2. Actuarial Guideline CCC What is it and how will it affect ROP products?

3. Intro – ROP Basics great opportunity for our industry. products that the consumer can understand and sees tremendous value unleveled playing field for how these products are priced based upon the guaranteed cash values. Actuarial Guideline CCC was created to level the playing field. Our goals today o better understanding of Actuarial Guideline CCC o develop products that meet compliant requirements.

4. ROP Journey Partner Frank Difficult to find people who were knowledgeable about the guideline Visited with the key members of the committee that authored the guideline Asking questions people haven’t thought of.

5. AG CCC – Executive Summary Short guideline (2+ pages) primarily for ROP products non forfeiture requirements “Additional Tests” required to determine minimum o Endowment period test is primary new test Supports the Smoothness Test in the 1980 Standard Nonforfeiture Law (SNL) Creates some compliance dilemma’s

6. Application / Scope (Part 1 of 2) Individual life insurance policies Not variable / non-variable adjustable life / current assumption whole life Intermediate endowment that is “materially less” than the policy face amount (<50%?) Policy does not automatically terminate upon the endowment

7. Application / Scope (Part 2 of 2) Return of premium considered a “special case” to this guideline Intention of AG CCC is to address the new type of ROP product Generic language includes o Products with multiple endowments – use same principles o “Similar” type products should also comply with this guideline

8. Background Section 3 & 5c of the 1980 SNL unitary method o cash values were small to non existent o Similar to XXX dilemma Goal is to put everyone on the same page o remove the “hockey stick” set of cash values o Policy ceases at the end of the endowment period

9. Text – Section A – New Test(s) (Part 1 of 3) Endowment period defined o Is the “benefit cease period” for additional tests Endowment benefit to be considered “integrated” o Doesn’t matter if it is a rider or part of the policy Must test the “current scale” if these premiums are candidates to be returned o Recall in the minimum test that the slope is what is important o Could provide some challenges for some policy forms Language of guideline is curtate in nature Some states are more particular about continuous cases

10. Text – Section A – New Test(s) (Part 2 of 3) Million dollar question for Section A: What are the “benefits” to be considered? CSV k ≥ PV of endowment benefit + Incremental death benefits – (Sum of adjusted premiums and amount of indebtedness) What are “incremental death benefits”? o “Death benefits during the endowment period in excess of the lowest death benefit provided under the policy during the endowment period.” Adjusted premiums similar in concept to 1980 SNL once benefits are defined o Substandard premiums ignored o Policy fee ignored o Doesn’t mean they are ignored in determining the endowment amount

11. Text – Section A – New Test(s) (Part 3 of 3) Expense Allowance (in adjusted premium calculation) o Same general formula as 1980 SNL o Benefits are those that are consistent with this Endowment Test Except AAI is based upon the 1980 SNL unitary basis Uses the entire death benefit o Nonforfeiture net level premium “Formula” same as the 1980 SNL Benefits are those that are consistent with this Endowment Test PV of benefits divided by present value of annuity due o Primary benefit is endowment

12. Comparisons compare terminal CV’s on a duration basis from all the tests and take the largest. Potentially 4 tests specifically mentioned o Pure 1980 SNL – Unitary period, guaranteed premiums o “Additional” 1980 SNL - Unitary period, current premiums o Endowment period, guaranteed premiums o Endowment period, current premiums Other issues to consider before determining minimums o Policy fees included? o Modal factors affect o Substandard premiums o Read the policy form

13. “Framing” the Section A tests Resemblance to XXX o Language similarity … but “turned around” o (Minimum/Basic. XXX calculates basic first) Unlike XXX, mortality and interest assumptions don’t change between Minimum/Basic Speaking of XXX o Potential Unusual CV implications for XXX

14. Smoothness Test (Part 1 of 3) Programming challenge to get the timing to work correctly Using the original 1980 SNL minimums guaranteed passing the smoothness test o AG CCC minimums don’t provide same guarantee Segments must be defined for the NFF (non forfeiture factors) Equivalency principle not required because test starts in year 2 Basic Cash Value calculated based upon the NFF

15. Smoothness Test (Part 2 of 3) NFF’s are a constant percent of the adjusted premiums o Avoids having to redefine the expense allowance Use the adjusted premium from the “pure 1980 method” to be used in the smoothness test. o Conflicting views exist Tolerance of 0.2% of AAI on either side Test is during the endowment period Pass the test if guaranteed cash value at each duration is within the tolerance

16. Smoothness Test (Part 3 of 3) Actuary provided a lot of flexibility in determining NFF’s Algorithms exist that iteratively solve for the NFF’s Challenge is to prove it passes for “worst case” o Many cases to consider o States have different views (e.g. 95% success)

17. Regulatory environment Hockey stick cash value patterns less likely to pass Guideline effective for all policy forms filed on or after January 1, 2009 Affects all contacts on or after January 1, 2010 Interstate Insurance Product Regulation Commission (Insurance Compact) actively involved (Utah) o Promotes uniformity by national standards o 33 member states

18. Resources Free Other web sites: SOA, NAIC, Compact (http://www.insurancecompact.org/)http://www.insurancecompact.org/ “Additional standards for intermediate period endowment benefit features for individual life insurance policies (including return of premium)” - Recommendations by the product standard committee: http://www.insurancecompact.org/rulemaking_dock ets/additional_int_period_endowment_ind_life.pdf. (12/3/2008) http://www.insurancecompact.org/rulemaking_dock ets/additional_int_period_endowment_ind_life.pdf Discussion Forum on valuation and non forfeiture issues: Must register to contribute - http://actuarialauditor.saltsolutions.com/Home.aspx http://actuarialauditor.saltsolutions.com/Home.aspx Call or e-mail me!