Document and Reporting Requirements Hypothetical PBR Report Presenters: Donna Claire, MAAA, FSA, CERA Tim Cardinal, MAAA, FSA, CERA
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Document and Reporting Requirements
Hypothetical PBR Report
Presenters:
Donna Claire, MAAA, FSA, CERA
Tim Cardinal, MAAA, FSA, CERAIMPORTANT NOTE: This is a sample, hypothetical report and
does not necessarily cover all requirements of VM-20. It has been
designed as an illustration of the type of information required for
documentation of a Principle-Based Reserve Actuarial Report
(PBRAR). The hypothetical report is not complete and should not be
used as a template for developing a PBRAR.
CONFIDENTIAL
SURAK LIFE INSURANCE
COMPANY
PBR ACTUARIAL REPORT ON POLICIES SUBJECT TO PBR VALUATION
As of December 31, 2018
1CONFIDENTIAL
Surak Life Insurance Company
February 28, 2019
This report is confidential and for the exclusive use of the management and state
insurance examiners of the Surak Life Insurance Company.CONFIDENTIAL
Surak Life Insurance Company
February 28, 2019
TABLE OF CONTENTS
I. OVERVIEW .................................................................................................................................................... 1
1. INTRODUCTION ....................................................................................................................................... 1
2. PRODUCT DESCRIPTIONS OF POLICIES SUBJECT TO PBR REQUIREMENTS ............................................. 1
3. TABLE NET OF REINSURANCE .................................................................................................................. 2
4. TABLE OF RESERVES ................................................................................................................................ 4
5. DESCRIPTION OF MATERIAL RISKS FOR PBR CONTRACTS....................................................................... 5
6. RELIANCES ............................................................................................................................................... 5
7. VALUATION ASSUMPTIONS AND MARGINS ............................................................................................ 5
a. METHODS USED TO DETERMINE RISK FACTORS ............................................................................. 5
b. CHANGES FROM PRIOR YEAR .......................................................................................................... 6
c. KEY REPORTING ITEMS .................................................................................................................... 6
d. METHODS USED TO DETERMINE MARGINS .................................................................................... 6
e. SIGNIFICANT CHANGES IN METHOD TO DETERMINE MARGINS ..................................................... 7
f. METHODS INCONSISTENT WITH RISK ANALYSIS.............................................................................. 7
g. OTHER .............................................................................................................................................. 7
8. ASSETS ..................................................................................................................................................... 7
a. ALLOCATION TO MULTIPLE SEGMENTS ........................................................................................... 7
b. PORTFOLIO DESCRIPTION ................................................................................................................ 8
9. HEDGING ................................................................................................................................................. 9
10. MATERIALITY OF ASSUMPTIONS........................................................................................................... 9
11. CERTIFICATION ...................................................................................................................................... 9
12. CLOSING PARAGRAPHS .................................................................................................................. 9
II. PBR LIFE REPORT ........................................................................................................................................ 11
1. TABLE OF LIFE PRODUCTS .................................................................................................................. 11
a. Deterministic, Not Stochastic Reserves ......................................................................................... 11
b. Stochastic Reserves........................................................................................................................ 12
2. SUMMARY OF VALUATION ASSUMPTIONS ....................................................................................... 12
MORTALITY ASSUMPTIONS ................................................................................................................... 12
LAPSE ASSUMPTIONS............................................................................................................................. 13
EXPENSES ............................................................................................................................................... 14
PREMIUM PERSISTENCY ........................................................................................................................ 15CONFIDENTIAL
Surak Life Insurance Company
February 28, 2019
3. CASH FLOW MODEL ........................................................................................................................... 15
a. MODELING SYSTEM USED .............................................................................................................. 15
b. MODEL SEGMENTS ........................................................................................................................ 15
c. GROUPING FOR DETERMINISTIC RESERVES .................................................................................. 15
d. STOCHASIC GROUPING .................................................................................................................. 16
e. VALIDATION OF MODEL ................................................................................................................. 16
f. PROJECTION PERIOD ...................................................................................................................... 16
g. POLCY LOANS ................................................................................................................................. 16
h. REINSURANCE ................................................................................................................................ 16
i. GENERAL ACCOUNT EQUITY INVESTMENTS .................................................................................. 17
j. SEPARATE ACCOUNT FUND GROUPING ........................................................................................ 17
k. ASSET INVESMENT STRATEGY........................................................................................................ 17
l. NOT LESS THAN ALTERNATIVE INVESTMENT STRATEGY ............................................................... 18
m. NUMBER OF SCENARIOS ............................................................................................................ 19
n. SCENARIO TECHNIQUES ................................................................................................................. 19
4. MORTALITY ........................................................................................................................................ 19
a. DESCRIPTION OF MORTALITY SEGMENTS ..................................................................................... 19
b. SUBSEGMENTS ............................................................................................................................... 19
c. UNDERWRITING SCORING PROCEDURE ........................................................................................ 19
d. SOURCE OF DATA OTHER THAN OWN COMPANY ......................................................................... 20
e. ADJUSTMENTS TO COMPANY EXPERIENCE ................................................................................... 20
f. LEVEL OF CREDIBILITY .................................................................................................................... 20
g. COMPANY EXPERIENCE MORTALITY .............................................................................................. 20
h. INDUSTRY BASIC MORTALITY USED ............................................................................................... 20
i. MORTALITY IMPROVEMENT .......................................................................................................... 21
j. SUBSTANDARD LIVES ..................................................................................................................... 21
k. ADJUSTMENTS TO COMPANY EXPERIENCE ................................................................................... 21
l. MARGINS ....................................................................................................................................... 21
m. ACTUAL TO EXPECTED ANALYSIS ............................................................................................... 21
5. POLICYHOLDER BEHAVIOR................................................................................................................. 22
a. SOURCE OF DATA ........................................................................................................................... 22
b. WHEN DATA WAS NOT FULLY CREDIBLE ....................................................................................... 22
c. ANTICIPATED EXPERIENCE ............................................................................................................. 22
d. ACTUAL TO EXPECTED ANALYSIS ................................................................................................... 22
e. MARGINS ....................................................................................................................................... 22CONFIDENTIAL
Surak Life Insurance Company
February 28, 2019
f. IMPACT OF CHANGES TO NON‐GUARANTEED RATES ................................................................... 23
g. SCENARIO DEPENDENT DYNAMIC FORMULA ................................................................................ 23
h. CHANGES SINCE LAST REPORT ....................................................................................................... 23
i. PREMIUM PAYMENT ASSUMPTION............................................................................................... 23
j. ADJUSTMENTS TO LAPSES AND MORTALITY FOR ANTI‐SELECTION .............................................. 23
6. EXPENSES ........................................................................................................................................... 24
a. EXPENSE ALLOCATION METHODOLOGY ........................................................................................ 24
b. ALLOCATION TO SEGMENTS .......................................................................................................... 24
c. MARGIN METHODOLOGY .............................................................................................................. 24
7. ASSETS................................................................................................................................................ 24
a. STARTING ASSETS .......................................................................................................................... 24
b. SELECTING ASSETS ......................................................................................................................... 24
c. MARKET VALUE OF ASSETS ............................................................................................................ 25
d. FOREIGN CURRENCY EXPOSURE .................................................................................................... 25
e. NET SPREAD ADJUSTMENT FACTOR .............................................................................................. 25
f. NET EARNED RATES BY SEGMENT ................................................................................................. 25
g. INVESTMENT EXPENSES ................................................................................................................. 25
h. PREPAYMENT, CALL AND PUT FUNCTIONS.................................................................................... 26
i. ASSETS IN 2% COLLAR .................................................................................................................... 27
j. DERIVATIVES .................................................................................................................................. 27
8. REVENUE SHARING ASSUMPTIONS ................................................................................................... 27
a. REVENUE SHARING AGREEMENTS ................................................................................................. 27
b. INCOME FROM AGREEMENTS ....................................................................................................... 27
c. MARGIN FOR UNCERTAINTY .......................................................................................................... 28
9. REINSURANCE ASSUMPTIONS ........................................................................................................... 28
a. REINSURANCE AGREEMENTS ......................................................................................................... 28
b. REINSURANCE CASH FLOWS IN MODEL......................................................................................... 28
c. ADDITIONAL ANALYSIS................................................................................................................... 28
d. MULTIPLE REINSURANCE TREATIES ............................................................................................... 28
e. WHY ADDITIONAL TESTING IS NOT NEEDED ................................................................................. 28
10. NON‐GUARANTEED ELEMENTS ..................................................................................................... 29
a. MODELING NGEs............................................................................................................................ 29
b. MARGIN FOR CONSERVATISM ....................................................................................................... 29
c. PAST MANAGEMENT PRACTICES ................................................................................................... 29
d. CONSISTENCY OF ASSUMPTIONS................................................................................................... 29CONFIDENTIAL
Surak Life Insurance Company
February 28, 2019
e. CONDITIONAL EXCLUSIONS ........................................................................................................... 29
11. DETERMINISTIC AND STOCHASTIC EXCLUSION TESTS ................................................................... 30
a. POLICIES USED IN EXCLUSION TESTS ............................................................................................. 30
b. STOCHASTIC EXCLUSION ................................................................................................................ 30
c. RESULTS OF STOCHASTIC EXCLUSION TEST ................................................................................... 30
d. STOCHASIC RESERVE DEMONSTRATION........................................................................................ 30
e. CERTIFICATION ............................................................................................................................... 30
f. RESULTS OF DETERMINISTIC EXCLUSION TEST .............................................................................. 30
12. OTHER ............................................................................................................................................ 31
a. IMPACT OF MARGINS .................................................................................................................... 31
b. COMBINED IMPACT ....................................................................................................................... 31
c. IMPACT OF IMPLICIT MARGINS ..................................................................................................... 31
d. SENSITIVITY TESTS .......................................................................................................................... 31
e. RISKS NOT FULLY REFLECTED ......................................................................................................... 31
f. IMPACT OF AGGREGATION ON RESERVES ..................................................................................... 32
g. EARLIER TESTING PERIOD ............................................................................................................ 32
h. APPROXIMATION AND SIMPLIFICATIONS ...................................................................................... 32
i. COMPETITOR RATE ........................................................................................................................ 32
j. FUND PERFORMANCE AND STOCHASTIC PATHS ........................................................................... 32
k. INTEREST CREDITING STRATEGY .................................................................................................... 33
13. CERTIFICATION FROM INVESTMENT OFFICER ............................................................................... 33
14. CERTIFICATION FROM SENIOR MANAGEMENT ............................................................................. 33
BASIC RESULTS ............................................................................................................................................... 34
RESULTS FOR ACCUMULATION UL............................................................................................................. 35
RESULTS FOR UL WITH SHADOW ACCOUNT ............................................................................................. 37
VARIABLE UL RESULTS ............................................................................................................................... 40
MARGINS ....................................................................................................................................................... 43
APPENDIX A: MORTALITY FACTORS ............................................................................................................... 44
APPENDIX B: PREMIUM PATTERN ................................................................................................................. 47
APPENDIX C: LAPSE STUDY ........................................................................................................................... 48
APPENDIX D: EXPENSES ................................................................................................................................ 49
ADDENDIX E: RELIANCE STATEMENT FROM ASSET OFFFICER ....................................................................... 50
APPENDIX F: SENIOR MANAGEMNT SIGN‐OFF ............................................................................................. 51CONFIDENTIAL
Report of the PBR Reserves for Surak Life
February 28, 2014
I. OVERVIEW
1. INTRODUCTION
I, Claire R. Martin, FSA, MAAA am a Vice President and Actuary of Surak Life Insurance
Company. I am a Fellow of the Society of Actuaries and a Member of the American Academy of
Actuaries. I was appointed by the Board of Directors of Surak Life Insurance Company to render
this opinion. A copy of the Board Resolution, dated December 15, 2017, was sent to notify the
Commissioner of this appointment. I meet the qualification standards for rendering the opinion and
am familiar with the PBA valuation requirements applicable to life and health companies.
This report has been prepared on the Surak Life Insurance Company in conjunction with the
Actuarial Certification on the policies subject to a PBR valuation. This report details all of the
disclosure items for a PBR valuation as required by [insert applicable section] of the Valuation
Manual for Surak Life for year-end 2018.
2. PRODUCT DESCRIPTIONS OF POLICIES SUBJECT TO PBR REQUIREMENTS
The Surak Life Insurance Company has been determining the reserves for the products listed
below on a PBR basis since 2017:
Accumulation UL with no secondary guarantees
UL with shadow account
20 year level term products
Variable UL
This report covers these products. The policies and assets examined were those in-force on
December 31, 2018.
A brief description of each of these products is given below:
Accumulation UL with No Secondary Guarantees
The Accumulation Universal Life policies are flexible premium policies. There are two death
benefit options: Option 1 pays a death benefit at the Specified Amount plus the increase in the
fund value since the last Anniversary Day; Option 2 has a death benefit equal to the Specified
Amount plus the fund value. The fund value is accumulated as the total of: premiums plus
1CONFIDENTIAL
Report of the PBR Reserves for Surak Life
February 28, 2019
interest credited less premium expense charges less partial surrenders less monthly deductions.
The cash value equals the fund value less a fund charge. The fund charge is a percentage of fund
value: 10% in the first year, grading down by 1% a year to 0 in years 11 and later. The
guaranteed interest rate is 4%. Excess interest may be credited in a manner determined by the
Company. Policy loans are made at the credited rate plus two percent. There are monthly
deductions for the cost of insurance plus the monthly expense charge.
UL with Secondary Guarantees
The Universal Life product with Secondary Guarantees is similar to the Accumulation UL product,
except that there is a shadow account guarantee. This shadow account guarantee is for the life of the
policy. The shadow account guarantees that, as long as the premiums paid plus interest are greater
than amounts specified in the policy, the policy will not lapse, even if the fund account were to go to
zero.
20 Year Term
The 20 year term product has level premiums over the 20 year period. There is no renewal option
after the 20 years. There are no cash values on this product.
Variable UL
The Variable UL product is similar to the Accumulation UL product, but there is no minimum
interest rate guarantee on the cash values - investment risk on funds held in separate accounts
backing variable life insurance is borne by the policyholder.
3. TABLE NET OF REINSURANCE
The table below shows the reserves for both PBR and non-PBR business in the Company.
2CONFIDENTIAL
Report of the PBR Reserves for Surak Life
February 28, 2019
IF using
PBR, Current
first Year
year Premium Face Amount
Product Name used (in $1,000s) (in $1,000s)
Life Insurance Issued prior to the operative date
of the Manual
Term 500,000 500,000,000
Non‐participating Whole Life 1,000,000 100,000,000
Participating Whole Life n/a ‐‐‐‐‐‐ ‐‐‐‐‐‐
Universal Life Without Secondary Guarantees 2,500,000 250,000,000
Universal Life With Secondary Guarantees 1,000,000 100,000,000
Variable Universal Life 450,000 45,000,000
Variable Life n/a ‐‐‐‐‐‐ ‐‐‐‐‐‐
Indexed Life n/a ‐‐‐‐‐‐ ‐‐‐‐‐‐
Other n/a ‐‐‐‐‐‐ ‐‐‐‐‐‐
TOTAL 5,450,000 995,000,000
Life Insurance Issued on or after to the operative
date of the Manual
Term 2017 25,000 25,000,000
Non‐participating Whole Life n/a ‐‐‐‐‐ ‐‐‐‐‐‐
Participating Whole Life n/a ‐‐‐‐‐‐ ‐‐‐‐‐‐
Universal Life Without Secondary Guarantees 2017 125,000 12,500,000
Universal Life With Secondary Guarantees 2017 50,000 5,000,000
Variable Universal Life 2017 45,000 4,500,000
Variable Life n/a ‐‐‐‐‐‐ ‐‐‐‐‐‐
Indexed Life n/a ‐‐‐‐‐‐ ‐‐‐‐‐‐
Other n/a ‐‐‐‐‐‐ ‐‐‐‐‐‐
TOTAL 245,000 97,000,000
Annuities
Fixed n/a ‐‐‐‐‐‐ ‐‐‐‐‐‐
Variable Other n/a ‐‐‐‐‐‐ ‐‐‐‐‐‐
TOTAL
Accident and Health Insurance n/a ‐‐‐‐‐ ‐‐‐‐‐
Deposit Type Contracts n/a ‐‐‐‐ ‐‐‐‐‐‐‐
3CONFIDENTIAL
Report of the PBR Reserves for Surak Life
February 28, 2019
4. TABLE OF RESERVES
(Numbers in $1,000s)
Assumed
Direct Ceded Net Reserve
Annual Statement Item Reserve
Reserve (1) Reserve (3) (1)+(2)-(3)
(2)
Life Insurance and Annuity
Life Insurance-Issued prior to the operative
5,300,000 ______ 800,000 4,500,000
date of the Valuation Manual
Life Insurance-Issued on or after the operative
date of the Valuation Manual
Policies stochastically modeled per VM-20 450,000 _____ 13,000 437,000
Policies deterministically modeled (not
257,000 _____ 231,298 25,702
stochastically modeled) per VM-20
Policies not modeled (non-PBR) 0 0 0
Net Premium Reserve per VM-20 _____ _____ _____ _____
Other policies _____ _____ _____ _____
Annuities
Supplementary Contracts Involving
29,000 _____ 0 29,000
Life Contingencies
Accidental Death Benefit 1,298 _____ 0 1,298
Disability – Active 2,000 _____ 0 2,000
Disability – Disabled 5,000 _____ 0 5,000
Miscellaneous 0 _____ 0 0
Total Life Insurance and Annuity 6,044,298 0 1,044,298 5,000,000
Accident and Health Insurance 0 0 0 0
Active Life Reserve _____ _____ _____ _____
Claim Reserve _____ _____ _____ _____
Deposit Type Contracts _______ ______ ______ _______
TOTAL PRINCIPLE-BASED RESERVES 707,000 0 246,298 462,702
TOTAL RESERVES (PBR + Non-PBR) 6,044,298 0 1,044,298 5,000,000
4CONFIDENTIAL
Report of the PBR Reserves for Surak Life
February 28, 2019
5. DESCRIPTION OF MATERIAL RISKS FOR PBR CONTRACTS
Surak Life only has life insurance policies which are covered under PBR. A material risk to
these contracts is mortality.
Lapse is also an important risk, especially for the universal life contracts with guarantees. Lapses
can depend on what the rate credited is compared to the market rate, so the dynamic lapse factor
and the interest crediting methodology is also explained.
To a lesser extent, expenses can impact results.
For the universal life product, including the Universal Life products with secondary guarantees
as well as those without secondary guarantees, and the Variable Universal Life product.
There is also some reliance on the reinsurance of these PBR contracts.
6. RELIANCES
I relied upon asset data prepared under the direction of Ay Set, Vice President - Investments and
liability data prepared under the direction of Li Ability, Vice President - Corporate Actuarial, as
certified in the attached statements. I evaluated that data for reasonableness and consistency. I also
reconciled that data to Schedules A, B and D, Page 3, Exhibits 5 - 8 and Pages 48 and 50 (IMR &
AVR) of the company's current annual statement.
In other respects my examination included such review of the actuarial assumptions and actuarial
methods and such tests of the actuarial calculations as I considered necessary.
7. VALUATION ASSUMPTIONS AND MARGINS
a. METHODS USED TO DETERMINE RISK FACTORS
In determining risk factors, Company experience was used to the extent credible.
For mortality, Company experience was blended with industry experience to develop the factors
used.
The base lapse rates were developed using Company data where credible. Where the data was
partially or not credible, industry data was used, as well as some actuarial judgment based on
data of similar products.
For items related to the lapse factors, such as the dynamic lapse factors and the market rates,
studies of industry data were done.
The assumed interest crediting spreads were based on pricing spreads, which management has
adhered to in the past.
Expenses are based on a Company study.
5CONFIDENTIAL
Report of the PBR Reserves for Surak Life
February 28, 2019
Premium persistency is based on a Company study.
b. CHANGES FROM PRIOR YEAR
In general, all methodology was similar to those used in the prior year. . Note that although the
total expenses did not change significantly, there was a revision to how the company allocated
expenses between per policy and per $1000 expenses. The result was an increase in the per policy
expenses and a decrease in the per $1000 expenses. These new expenses were used in the
reserving, which resulted in a slight increase in overall expenses for UL insurance, and a decrease in
expenses for term insurance (less than $1000).
c. KEY REPORTING ITEMS
The key reporting items which are tracked on a policy level basis include lapses, mortality,
premium persistency.
On a Company basis, expenses are tracked.
d. METHODS USED TO DETERMINE MARGINS
Margins are based on the credibility and volatility of data.
For mortality, factors were added in the form of a factor divided by the expectation of life to take
into account that Surak Life does not have fully credible data.
For lapses, a study was done to determine whether higher or lower lapses were more
conservative, and a margin was added based on this study. The margin was higher for universal
life with secondary guarantees (lowering the assumed lapses) because the experience was not
credible. Also, in years where the experience was less credible, margins were added for
conservatism.
For expenses, a flat 5% margin was added. This is based on actuarial judgment, looking at the
variation in expense factors over the last 20 years.
For premium persistency, only slight margins were added, since the rates have been relatively
stable.
6CONFIDENTIAL
Report of the PBR Reserves for Surak Life
February 28, 2019
e. SIGNIFICANT CHANGES IN METHOD TO DETERMINE MARGINS
There were no significant changes made from the prior year to determine margins.
f. METHODS INCONSISTENT WITH RISK ANALYSIS
All assumptions used in the PBR testing are generally consistent with the risk analysis and
management techniques used by the Company. There are two exceptions:
a) Mortality improvement is typically included when reviewing results for management,
while mortality improvement was not included when analyzing mortality for PBR
reserves.
b) Actual investments would average an A rating as opposed to the requirement that the
reinvestment assumption be 50% AA and 50% A rated bonds.
g. OTHER
This is only the second year of PBR. The Company generally used methodology similar to those
used for asset adequacy testing. The only exceptions were where VM-20 specifies a
methodology.
The Accumulation UL and the UL with a shadow account credits interest above the minimum at a
rate declared by the company. The goal is to earn a spread of 180 basis points over the portfolio
rate. This is the Company’s current spreads, and the Company expects to maintain this in the future.
There is no explicit margin in this spread. This factor will be examined at least once a year.
8. ASSETS
a. ALLOCATION TO MULTIPLE SEGMENTS
In support of the Asset/Liability Management Process, Surak Life has segmented its investment
portfolio. There is a segment specifically for the PBA products. This action, along with continued
refinements of the segments, should facilitate the management of investment risks associated with
the various lines of business. However, it should be understood that all assets of the company back
all liabilities of the company.
7CONFIDENTIAL
Report of the PBR Reserves for Surak Life
February 28, 2019
b. PORTFOLIO DESCRIPTION
The majority of invested assets backing PBA reserves in Surak Life are investment grade corporate
bonds, both public and private placements. The portfolio also includes a substantial holding in
CMOs and other mortgage backed securities. The majority of the CMOs are government or agency
backed. The portfolio is rounded out with commercial mortgages and residential mortgages. The
Table at the end of this section lists of assets by type and by product.
The assets backing the general account segments used for term insurance and UL are given below:
ASSETS BACKING PBA PRODUCTS
Total Bonds 397,705 85.9%
Commercial Mortgage Loans 20,000 4.3%
Residential Mortgage Loans 20,000 4.3%
Cash & Short Term 10,000 2.2%
Miscellaneous 5,000 1.1%
Policy Loans 10,000 2.2%
Total 462,705 100%
RATING OF BONDS HELD
Long Term Bonds Amount % of Total
Exempt Obligations 21,705 4.6%
NAIC 1 225,000 48.6%
NAIC 2 130,000 28.1%
NAIC 3 10,000 2.2%
NAIC 4 5,000 1.1%
NAIC 5 5,000 1.1%
NAIC 6 1,000 0.2%
DURATION OF ASSETS
1-5 years 37,705
5-10 years 210,000
10-20 years 190,000
20+ years 25,000
TOTAL 462,705
8CONFIDENTIAL
Report of the PBR Reserves for Surak Life
February 28, 2019
9. HEDGING
There are no specific hedging programs in place to hedge the PBA portfolio.
10. MATERIALITY OF ASSUMPTIONS
Surak Life defines materiality with respect to the PBA portfolio as items that could have an
impact of 2.5% or more on the reserves being set up for PBR. At year-end 2018, the total PBR
reserves were $462,702,000. These reserves were roughly 5% of the total reserves of the
Company. The surplus of Surak Life at year-end 2018 was $300,000,000. We therefore feel a
2.5% of PBR number is reasonable and conservative.
11. CERTIFICATION
I certify that the PBR reserve calculation:
a. Was calculated in accordance with VM-05 and VM-20; and
b. The assumption and margins used in the testing were prudent estimates.
12. CLOSING PARAGRAPHS
The reserves and related items, when considered in light of the assets held by the company with
respect to such reserves and related actuarial items including, but not limited to, the investment
earnings on such assets, and the considerations anticipated to be received and retained under such
policies and contracts, make adequate provision, according to presently accepted actuarial standards
of practice, for the anticipated cash flows required by the contractual obligations and related
expenses of the company.
The actuarial methods, considerations and analyses used in forming my opinion conform to the
appropriate Standards of Practice as promulgated by the Actuarial Standards Board, which
standards form the basis of this statement of opinion.
This opinion is updated annually as required by statute. To the best of my knowledge, there have
been no material changes from the applicable date of the annual statement to the date of the
rendering of this opinion which should be considered in reviewing this opinion.
9CONFIDENTIAL
Report of the PBR Reserves for Surak Life
February 28, 2019
The impact of unanticipated events subsequent to the date of this opinion is beyond the scope of this
opinion. The analysis of PBA reserves portion of this opinion should be viewed recognizing that
the company's future experience will not follow all the assumptions used in the analysis.
Claire R. Martin, FSA, M.A.A.A., CERA
Vice President and Actuary
Surak Life Insurance Company
100 Accuracy Avenue
Littletown, New York 11746
(631) 269-1501
February 28, 2019
10CONFIDENTIAL
Report of the PBR Reserves for Surak Life
February 28, 2019
II. PBR LIFE REPORT
1. TABLE OF LIFE PRODUCTS
The tables below show the reserves under PBR. Table (a) shows those reserves calculated on a
deterministic basis, while Table (b) shows those calculated on a stochastic basis. Table (c) shows
the policies where principles-based reserves were not calculated. All the lie reserves since 2017,
when PBR when into effect, are calculated on a PBR basis. There are no policies which were
subject to PBR but which both the deterministic and stochastic exclusion test was passed.
The 20 year term product was tested using a stochastic testing in June of 2010. There was less than
a 1% difference between the deterministic test and stochastic testing, so it was concluded that a
stochastic test was not needed.
For all the UL products, stochastic testing was done.
a. Deterministic, Not Stochastic Reserves
Net Deferred
Premium Deterministic Premium Reported
Product Reserve Reserve Asset (3) Reserve
(1) (2) (4)
Term 25,000 25,500 202 25,702
Non-participating 0 0 0 0
Whole Life
Participating Whole 0 0 0 0
Life
Universal Life 0 0 0 0
without secondary
guarantee
Universal Life with 0 0 0 0
Secondary
Guarantee
Variable Universal 0 0 0 0
Life
Variable Life 0 0 0 0
Indexed Life 0 0 0 0
Other 0 0 0 0
TOTAL 25,000 25,500 202 25,702
11CONFIDENTIAL
Report of the PBR Reserves for Surak Life
February 28, 2019
b. Stochastic Reserves
Net Deferred
Premium Deterministic Premium Reported
Product Reserve Reserve Asset (3) Reserve
(1) (2) (4)
Term 0 0 0 0
Non-participating 0 0 0 0
Whole Life
Participating Whole 0 0 0 0
Life
Universal Life 95,000 90,000 6,000 100,000
without secondary
guarantee
Universal Life with 249,000 250,000 10,000 247,000
Secondary
Guarantee
Variable Universal 80,000 85,000 4,000 90,000
Life
Variable Life 0 0 0 0
Indexed Life 0 0 0 0
Other 0 0 0 0
TOTAL 424,000 425,000 20,000 437,000
2. SUMMARY OF VALUATION ASSUMPTIONS
The valuation assumptions used in PBR modeling are given below:
MORTALITY ASSUMPTIONS
Surak Life does mortality studies yearly. One component of our expected mortality assumption is
the results from the current rolling 5 year average mortality study. The current study was for the
period 2010-2015. This is the basis for the experience mortality curve.
These assumptions did not change since the last year.
In computing the mortality, the first step was to determine the underwriting score by applying the
Underwriting Criteria algorithm to our current preferred underwriting rules. Using this score (“45”)
we chose a published industry mortality table without margin table for scores in the range 35-50.
This table (“Industry Table 35-50) is used as expected mortality.
Surak Life does not have full credibility for mortality. It was assumed that 1000 deaths were needed
for full credibility. The actual number of deaths were 123, so the Total Credibility Factor was .35
(the square root of 123 divided by 1000). Since all policies issued have essentially the same face
amount, I have excluded the effect of the variance in face amount when calculating the Total
12CONFIDENTIAL
Report of the PBR Reserves for Surak Life
February 28, 2019
Credibility Factor. Credibility was assigned to subsegments using the Normalized Credibility
Methodology. A summary of the mortality for term insurance is found in Appendix A. This
produced mortality factor of 1.0614 for age 45 year olds, and 1.034 for 65 year olds.
Note that Surak Life had experience through 10 years. Therefore, the credibility weighted mortality
curve for durations 11 through 20 was set equal to 1.04 times the Industry Table 35-50.
In addition, a margin was added to the mortality of 9.375 deaths per 1000 divided by ex. This is to
add conservatism to reflect the possible variance in results.
Reserves computed with the credibility weighted mortality curves, including the margins, were
compared to reserves using standard industry mortality table with margins. It was determined that
the valuation mortality table that most resembled these results was the 2010 Table D. This table
was therefore used to compute reserves.
LAPSE ASSUMPTIONS
A lapse study is done yearly for each product. The latest lapse study and the lapse assumptions used
are shown in Appendix C. There was only 10 years of credible information on lapses for most
products; for the UL with shadow account there was only 5 years of data. Beyond the year credible
data is available, a conservative assumption was made.
For UL, the lapse study currently does not break out the lapses by premium pattern. Therefore, an
estimate was made as to the lapses by premium pattern, taking into account the fact that those
paying lower premiums would likely lapse their products more than those who paid a level or single
premium.
For the term products and UL with secondary guarantees, the PBA products tested show worse
results with lower lapses. Therefore, for these products I determined that a 30% lower lapse factor
would be used as a reasonably conservative estimate. For the Accumulation UL and Variable UL,
the products were marginally worse off with higher lapses, so 30% higher than expected lapses was
used as a baseline.
These assumptions did not change since last year.
DYNAMIC LAPSE FORMULA
For general account universal life, the excess lapses were assumed to be triggered off of the
following formula: (Competitor rate-credited rate)*1.75.
There were no dynamic lapses assumed for the 20 year term business or the variable UL business.
13CONFIDENTIAL
Report of the PBR Reserves for Surak Life
February 28, 2019
Our best guess as to the dynamism of lapses based on information received from our reinsurer
would use a factor of 1.6; the factor used was increased slightly for conservatism.
We will continue to review industry data for this factor annually.
COMPETITOR RATE
For testing UL excess lapses, it was assumed that the competitor rate was assumed to be equal to the
5 year Treasury rate in any given scenario less 25 basis points. This formula was based on a
comparison of interest rates of our competitors over the last 10 years. We will continue to examine
this formula at least annually
INTEREST CREDITING
The 20 year level term product is fully guaranteed.
The Accumulation UL and the UL with a shadow account credits interest above the minimum at a
rate declared by the company. The goal is to earn a spread of 180 basis points over the portfolio
rate. This is our current spread, and the Company expects to maintain this in the future. There is no
explicit margin in this spread. This factor will be examined at least once a year.
VARIABLE ACCOUNT ASSUMPTION
The variable UL product does not have a fixed bucket, so there is no risk of money moving to or
from a fixed account to select against the company. Therefore, we do not need to develop
assumptions for movement between the fixed and variable account. The variable account funds
were modeled based on the NAIC C-3 Phase 3 scenario generator, which is updated once a year.
No additional margins were added to this assumption.
EXPENSES
Expenses are shown in Appendix D. They were loaded 5% from the best estimate assumptions.
Expenses are reviewed annually. Note that although the total expenses did not change significantly,
there was a revision to how the company allocated expenses between per policy and per $1000
expenses. The result was an increase in the per policy expenses and a decrease in the per $1000
expenses. These new expenses were used in the reserving, which resulted in a slight increase in
overall expenses for UL insurance, and a decrease in expenses for term insurance (less than $1000).
Expenses are reviewed annually. There is also an explicit per policy expense inflation factor used,
which is based on the 90 day Treasury rate, with a minimum rate of 2%.
14CONFIDENTIAL
Report of the PBR Reserves for Surak Life
February 28, 2019
PREMIUM PERSISTENCY
The UL products may continue without a premium payment each period. The results differ slightly
depending on which premium assumption is used. The actual premium payment patterns are given
in Appendix B, along with the baseline assumption used for this. The premium payment assumption
was based on the actual premium persistency patterns seen by studying the business for the last 10
years. As these numbers have been relatively constant over the last 10 years, no margins were
added to the results. We will continue to study this factor annually.
3. CASH FLOW MODEL
a. MODELING SYSTEM USED
Surak Life uses the SuperPBA modeling system, a commercial software system owned by
Whynot, for determining reserves. This system models both assets and liabilities. This is the
same system that is being used for asset adequacy analysis at Surak Life. There were a few
modifications that Surak Life made to the model in order to capture all the risks of their contracts
for PBA reserving, such as reflecting different potential premium payments for UL insurance.
These changes have now also been incorporated into the asset adequacy testing model.
b. MODEL SEGMENTS
Surak Life models its major product lines separately, as there are some differences expected in
assumptions. This means that Surak Life looks at is term products, Universal Life products
without secondary guarantees, universal life products with secondary guarantees, and Variable
Universal Life products separately.
For the assets, there is one PBR portfolio segment, since it was felt that the asset needs of the
products are similar.
c. GROUPING FOR DETERMINISTIC RESERVES
Each major product class was assigned a pro-rata portion of the assets in the PBR portfolio. The
assets were modeled on a seriatim basis.
With respect to modeling the liabilities, the same grouping was used as is used in asset adequacy
testing. This bands the policies by issue quarter, sex, 5 year age groups, underwriting class, and,
for the UL policies, premium payment pattern.
15CONFIDENTIAL
Report of the PBR Reserves for Surak Life
February 28, 2019
d. STOCHASIC GROUPING
The grouping for stochastic testing is the same as described above for deterministic reserves.
e. VALIDATION OF MODEL
The result of this grouping is compared to the actual net premium reserves held for the policies,
which are done on a seriatim basis, and are within 0.25% of these amounts.
f. PROJECTION PERIOD
The projection period used in the modeling in 30 years, at which time less than 5% of the
business is assumed to remain in force.
g. POLCY LOANS
Policy loans were included with the policies they are associated with. Since policy loans are
charges at the credited rate plus two percent for the effected policies, policy loans do not have a
large impact on these products.
h. REINSURANCE
Depending on the type of reinsurance, reinsurance could impact the results for PBR. However,
Surak Life is only using YRT reinsurance. There were several reinsurance treaties in effect at the
end of 2018 on Universal Life. These treaties were all for amounts of insurance in excess of the
retention limit and are reinsured on a YRT basis. The 20 year term product was 90% coinsured with
VerySafe Reinsurer.
There is no financial reinsurance. The overall effect of reinsurance is to reduce the volatility of
future benefit payment amounts by replacing the reinsured risk with a reinsurance premium. For
conservatism, Surak Life assumed that the reinsurance premiums would be equal to the mortality
assumed in the modeling times a factor of 10%, which were added to the expenses in the modeling.
16CONFIDENTIAL
Report of the PBR Reserves for Surak Life
February 28, 2019
i. GENERAL ACCOUNT EQUITY INVESTMENTS
The General Account backing the PBR segment has no equity investments.
j. SEPARATE ACCOUNT FUND GROUPING
There are only three variable account choices for UL: an indexed S&P 500 fund, a bond fund,
and an international fund. It is assumed these funds would earn rates consistent with those
developed for the standard scenario for variable annuities, as specified in VM-21.
k. ASSET INVESMENT STRATEGY
PORTFOLIO DESCRIPTION
The majority of invested assets backing PBA reserves in Surak Life are investment grade corporate
bonds, both public and private placements. The portfolio also includes a substantial holding in
CMOs and other mortgage backed securities. The majority of the CMOs are government or agency
backed. The portfolio is rounded out with commercial mortgages and residential mortgages. The
Table at the end of this section lists of assets by type and by product. The assets are modeled on a
seriatim basis.
The assets backing the general account segments used for term insurance and UL are given below:
ASSETS BACKING PBA PRODUCTS
Total Bonds 397,705 85.9%
Commercial Mortgage Loans 20,000 4.3%
Residential Mortgage Loans 20,000 4.3%
Cash & Short Term 10,000 2.2%
Miscellaneous 5,000 1.1%
Policy Loans 10,000 2.2%
Total 462,705 100%
17CONFIDENTIAL
Report of the PBR Reserves for Surak Life
February 28, 2019
Long Term Bonds Amount % of Total
Exempt Obligations 21,705 4.6%
NAIC 1 225,000 48.6%
NAIC 2 130,000 28.1%
NAIC 3 10,000 2.2%
NAIC 4 5,000 1.1%
NAIC 5 5,000 1.1%
NAIC 6 1,000 0.2%
INVESTMENT ASSUMPTIONS
As the chart above shows, most of the assets are in investment grade corporate bonds. The
investment philosophy for the PBR segment is to invest in assets with a maturity of about 10 years.
The chart below shows the actual assets in this portfolio at year-end 2018 (after its second year):
Duration of Assets
1-5 years 37,705
5-10 years 210,000
10-20 years 190,000
20+ years 25,000
TOTAL 462,705
It is required in VM-20 that the investment assumption be based on 50% AA rated bonds and 50%
A rated bonds, which is more conservative than the actual investments of the Company. Therefore,
in the modeling, it is assumed that all cash will be invested in 10 year non-call bonds, rated NAIC 1,
50% AA-rated and 50% A-rated.
DISINVESTMENT ASSUMPTION
For disinvestment, it is assumed that the company can borrow up to $1 million at the 90 day
Treasury rate plus 2%. Additional disinvestment would be on a pro-rata slice of the remaining
assets. This disinvestment assumption is consistent which what the Chief Investment Officer has
stated is the disinvestment strategy.
l. NOT LESS THAN ALTERNATIVE INVESTMENT STRATEGY
For conservatism, the alternative investment strategy mentioned in VM-20 was used as the basic
investment strategy.
18CONFIDENTIAL
Report of the PBR Reserves for Surak Life
February 28, 2019
m. NUMBER OF SCENARIOS
For stochastic testing 1000 scenarios were used. As a test, another 1000 scenarios were run, and
the answers were within 0.1% of those on the base scenario.
n. SCENARIO TECHNIQUES
No scenario reduction techniques were used for the 2018 testing.
4. MORTALITY
a. DESCRIPTION OF MORTALITY SEGMENTS
The term insurance products are in one segment.
All UL products are in a segment together. These plans were sold to the same type of
policyholders, and have the same underwriting standards. The average size and age of these
three plans are similar.
b. SUBSEGMENTS
Subsegments are made of the mortality based on 10 year age groups. Surak Life did a test to
show that the weighted segments together produce the total number of expected claims which is
greater than the company experience for the aggregate claims (Note: if this were a real report,
I’d include a table showing this in the Appendix.)
c. UNDERWRITING SCORING PROCEDURE
In computing the mortality, the first step was to determine the underwriting score by applying the
Underwriting Criteria algorithm to our current preferred underwriting rules. Using this score (“45”)
we chose a published industry mortality table without margin table for scores in the range 35-50.
This table (“Industry Table 35-50) is used as expected mortality. (Note: if this were a real report,
each class would be explained.)
19CONFIDENTIAL
Report of the PBR Reserves for Surak Life
February 28, 2019
d. SOURCE OF DATA OTHER THAN OWN COMPANY
The sources of mortality data was Surak’s company experience, which was blended with the
SOA 2014 VBA table. (Note: if other data is used, one must explain the source, the similarities
of products, adjustments made to account for differences, and the number of deaths and death
claim amounts).
e. ADJUSTMENTS TO COMPANY EXPERIENCE
Other than adding a margin, no adjustments were made to company experience due to
underwriting. The Company has strict rules regarding underwriting, and does not allow
exceptions for any reason. (Note: if exceptions are made, the Company needs to explain the
rationale for the adjustments, the summary of studies to support exceptions, documentation of
the mathematics used to support the adjustments, and summary of any other relevant
information.)
f. LEVEL OF CREDIBILITY
i. Surak Life does not have full credibility for mortality. It was assumed that 1000 deaths
were needed for full credibility. For term insurance, the actual number of deaths were
123, so the Total Credibility Factor was .35 (the square root of 123 divided by 1000).
Since all policies issued have essentially the same face amount, the company has
excluded the effect of the variance in face amount when calculating the Total Credibility
Factor. Credibility was assigned to subsegments using the Normalized Credibility
Methodology. This methodology was recommended in the AAA Practice Note on VM-
20.
ii. A summary of the mortality for term insurance is found in Appendix A. The
adjustment varies by ten year age groups. The produced mortality factor of 1.0614 for
age 45 year olds, and 1.034 for 65 year olds.
g. COMPANY EXPERIENCE MORTALITY
Appendix A shows [a sample of] the actual company mortality.
h. INDUSTRY BASIC MORTALITY USED
Where industry data was used, it was based on the 2014 VBA Table. The factors are based on
the Underwriting Criteria Scores.
20CONFIDENTIAL
Report of the PBR Reserves for Surak Life
February 28, 2019
i. MORTALITY IMPROVEMENT
For conservatism, no mortality improvement factors were used to bring the industry mortality
factors up to the valuation date.
j. SUBSTANDARD LIVES
All substandard lives used mortality factors consistent with the Table rating; e.g., 125% of
baseline for Table A, 150% for Table B, etc.
k. ADJUSTMENTS TO COMPANY EXPERIENCE
i. Company experience was graded to100% of industry tables at the earlier of age 95 or
20 years after policy underwriting.
ii. The basic table used was the 2014 VBA Table, 45% for the UltraPreferred [etc.]
iii. Tables were smoothed using the Jenkins modified fifth difference oscillatory
interpolation formula
iv. All rates were checked to ensure consistency. No adjustments were needed.
v. The anticipated experience used for the reserve mortality assumption is
conservative. When the mortality factors used for the reserve calculation are
compared to the actual experience, there is margin. [if this were real, I’d include a
table showing this in Appendix A].
l. MARGINS
The table ignores mortality improvements. In addition, a margin was added to the mortality of
9.375 deaths per 1000 divided by ex . This is to add conservatism to reflect the possible variance
in results.
m. ACTUAL TO EXPECTED ANALYSIS
The Company performs actual to expected analysis each year. [Sample] results are included in
Appendix A.
21CONFIDENTIAL
Report of the PBR Reserves for Surak Life
February 28, 2019
5. POLICYHOLDER BEHAVIOR
a. SOURCE OF DATA
The Company uses its own experience on the products for the base lapse assumption. There was
only 10 years of credible information on lapses for most products; for the UL with shadow account
there was only 5 years of data. Beyond the year credible data is available, a conservative
assumption was made.
b. WHEN DATA WAS NOT FULLY CREDIBLE
When actual data was not available, pricing assumptions were used as a baseline, with margins
added for conservatism. Pricing assumptions are typically based on company experience where
applicable, or industry data, such as the LIMRA/SOA lapse study, where this is not the case.
c. ANTICIPATED EXPERIENCE
Anticipated experience was calculated based on actual data, with margins for conservatism as
explained above.
d. ACTUAL TO EXPECTED ANALYSIS
A study of actual to expected analysis is done annually.
e. MARGINS
When data was not fully credible, a margin for conservatism was added. For the ULSG product,
it was determined that lower lapses were conservative, so the assumed lapse rates were reduced
by 30%. For the Accumulation UL, Variable UL and term insurance, the products were marginally
worse off with higher lapses, so 30% higher than expected lapses was used as a baseline.
For UL, the lapse study currently does not break out the lapses by premium pattern. Therefore, an
estimate was made as to the lapses by premium pattern, taking into account the fact that those
paying lower premiums would likely lapse their products more than those who paid a level or single
premium.
22You can also read
