1. Principles-based Reserves and RBC Iowa Actuaries Club February 28, 2006 David E. Neve Co-chair, Academy Life Reserves Work Group

2. Objectives of this Session 1. Define “Principles-based” 2. Discuss Academy’s Principles-based initiative (PBA) 3. Provide Summary and Update of PBA to Life Products 4. Briefly Summarize ACLI’s “Interim Solution” 5. Briefly Describe work underway to develop new mortality tables.

3. Definition of Principles-based 1. Captures all of the material financial risks, benefits, and guarantees associated with the contracts, including the ‘tail risk’ and the funding of the risks. 2. Utilizes risk analysis and risk management techniques to quantify the risks. This may include stochastic models or other means of analysis that properly reflect the risks of the underlying contracts.

4. Definition of Principles-based 3. Incorporates assumptions and methods that are consistent with, but not necessarily identical to, those utilized within the company’s overall risk assessment process. 4. Permits the use of company experience to establish assumptions for risks over which the company has some degree of control or influence. 5. Provides for the use of assumptions set on a prudent best estimate basis that contain an appropriate level of conservatism when viewed in the aggregate.

5. In contrast, a “rules-based” approach: Relies on a static formula that may not capture all of the risks of the contract. Relies on a static formula that may not capture all of the risks of the contract. Uses prescribed valuation assumptions that are the same across all companies, regardless of differences in the risk profile of companies. Uses prescribed valuation assumptions that are the same across all companies, regardless of differences in the risk profile of companies. Definition of Principles-based

6. 1. Is consistent with the global trend toward Enterprise Risk Management 2. Relies more on actuarial judgment 3. Requires more sophisticated tools 4. Requires that a stronger regulatory governance process be in place, including independent review Observations of moving to a Principles-based approach (PBA)

7. Why Do We Need PBR? Current valuation system is broken – we have been using band-aids as new products come out 1. Current valuation system is broken – we have been using band-aids as new products come out 2. Reserves are too high for some products – too low on others 3. Capital requirements and reserves need to take into account actual risks of products and company

8. Evolution Asset Adequacy Testing Asset Adequacy Testing Equity Indexed Annuity Regulation Equity Indexed Annuity Regulation C-3 Phase I C-3 Phase I C-3 Phase II C-3 Phase II

9. Academy’s Principles-based Initiative Governance Issues and Overall direction: SVL II Work Group Reserve work groups: Variable Annuities: VACARVM Life Products: LRWG Other Annuities: ARWG Coming soon: LTC RBC work groups: Fixed Annuities: C3 Phase I Variable Annuities: C3 Phase II Life Products: C3 Phase III

10. Educational Opportunities 1. Webcasts: Academy has committed to a one hour webcast after each quarterly NAIC meeting. Format: presentations, ask questions. 2. Academy website: www.actuary.org/risk.asp www.actuary.org/risk.asp – Gives overview of projects – Provides links to documents Seminars Seminars 3. Seminars

11. Life Reserve Work Group Overview and Update

12. LRWG Charge and Scope Charge: Develop a proposal for a new Principles-based statutory reserve method for life products Develop a proposal for a new Principles-based statutory reserve method for life products Coordinate with C3 Phase III work group (which is working on RBC requirements for life products) Coordinate with C3 Phase III work group (which is working on RBC requirements for life products)Scope: Initially, scope was limited to UL Initially, scope was limited to UL Now, scope is all life products Now, scope is all life products

13. Basic Framework Based on Gross Premium Reserve (GPR): Reserve = PV of future benefits and expense (excluding FIT) less PV of future gross premiums Reserve = PV of future benefits and expense (excluding FIT) less PV of future gross premiums Reserve assumptions will be determined for all material risks (mortality, interest, expenses, lapse, premium levels, etc.) Reserve assumptions will be determined for all material risks (mortality, interest, expenses, lapse, premium levels, etc.) Reserve assumptions will include a margin for adverse deviation (not best estimates) Reserve assumptions will include a margin for adverse deviation (not best estimates) Discount rates will be pre-tax Discount rates will be pre-tax

14. Basic Framework (cont) Reserve is the greater of: 1. A deterministic, seriatim, single scenario reserve calculation 2. A stochastically derived reserve (if needed) using a prescribed CTE level Since the stochastic reserve is done in the aggregate, risk offsets between contracts are recognized (but limited).

15. Basic Framework (cont) Deterministic Reserve : Uses a single set of assumptions that is aligned with economic reality, yet still provides an appropriate level of conservatism Uses a single set of assumptions that is aligned with economic reality, yet still provides an appropriate level of conservatism Is not designed to capture tail risk Is not designed to capture tail risk Is subject to a cash surrender value floor on a contract by contract basis Is subject to a cash surrender value floor on a contract by contract basis

16. Basic Framework (cont) Stochastic Reserve: Multiple scenarios will be defined to properly capture the “tail risk” of the contract (risks that have high impact, but low probability) Multiple scenarios will be defined to properly capture the “tail risk” of the contract (risks that have high impact, but low probability) Will use a CTE (conditional tail expectation) level that is set by regulators, such as 65 CTE Will use a CTE (conditional tail expectation) level that is set by regulators, such as 65 CTE Current thinking is that only interest rate movements will be modeled stochastically Current thinking is that only interest rate movements will be modeled stochastically

17. Basic Framework (cont) “Prudent Best Estimate” Assumptions Assumptions will be based on “prudent best estimates” that include a provision for adverse deviation Assumptions will be based on “prudent best estimates” that include a provision for adverse deviation Definition: Conservative end of actuaries best estimate confidence interval Definition: Conservative end of actuaries best estimate confidence interval Since actuarial judgment is involved, will need to set limits and controls on setting assumptions Since actuarial judgment is involved, will need to set limits and controls on setting assumptions

18. Basic Framework (cont) Asset Model Needed to Project Cash Flows Needed for both Deterministic and Stochastic Reserve Needed for both Deterministic and Stochastic Reserve Asset Model is used to determine: Asset Model is used to determine: Discount rates for GPR Discount rates for GPR Earned rates for surrender benefits Earned rates for surrender benefits Discount rates for GPR calculation: Discount rates for GPR calculation: Based on projected portfolio rates in each year Based on projected portfolio rates in each year New money treasury rates will be prescribed for Deterministic Reserve; modeled for Stochastic New money treasury rates will be prescribed for Deterministic Reserve; modeled for Stochastic

19. Principles-based versus Asset Adequacy Analysis Both involve more actuarial judgment than current “rules-based” valuation approach Both involve more actuarial judgment than current “rules-based” valuation approach Asset adequacy analysis has few limits and controls; actuary has a high degree of discretion in setting assumptions Asset adequacy analysis has few limits and controls; actuary has a high degree of discretion in setting assumptions In contrast, the Principles-based approach will have controls, caps and limits placed throughout the framework In contrast, the Principles-based approach will have controls, caps and limits placed throughout the framework Basic Framework (cont)

20. Challenges Establishing assumption margins (on each assumption and in the aggregate) Establishing assumption margins (on each assumption and in the aggregate) Difficulty of projecting future premium levels for UL Difficulty of projecting future premium levels for UL Criteria to require Stochastic Reserve Criteria to require Stochastic Reserve Treatment of non-guaranteed elements Treatment of non-guaranteed elements Impact on taxes (tax deductibility & 7702 issues) Impact on taxes (tax deductibility & 7702 issues)

21. Major Issues Under Discussion Discount Rate Discount Rate Including Federal Income Taxes Including Federal Income Taxes Allowing full aggregation Allowing full aggregation Gross Premium Valuation vs. PV of greatest accumulated deficiency (VACARVM approach) Gross Premium Valuation vs. PV of greatest accumulated deficiency (VACARVM approach) Stochastic Reserve exclusion Stochastic Reserve exclusion Small Company concerns Small Company concerns

22. Timeline and Deliverables LHATF exposed the proposal for comment at the December 1, 2005 LHATF Winter meeting. LHATF exposed the proposal for comment at the December 1, 2005 LHATF Winter meeting. During 2006, LRWG will assist LHATF in finalizing the details of the proposal (and will assist the C3 Phase III work group to finalize the RBC proposal). During 2006, LRWG will assist LHATF in finalizing the details of the proposal (and will assist the C3 Phase III work group to finalize the RBC proposal). Goal is for LHATF to approve final draft of reserve proposal at December 2006 LHATF meeting, and sends to A Committee for approval Goal is for LHATF to approve final draft of reserve proposal at December 2006 LHATF meeting, and sends to A Committee for approval Begin state-by-state adoption in 2007. Begin state-by-state adoption in 2007.

23. Key Issues Needing Regulatory Attention Development and implementation of an acceptable governance process Development and implementation of an acceptable governance process Make changes to SVL that enable the Principles- based approach to be implemented by Model Regulation and/or Actuarial Guidelines Make changes to SVL that enable the Principles- based approach to be implemented by Model Regulation and/or Actuarial Guidelines Determine specific limits and controls on reserve assumptions and margins Determine specific limits and controls on reserve assumptions and margins Decide if new approach will be applied to inforce contracts, or only applied prospectively. Decide if new approach will be applied to inforce contracts, or only applied prospectively.

24. Determining Assumption Margins

25. Considerations for setting assumption margins under a principles-based system 1. This is a major issue! 2. Regulators need to determine the balance between prescribed standards and actuarial judgment. 3. The LRWG believes there are several reasons why different margins are justified compared to current formulaic approach 4. The LRWG has developed a tool that provides a quantitative comparison of the aggregate impact of all assumption margins on the reserve

26. Reasons for different assumption margins under a Principles-based approach: 1. Assumptions reflect risk characteristics of each company; no need to establish an “industry-based margin” to cover uncertainties between companies. 2. Assumptions are not “locked-in” at issue; less need for a provision for adverse deviation since assumptions can be revised in the future 3. Implicit margins are already built into the methodology Blending to an industry mortality table if experience not fully credible Blending to an industry mortality table if experience not fully credible Removing mortality improvement is a margin Removing mortality improvement is a margin Cash value floor is a margin Cash value floor is a margin

27. Possible approach to compare aggregate impact of all assumption margins The LRWG is exploring is the use of a number we are calling “Z” to provide for the quantitative comparison of the aggregate impact of all assumption margins. It is defined as follows : Z = Reserve held - Best estimate liability Z = Reserve held - Best estimate liability Present value of capital requirement Present value of capital requirement “Z” represents the amount by which the pre-tax return on capital is expected to exceed the return on invested assets: ROC = Z + i (pre-tax) ROC = Z + i (pre-tax)

28. Possible approach to compare aggregate impact of all assumption margins Given this connection with the return on capital, one can determine whether the aggregate impact of all margins are within a reasonable range. Given this connection with the return on capital, one can determine whether the aggregate impact of all margins are within a reasonable range. For these illustrations, the level of capital was set equal to 100% of claims plus 5% of the reserve. For these illustrations, the level of capital was set equal to 100% of claims plus 5% of the reserve. “Z” could be used as a disclosure item to compare the aggregate impact of all assumption margins. “Z” could be used as a disclosure item to compare the aggregate impact of all assumption margins.

29. Modeling Results: 20-year Level Premium Term Product Term Product

30. Modeling Results: 20-year level premium term product Initial results were presented to LHATF in December Overall reserves were lower than current formulaic reserves Overall reserves were lower than current formulaic reserves However, concerns were expressed about the appropriateness of the high reserve levels in the early durations (higher than current formulaic) However, concerns were expressed about the appropriateness of the high reserve levels in the early durations (higher than current formulaic) Upon review, the impact was due to high assumption margins that were used: in early years, impact of high margins has large effect on PV of benefits, but not PV of premiums. Upon review, the impact was due to high assumption margins that were used: in early years, impact of high margins has large effect on PV of benefits, but not PV of premiums. Conclusion: overall margin levels must be carefully considered under the PBA, especially for mortality (e.g. the loadings used for 2001 CSO may be too high.). Conclusion: overall margin levels must be carefully considered under the PBA, especially for mortality (e.g. the loadings used for 2001 CSO may be too high.).

31. Recap of Results from December LHATF Excerpts from Slide 9, of December term presentation Numeric Summary – Impact of all margins on deterministic Reserve gross of reinsurance. Issue Age 45 Issue Age 65 PolicyDuration(EOY) Deterministic Reserve With Margins CurrentFormulaicRatioDeterministic/Formula CurrentFormulaicRatioDeterministic/Formula 1$9,636$0N/A$30,965$0N/A 211,1124,365254%41,72227,874149% 312,7168,646147%53,23455,20096% 414,27212,822111%64,78781,89579% 515,84416,85094%76,149107,82370%

32. Modeling Results: 20-year level premium term product Decided that multiple scenarios using different assumption margins needed to be modeled Decided that multiple scenarios using different assumption margins needed to be modeled Changes Made in Model since December Changes Made in Model since December Policy terminates end of 20 th year (removed option to renew) Policy terminates end of 20 th year (removed option to renew) Increased the premium level Increased the premium level Assumed mortality fully credible (no blending) Assumed mortality fully credible (no blending) Modeled different assumption margins (primarily mortality margins) Modeled different assumption margins (primarily mortality margins) Formulaic Reserves updated to use 2001 CSO Formulaic Reserves updated to use 2001 CSO

33. 20 Year Term Product Description Plan of Insurance:20 Year Level Term Guaranteed Premiums No Renewal Option after 20 yrs. Gender/Issue Ages: Male, 45 and 65 Risk Class: Best Non Smoker Class Premium Information Age 45 Age 65 Annual Rate per $1000 $1.35$11.81 Policy Fee $65.00$65.00 Total Premium $1,000,000 Face $1,415.00$11,875.00 Pre-Tax IRR on Distributable Earnings (1) 10%10% (1) Reflecting capital of 100% of claims and 5% of reserves. Reserves using PBE assumptions

34. Market Perspective Premium Comparison Issue Age 45, Best Class – Annual Premiums for $1,000,000 Face Amount

35. Market Perspective Premium Comparison Issue Age 65, Best Class – Annual Premiums for $1,000,000 Face Amount

36. Five Margin Levels Level 1: Deterministic interest scenario, 2001 CSO mortality margins, 30% lower lapse rates Level 2: Same as level 1, but mortality margin of 9.375 deaths per 1000 divided by e x Level 3: Same as level 1, but mortality margin of 3.5 deaths per 1000 divided by e x Level 4: Deterministic interest scenario, mortality margin of 3.2%, no other margins Level 5: Deterministic interest scenario, mortality margins of 2.1%, 10% lower lapse rates Best Estimate reserve (no margins) is also shown

37. Observations Level 4 and Level 5 margins give a near zero reserve at time 0, which is close to a “no gain or loss at issue” scenario Level 4 and Level 5 margins give a near zero reserve at time 0, which is close to a “no gain or loss at issue” scenario The reserve at the end of the first year always decreases from time 0, due to acquisition expenses The reserve at the end of the first year always decreases from time 0, due to acquisition expenses But the reserve is not “forced” to be zero at the end of the first year, since there is no FPT adjustment as under the current formulaic But the reserve is not “forced” to be zero at the end of the first year, since there is no FPT adjustment as under the current formulaic Cash value floor would come into play (reserve is negative) in early durations for Level 3, 4 and 5. Cash value floor would come into play (reserve is negative) in early durations for Level 3, 4 and 5. Deterministic reserve is about the same as the stochastic reserve. Deterministic reserve is about the same as the stochastic reserve.

38. Observations (cont.) Current formulaic reserves start with small “Z”, but then “Z” gets very large, due to impact of mortality margin on PV of benefits and net premiums. Current formulaic reserves start with small “Z”, but then “Z” gets very large, due to impact of mortality margin on PV of benefits and net premiums. Level 4 and Level 5 margins produce a “Z” value close to 4%, consistent with a 10% IRR assumption (that is, 4% over investment return) Level 4 and Level 5 margins produce a “Z” value close to 4%, consistent with a 10% IRR assumption (that is, 4% over investment return) Levels 1, 2 and 3 margins have significantly higher “Z” values (in excess of 20%). Levels 1, 2 and 3 margins have significantly higher “Z” values (in excess of 20%).

39. 20 Year Term Examples: Deterministic Terminal Reserves at Different Margin Levels Male, 45, Best Class, $1,000,000, Annual Premium of $1,415.00. PolicyCurrent Principles-based with Margins PBA Best Year-EndFormulaic Level 1 Level 2 Level 3 Level 4 Level 5 Estimate At Issue $ 0 $ 6,931 $3,309 $3,309 $1,249 $1,249 $3 $3 $2 $2 $(362) $(362) 1 $ 0 4,785 4,785 947 947 (1,143) (1,143) (2,448) (2,448) (2,436) (2,436) (2,834) (2,834) 2 3,386 3,3865,956 1,888 1,888 (239) (239) (1,618) (1,618) (1,588) (1,588) (2,026) (2,026) 3 6,673 6,6737,081 2,813 2,813 667 667 (760) (760) (717) (717) (1,184) (1,184) 49,8598,214 3,752 3,752 1,591 1,591 130 130 181 181 (309) (309) 512,8929,328 4,699 4,699 2,536 2,536 1,063 1,063 1,118 1,118 611 611 …………………… 1024,14513,5838,5546,5545,2635,2924,791 15 23,686 23,686 13,156 13,156 9,068 9,068 7,653 7,653 6,956 6,956 6,905 6,905 6,567 6,567 Discount Rate Margin DeterministicDeterministicDeterministicDeterministicDeterministicNone Mortality Margin 2001 CSO 0.009375/ex0.0035/ex3.2%2.1%None Lapse Rate Margin 30%30%30%None10%None

40. 20 Year Term Examples: Deterministic Terminal Reserves at Different Margin Levels Male, 45, Best Class, $1,000,000, Annual Premium of $1,415.00.

41. 20 Year Term Examples: Comparison of Z Levels and Deterministic Reserve Margins Male, 45, Best Class, $1,000,000, Annual Premium of $1,415.00. PolicyCurrent Principles-based with Margins PBA Best Z Values Formulaic Level 1 Level 2 Level 3 Level 4 Level 5 Estimate At Issue 4.5%90.7%45.7%20.0%4.5%4.5%0.0% At 10 Years 228.4%103.7%44.4%20.8%5.6%5.9%0.0% Discount Rate Margin DeterministicDeterministicDeterministicDeterministicDeterministicNone Mortality Margin 2001 CSO 0.009375/ex0.0035/ex3.2%2.1%None Lapse Rate Margin 30%30%30%None10%None

42. 20 Year Term Examples: Deterministic Terminal Reserves at Different Margin Levels Male, 65, Best Class, $1,000,000, Annual Premium of $11,875.00. PolicyCurrent Principles-based with Margins PBA Best Year-EndFormulaic Level 1 Level 2 Level 3 Level 4 Level 5 Estimate At Issue $0 25,916 25,916 7,717 7,717 3,849 3,849 (73) (73) 346 346 (3,966) (3,966) 1$0 18,732 18,732 (438) (438) (4,422) (4,422) (8,631) (8,631) (8,144) (8,144) (12,734) (12,734) 2 22,483 22,483 29,126 29,126 8,862 8,862 4,741 4,741 187 187 758 758 (4,129) (4,129) 3 44,193 44,193 39,322 39,322 18,067 18,067 13,833 13,833 9,082 9,082 9,694 9,694 4,614 4,614 4 65,059 65,059 49,208 49,208 27,094 27,094 22,777 22,777 17,942 17,942 18,562 18,562 13,382 13,382 5 85,058 85,058 59,255 59,255 36,375 36,375 31,993 31,993 27,192 27,192 27,784 27,784 22,566 22,566 …………………… 10 171,494 171,494 104,894 104,894 79,045 79,045 74,521 74,521 71,648 71,648 71,526 71,526 66,854 66,854 15 187,852 187,852 112,903 112,903 89,834 89,834 86,121 86,121 85,876 85,876 85,127 85,127 81,877 81,877 Discount Rate Margin DeterministicDeterministicDeterministicDeterministicDeterministicNone Mortality Margin 2001 CSO 0.009375/ex0.0035/ex3.2%2.1%None Lapse Rate Margin 30%30%30%None10%None

43. 20 Year Term Examples: Deterministic Terminal Reserves at Different Margin Levels Male, 65, Best Class, $1,000,000, Annual Premium of $1,415.00.

44. 20 Year Term Examples: Comparison of Z Levels and Deterministic Reserve Margins Male, 65, Best Class, $1,000,000, Annual Premium of $11,875.00. PolicyCurrent Principles-based with Margins PBA Best Z Values Formulaic Level 1 Level 2 Level 3 Level 4 Level 5 Estimate At Issue 4.5%34.1%13.3%8.9%4.5%4.9%0.0% At 10 Years 113.0%41.1%13.2%8.3%5.2%5.0%0.0% Discount Rate Margin DeterministicDeterministicDeterministicDeterministicDeterministicNone Mortality Margin 2001 CSO 0.009375/ex0.0035/ex3.2%2.1%None Lapse Rate Margin 30%30%30%None10%None

45. 20 Year Term Examples: Model Office Reserve Levels – Aged 20 Years Current Formulaic Reserve:$121,301 Current Formulaic Reserve:$121,301 Comparative Deterministic Reserves Comparative Deterministic Reserves – Level 2:$ 50,564 (42% of Formulaic) – Level 4:$ 41,095 (34% of Formulaic) Stochastic reserves not materially different Stochastic reserves not materially different

46. Considerations for Application of Principles-based Reserving to In force Contracts

47. Arguments For the Application of PBR to All In force Contracts 1.Measures the risks of a company more appropriately than current formulaic reserves Provides a consistent methodology for all business.Provides a consistent methodology for all business. Consistent with international actuarial and accounting directionsConsistent with international actuarial and accounting directions Constitutes a more rigorous approach for all blocks of businessConstitutes a more rigorous approach for all blocks of business Provides better information for regulatorsProvides better information for regulators 2.Reduces those reserves that are redundant under current regulation and strengthens those reserves that are inadequate under current regulation, and will tend to lessen dependence on complex reinsurance and financing solutions

48. 3.Consistent with Enterprise Risk Management in that: Incorporates risk of the entire block of businessIncorporates risk of the entire block of business The reserve will allow some offset of covariant risksThe reserve will allow some offset of covariant risks Reserves are set using the same or similar models to those that should be used to manage the business.Reserves are set using the same or similar models to those that should be used to manage the business. 4. Allows the entire asset portfolio to be reflected in the reserve calculation, reducing the subjectivity involved in allocating assets between PBR and non-PBR liabilities 5.Mitigates the change in the pattern of margins under PBR as compared to the current formulaic approach 6.Potentially reduces on-going costs by not requiring companies to maintain multiple reserve approaches 6.Potentially reduces on-going costs by not requiring companies to maintain multiple reserve approaches Arguments For the Application of PBR to All In force Contracts

49. Arguments Against the Application of PBR to All In force Contracts 1.Potential for large reserve discontinuity if inforce block is large relative to new business 1.Potential for large reserve discontinuity if inforce block is large relative to new business 2.May have significant tax implications Retroactive changes in reserve method are not permitted for tax purposesRetroactive changes in reserve method are not permitted for tax purposes Reserves increase will not increase tax-deductible reserve, but reserve decreases will likely decrease tax- deductible reserveReserves increase will not increase tax-deductible reserve, but reserve decreases will likely decrease tax- deductible reserve 3.Does not allow for as long a “learning period” with respect to the overall application, systems, and peer review before the approach is applied to a large block of business

50. Arguments Against the Application of PBR to All In force Contracts 4.System implications and training may initially lead to large implementation costs. 5.Most, but not all, past changes in reserve methodology have not been applied to inforce business. 6.Some blocks may be very small or the reserves may already be equal to the Cash Surrender Value, creating a lot of additional work for little or no value.

51. Application of PBR to Subset of Inforce Three recent dates with significant changes to formulaic reserves:Three recent dates with significant changes to formulaic reserves: 1.January 1, 2000 – Reg “XXX” 2.January 1, 2003 – AG38, section 8 3.July 1, 2005 – revised AG38, section 8 Inforce contracts subject to these reserve standards are possible subsets that could be subject to application of PBRInforce contracts subject to these reserve standards are possible subsets that could be subject to application of PBR Some of the arguments against application to inforce contracts are mitigatedSome of the arguments against application to inforce contracts are mitigated But many of the problems described above dealing with the application to inforce contracts still existBut many of the problems described above dealing with the application to inforce contracts still exist

52. Phased-in Application of PBR Another option is to phase-in the application to inforce contracts over time (or phase-in the effect over time).Another option is to phase-in the application to inforce contracts over time (or phase-in the effect over time). For example, initially PBR would be prospective only, and then all or a portion of inforce contracts would be phased on over X years.For example, initially PBR would be prospective only, and then all or a portion of inforce contracts would be phased on over X years. Some of the arguments against application to inforce contracts are mitigatedSome of the arguments against application to inforce contracts are mitigated But many of the problems described above dealing with the application to inforce contracts still existBut many of the problems described above dealing with the application to inforce contracts still exist

53. ACLI Interim Proposal ACLI has a strong commitment to see PBR implementedACLI has a strong commitment to see PBR implemented Concern: it will take several years to get thereConcern: it will take several years to get there Need an “interim solution” by 4/1/07Need an “interim solution” by 4/1/07 Interim solution elements:Interim solution elements: Split 2001 CSO table into preferred and residual tablesSplit 2001 CSO table into preferred and residual tables Allow use of lapse assumptions for UL SGAllow use of lapse assumptions for UL SG Allow non-premium paying UL SG contracts to use the surrender charge offsetAllow non-premium paying UL SG contracts to use the surrender charge offset

54. Preferred Mortality Project Reasons for project – An essential element of a principles-based reserving system – Output from project may be useful as valuation tables under the traditional, rule-based reserving – Produce experience tables of greater utility to company actuaries

55. Project Oversight AAA-SOA Preferred Mortality Project Oversight Group (“POG”). AAA-SOA Preferred Mortality Project Oversight Group (“POG”). The POG oversees the teams responsible for completing assigned tasks and project funding. The POG oversees the teams responsible for completing assigned tasks and project funding. POG members represent different stakeholders POG members represent different stakeholders – SOA (2) – AAA (2) – Regulators (2) – Insurance Industry (ACLI, NALC, ALIA) Project tasks assigned to 6 teams. Project tasks assigned to 6 teams.

56. POG Teams Data Validation Data Validation Underwriting Criteria Underwriting Criteria Experience Analysis Experience Analysis Valuation Basic Tables Valuation Basic Tables Implementation Implementation Valuation Tables Valuation Tables

57. Deliverables Valuation Basic Tables and Valuation Tables submitted to the NAIC – March 2007 Valuation Basic Tables and Valuation Tables submitted to the NAIC – March 2007 Infrastructure for future preferred mortality tables Infrastructure for future preferred mortality tables

58. Challenges Develop the number of valuation basic tables (without margins) and valuation tables (with margins) expected by the AAA LRWG Develop the number of valuation basic tables (without margins) and valuation tables (with margins) expected by the AAA LRWG – Lack of data for later policy duration in the select period – Tables for a sufficient number of underwriting classes – Persistence of the relationship between underwriting class mortality