1. U.S. GAAP Loss Recognition Testing: Actuarial Science Session
Lisa Kuklinski
SVP & US Chief Actuary, MetLife
October 26, 2017
Hello everyone. Today, I want to take you through some of the topics that were covered at the most recent Leadership Group Meeting.
During the meeting, Chairman, President and CEO Steve Kandarian provided his perspective on our 2016 performance and our company’s transformation.
Then, Chief Strategy Officer Rebecca Tadikonda explained how we are using value agendas as one tool to drive strategy execution across the company.
Finally, Todd Katz, head of our Group Benefits business in the U.S. talked about how his team is driving value as a tangible example of our strategy in action.

2. Agenda Overview Theory – Basics Theory – Advanced Practice
Setting Assumptions
Future of LRT
Who we are and what we do
How do we:
Go to market
Design a product – the customer offering
Price a product
How do we know product is performing as expected?
What can we do to manage the inforce?
A lot of data, calculations – many pieces need to come together
What are the actuary’s responsibilities
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3. Overview

4. U.S. GAAP Valuation Management reporting Best-estimate
Background
Management reporting
Best-estimate
Matching revenues with cost
Deferred Acquisition Costs
Before we go into EV on inforce, let’s talk about reserves…
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5. U.S. GAAP Valuation Annual comprehensive assumption review:
Different accounting bases, but all assumptions are reviewed annually
Accounting Basis
Product Examples
Assumptions
FAS60
FAS97 Limited Pay
Term Insurance
Disability
Single Premium Immediate Annuities
Locked in at issue
Not changed unless reserves are insufficient to produce earnings under current “best estimate” assumptions
FAS97
Deferred Annuities
Universal Life
Dynamically unlocked
Also tested for recoverability and sufficiency
Annual comprehensive assumption review:
Are reserves sufficient?
Stat is basis of EV!
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6. Theory – Basics

7. Premium Deficiency Testing
Recoverability testing on current year issues
Loss Recognition Testing on all issue years
Profits Followed by Losses testing (PFBL) on all issue years
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8. Recoverability Testing
Are current year issues profitable? Are acquisition expenses recoverable?
Current year issues (e.g. 2017)
Test: PV of Gross Premiums >= PV of Future Benefits and Expenses
Best estimate assumptions with no Provision for Adverse Deviation
Maintenance expenses only
Pass? OK to Defer Acquisition Expenses
Fail? Cannot Defer Acquisition Expenses
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9. Recoverability Testing – Example 1
2017 Issues Pass the Test
Year
Gross Premiums
Benefits
Maintenance Expenses
Commissions 1
100 25 10 50 2 3 75 4 5
125 PV
500
375
PV of Gross Premiums
PV of Benefits and Exp
475
Margin
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10. Recoverability Testing – Example 2
2017 Issues Fail the Test
Year
Gross Premiums
Benefits
Maintenance Expenses
Commissions 1
100 30 10 40 2 60 3 90 4
120 5
150 PV
500
450 50
PV of Gross Premiums
PV of Benefits and Exp
540
Margin
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11. Loss Recognition Testing – FAS60
Is there a probable loss on the entire portfolio of business?
All issue years
Test: Current Net Reserve >= Gross Premium Reserve
Current Net Reserve = Benefit Reserve + Expense Reserve – DAC
Gross Premium Reserve = PV Future Benefits and Expenses – PV Future Gross Prem
Best estimate assumptions with no Provision for Adverse Deviation
Pass? OK
Fail? Loss Recognition Event
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12. LRT Testing – Example 1 Portfolio of Business Passes LRT Year
Gross Premiums
Benefits
Maintenance Expenses 1
500
100 50 2
200 3
300 4
400 5 PV
2,500
1,500
250
Current Net Reserve
Gross Premium Reserve
(750)
Margin
800
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13. LRT Testing – Example 2 Portfolio of Business Fails LRT Year
Gross Premiums
Benefits
Maintenance Expenses 1
500
200 50 2
400 3
600 4
800 5
1000 PV
2,500
3,000
250
Current Net Reserve
Gross Premium Reserve
750
Margin
700
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14. Loss Recognition Event – What to Do?
If there is a loss,
Write off DAC
If there is still a loss,
Increase reserves – to the point where deficiency no longer exists
“Unlock” assumptions
New assumptions are now locked in
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15. Premium Deficiency Testing – FAS97
Is there a probable loss on the entire portfolio of business?
All issue years
Test: PV of Future Gross Profits >= Net GAAP Asset
Future Gross Profits = PV of Future Revenues* – PV of Future Benefits and Expenses*
Net GAAP Asset = DAC + UREV + SOP03-1, etc.
Simplified Test: Is Amortization Ratio < 1?
* Non-deferred
Pass? OK
Fail? Loss Recognition Event
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16. Theory – Advanced

17. Profits Followed By Losses
Required by FAS60, paragraph 37
Even if pass LRT, if pattern of earnings is
Profits in early years
Losses in later years
Must increase liability to offset future losses
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18. Profits Followed By Losses – What To Do
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19. Aggregation Depends on how business is Acquired Serviced Managed
Can we use surplus in one product to offset deficiencies in other products?
Depends on how business is
Acquired
Serviced
Managed
Within legal entities
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20. Sensitivity Tests Not required
But, helpful to understand margins in different environments
Interest rates?
Liability assumptions?
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21. Practice

22. Best Practices for Liability Models
Results are only as good as your model
Static Validation
Dynamic Validation
Year-over-year change in margin attribution
Contribution from new business
Impact of mortality / loss ratio assumption changes
Impact of persistency assumption changes
Impact of expense changes
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23. Best Practices for Asset Models
Variety of possible approaches
Interest rates should reflect best-estimate of current and future earned rates on investment assets
Set assets = GAAP reserves
Consistent allocation
Assume reinvestment based on best-estimate yield curve
Possible simplifications:
For example, current portfolio rates
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24. Setting Assumptions

25. Types of Assumptions All best-estimate, reasonable expectations
Economic
Interest Rates
Expenses
Inflation
Biometric
Mortality
Morbidity
Policyholder Behavior
Lapse
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26. Experience Studies Actual to Expected Credibility Predictive Modeling
Behavioral Economic
Dynamic Functions

27. Credibility Limited Fluctuation Credibility Theory (LFCT)
Credibility is used to limit the effect random fluctuations in data can have on an estimate
Full credibility = 1,082 occurrences (deaths, lapses, etc.) using 90% probability of <5% error
Credibility Weighted A/E = (Credibility % * A/E) + (1 - Credibility %) * 100%
% Error
Probability
2.5% 5%
10%
90%
4,329
1,082
271
95%
6,146
1,537
384
99%
10,616
2,654
663

28. Credibility Other Methods – Bühlmann Credibility
Credibility = N / (N + K)
Where: N = Number of observations
K = Expected process variance / Variance of hypothetical mean
= E[ Var(X l θ) ] / Var[ E(X l θ) ]
LFCT is generally accepted as a credibility standard due to its simplicity compared to Bühlmann Credibility.

29. Credibility
Estimated Years to Reach Full Credibility in a Mortality Study*
Assumptions:
1. Average mortality rate = 0.07%
2. No non-death terminations
3. Using LFCT or “Classical Credibility”
*Actual experience will vary based on demographic mix, product features, lapse/surrender experience, etc.
New Issues
per Year
Full Credibility
at Year X
75% Credibility
10,000 33 20
25,000 15 9
50,000 6
100,000 4

30. Future of LRT

31. FASB Changes to U.S. GAAP
2020? 2021? 2022?
Will require major changes to models and processes
Assumptions will no longer be “locked in”
Annual unlocking
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32. Q&A