiums
Simpler ULSG product designs may emerge
Impact of streamlined underwriting on assumption setting will need to be considered
May be pressure on reinsurers to offer lower guarantees
Statutory reserve volatility will increase
Small companies opting for the small company exemption will have limitations placed on their ULSG offerings
© 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

19. Valuation Manual Updates
© 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

20. Valuation Manual Changes
Rider clarifications
If integrated with base policy, need to value together
If other, may value separately
Starting asset estimate guidance
Smooth maximum number of years to grade to the from company to experience mortality
Implicit Margin – quantification and impact on explicit margins
GI Mortality Tables
VM-31 clarification to include exclusion testing
SET – method selection
RBC requirement for small company exemption
ULSG – inclusion of all secondary guarantees
VM-51 clarifications
Credibility aggregation
Clarification of qualified actuary
© 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

21. Conclusions
© 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

22. PBR reserves take thought and time!
Conclusion
PBR reserves take thought and time!
Carefully consider NGEs and assumptions
Valuation Manual continues to evolve, so stay current
© 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

23. Contacts Kim Steiner, FSA, MAAA Director
175 Powder Forest Drive, Weatogue, T E
© 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.