LFV Exam

What were some of the initial impacts of AG49?

- Did not hurt IUL sales, which are still strong - More uniformity in max illustrated credited rates - Greater use of persistency bonuses to improved long-term illustration results - Fewer indexes offered - Shift away designs that use participation rates - Insurers have adjusted loads and fees to fine-tune competitiveness

How does the 2001 CSO differ from previous mortality tables?

- Extends ending age from 99 to 120 - Extends select period from 10 to 25 years

What does a product's classification under SSAP No. 50 ultimately determine (3 things)?

- How revenues and costs are reported on the income statement - Methodology and assumptions required in determining policy reserves - Supporting info required in exhibits, schedules, and supplemental reports of the statutory annual statement

What are some criteria that affect Dynamic Valuation Interest Rates and how do they affect them?

- Product classification (varies) - The reference rate - Guarantee duration of policy (the longer a policy can remain inforce, the lower the valuation interest rate) - Cash settlement options and future int rate guarantees (plans with disintermediation risk result in having a lower Val int rate) - Issue year method vs. Change in fund method . issue year method means Val int rate is based on issue year only, but change in fund method changes the rate when a fund value increases. more dynamic but more complex

How are actuarial guidelines different from model regulations? How are they enforced differently from actual laws?

1. AGs allow regulators to implement new rules and standards faster 2. AGs do not require state by state legislation 3. AGs may have more room for legal interpretation They are not enforced any differently than laws

What are the 3 additional disclosures required by AG49?

1. Alternative Scale Illustration - shows sensitivity to basic illustration, assumes no par loan coverage 2. Max and min values of geometric returns in MIICR to give sense of extremes in historical data 3. Table covering last 20 years of actual index changes side by side with what company's IUL interest credited rates would have been

What are the required certifications under AG35?

1. Appointed actuary must certify assumptions underlying all option values. 2. Must sign and file quarterly with stat financials. 3. For Type 1 reserves, provide Reasonableness of Assumptions Certification that assumptions used for initial EDIM reserve are reasonable in light of economic conditions at issue. 4. For Type 2 reserves, provide Reasonableness and Consistency of Assumptions Certification that states option values are reasonable and assumptions are consistent with comparable assumptions used to determine value of derivative instruments.

Describe how to use the CARVM-UMV method to calculate an EIA reserve under AG35.

1. At each future duration, determine the MV of the call option that would exactly hedge index credits for each year of the EIA. 2. Project the MV of the options forward at the valuation interest rate to the point where they would expire (for example, if a call option worth 125 today would pay index credits in years 1, 2 and 3, and val. int rate is 5.5%, the projected MV would be 125 * 1.055^3 = 147) 3. Determine the future guaranteed benefits at each time point by adding the MV of the call options + Guaranteed floor. (for example, if in previous example guar. CSV = 1000, your guar. ben. in year 3 would be 1000+147=1147) 4. Your CARVM reserve = max (all future guaranteed benefits from step 3)

Describe how to use the Enhanced Discounted Intrinsic Method (EDIM) to calculate an EIA reserve under AG35.

1. At issue, use CARVM-UMV or MVRM to determine the initial reserve. 2. Determine the ending value of the guarantee. 3. Solve for the fixed constant growth rate that would take you from the initial reserve to the ending guarantee in the guarantee period. Use this to determine the "Fixed Component" for each year. 4. At each anniversary, calculate the Equity Component, which is the discounted intrinsic value of the options (the in-the-moneyness floored at zero). i.e. if interest is 1.04 and option is $10 in the money at time 1, the time zero equity component is 10/1.04. 5. Final reserve = Fixed Component + Equity component.

What changes were there from section 8A of AG38 to section 8B?

1. Basic and deficiency reserves in the second step must be calculated on a segmented basis. 2. "7% solution" - for step 4, where you calculate excess premiums as a % of the single payment, can calculate as a % of future payments as well, and must divide result by 0.93 to add a 7% premium load. Cap the final ratio at 1.

Which method should you use to calculate an EIA reserve under AG35 for the following situations? 1. Need to use the most precise method possible, but cannot satisfy Hedged as Required Criteria. 2. Need to use a simple, efficient method to use without satisfying HaR Criteria. 3. Company satisfies HaR criteria quarterly 4. Company does not satisfy HaR criteria and has a product where guarantees reset

1. CARVM-UMV 2. MVRM 3. EDIM 4. BSPM

How do you handle the following product features in a CARVM calculation? 1. Bailout provision 2. MVAs 3. Two-Tiered Interest Credits

1. Calculate CARVM reserve by setting surr ch = 0 in any year bailout can be triggered 2. If annuity is in general account (i.e. fixed and not variable), exclude MVA from reserve calcs 3. Project CSV and Annuitization AV separately. Reserve is max (PV(CSV), PV(Annuitization AV))

Describe the irritatingly specific 8-step process for determining FPUL CRVM Reserves

1. Calculate a guaranteed maturity premium, which is the level gross premium that endows the contract at the latest maturity date. Use guaranteed assumptions as of the issue date. 2. Calculate Guaranteed Maturity Fund, which is the projected fund values at each issue date (assuming GMP is premium paid) 3. At each val date, project future FVs starting with max (Current FV, GMF), also using guaranteed values and assuming GMP is paid. 4. Calculate a net level premium assuming GMP is paid, which is the GMP multiplied by the ratio of PVFB to PVGMP (from issue date) 5. Calculate PV(GuarBen) using projected values from step 3 and VALUATION mort/interest 6. At the valuation date, calculate an r-ratio, where r is the minimum of 1 and FV/GMF. 7. Calculate the Net Level Reserve as r x (PV(GuarBen) - PVNLP) (from steps 5 and 4, respectively). Use valuation assumptions for the PV calcs 8. CRVM Reserve = NLR - r x Unamortized CRVM EA (Use PV(GuarBen) for CRVM EA formula)

What are the steps to calculate a CRVM reserve AT ISSUE under IGRM for an EIUL?

1. Calculate an implied guaranteed rate for initial term = guar int rate + Accumulated option cost expressed as % of IAV that covers index benefit. 2. Calculate an implied guaranteed rate for future terms = guar renewal int rate for future terms + accum. hist. moving avg cost of the option expressed as % of IAV 3. Follow UL Model Reg, calculating GMP, GMF and net premium based on guarantees at issue under CRVM

Describe how to use the Market Value Reserve Method under Black-Scholes to calculate an EIA reserve under AG35. Why might this be preferable to the normal MVRM method?

1. Calculate the cost of a call option that fully hedges index-based benefit for the year as a % of AV 2. Accumulate that percentage to end of year at risk-free rate. 3. Use the percentage from (2) as the projected growth rate of AV during that period and repeat for other periods. 4. Based on par rates, spreads, etc., determine index level that would provide that projected AV each anniversary. 5. Determine future benefits from those index levels 6. Do CARVM calculation as usual. This is a better method if certain account features (like annual ratchets) result in a reset of the guarantee each year, thus requiring separate option purchases at each anniversary.

What are the 2 main goals of SSAP No. 50?

1. Classify insurance contracts into 4 broad categories, one of which is life contracts. 2. Determine, based on the classification set in (1), the methodologies and assumptions used to set reserves.

What are a few general requirements for EDIM, MVRM, and BSPM when using these methods to calculate an EIA reserve under AG35?

1. Contract must have a single dominant benefit. For most, this will be either the CSV or max possible ending IAV. 2. A term must be set for the effective end date of calculations - equivalent to the point in time when the single dominant benefit will be paid. 3. An appointed actuary must demonstrate that the above requirements are met before performing calculations.

Describe the 5 steps for applying guideline XXX to the calculation of a statutory term life reserve?

1. Determine contract segments 2. Calculate segmented net premiums 3. Calculate segmented reserves = PVDB in segment - PVNPs in segment 4. Calculate unitary reserves = normal CRVM without segments 5. Calculate basic reserve = max ((3) and (4))

Describe the original approach to calculating a reserve for ULSG business under section 8A of AG38.

1. Determine minimum GP at issue that satisfies SG requirement 2. Calculate basic and deficiency reserves using GP in step 1 3. Determine premiums paid in excess of minimum GP - For shadow account designs, this is just the value of the shadow account - For cumulative premium designs, it's the amount paid in excess of minimum cumulative premium accounting for interest 4. Calculate excess premiums as a % of the single payment necessary at val date to fully fund remaining SG assuming min GP has been paid through val date 5. Calculate the NSP for secondary guarantee again BUT this time use XXX mortality 6. Determine net amount of addl premiums: (4) x [(5) - (3)] 7. Calculate reduced deficiency reserve = Def reserve from (2) x [1-(4)] 8. Calculate actual reserve = Min [(5), (6) + (2)] - SurrCh. Floor at reserve from (2) 9. Increased base reserve = (8) - (7)

What are the steps required to backcast the maximum index illustrated credited rate as prescribed by AG49?

1. Establish backcasting period, which starts 66 years before end of CY 2. Determine cumulative growth on benchmark index account for first 25 years of backcasting period 3. Solve for geometric average annual rate of return during the 25-year period in step 2 4. Advance 25-year window by one trading day and repeat step 3 5. Repeat step 4 until you read end of the year preceding the CY for which you're determining the rate 6. Take the simple arithmetic average of all geometric returns in steps 3-5

What is the main purpose of AG 48?

1. Establish standards governing XXX/AXXX reserve financing transactions 2. Ensure that Primary Security held is >= required level

What did AG 38 accomplish (4 points)?

1. Examples of product designs it applied to were given, as well as how actuaries should apply regulation to them. 2. Provided approach to address underfunded (or overfunded) ULSG 3. Incorporates UL with shadow fund designs into the approaches 4. Addressed all future product designs

What approaches do companies typically use to come up with a valuation interest rate to use for statutory VUL Reserves (there are 4 of them)? How is the GMDB benefit considered?

1. For contracts with a fixed account option, use the long-term guaranteed rate in the fixed account 2. Use the valuation rate less some or all of the contractual asset-based charges 3. 4% 4. The rate credited to policy loans The GMDB benefit is considered as a separate additional reserve

What conditions must be satisfied to a company to receive a reserve credit when ceding XXX/AXXX reserves to captives, SPVs or uncertified/uncompliant reinsurers?

1. Gross reserves must be held by ceding insurer according to current reserves guidance 2. Primary Security Requirement (based on actuarial method from VM-20 PBR with modifications) must be satisfied by ceding insurer 3. "RBC cushion" must be held by at least one party to transaction 4. Domestic regulator of ceding insurer must approve transaction Additional requirements: - Ceding company must issue qualified AO if Framework is not followed - Ceding company and its indep auditor must not whether Framework is being followed

What conditions must be met for the Implied Guarantee Rate Method (IGRM) under AG36 to be consistent with CARVM? How are the conditions different for the Type 2a Prerequisite Criteria?

1. Imp guar rate after first term <= the appropriate max val interest rate 2. Each index-based benefit term <= 1 year 3. AA has demonstrated to state regulators that the requirements in (1) and (2) have been met Conditions are the same, except a company can prove policies with identical renewal guarantees issued in 3 of the past 5 years satisfy condition 1 in lieu of current policies satisfying it.

Describe FASB's and IAS's three-tiered hierarchy for methods of determining fair value, in the order of most preferable to least.

1. Market Value, when available 2. Market Value of similar instruments, with appropriate adjustments 3. PV of projected cash flows

For the following features, what assumptions should be used to project values for GMDB reserve calculations under AG37? 1. COI rates 2. Length of guarantee 3. AV interest rate 4. Changes in policy options and benefits 5. Length of projection

1. Min valuation mortality 2. Maximum period of GMDB 3. Valuation interest rate 4. Assumed to continue unchanged 5. Maximum period of guarantee

Describe how section 8E of AG38 differs from 8C

1. Minimum premium subject to safe harbor rules 2. Otherwise use similar process as 8C.

Define the following types of reserves: 1. Terminal Reserve 2. Initial Reserve 3. Mean Reserve 4. Mid-Terminal Reserve 5. Fully continuous reserve 6. Semi-continuous reserve 7. Immediate Payment of Claims Reserve (IPCR) 8. Refund reserve

1. Net premium reserve at beginning of a policy year, before BOY premium is paid 2. A terminal Reserve PLUS the net premium 3. A weighted linear avg of the initial Reserve and terminal Reserve 4. A weighted average of two terminal reserves 5. Continuously payable premiums and DBs - not realistic because premiums are never continuous 6. Continuous death benefits, curtate premiums 7. Required for any reserve method that assumes curtate death benefits, since they are usually paid closer to time of death 8. Refund for portion of paid premium refunded on death if it was unearned. Required for curtate DBs

A statutory GMDB reserve is calculated as the largest of what three separate items? Describe each item.

1. One Year Term (OYT) Method Reserve - A reserve calculated as the excess of the GMDB over the Death Benefit if the SA assets drop by a third in value immediately and then appreciates at the assumed investment rate. This calculation is carried back with interest and mortality. 2. Attained Age Level Reserve (AALR) - a reserve designed to react slowly over time to protect against an extended period of poor asset performance. 3. Principles-Based Approach - Accumulation of amounts allocated to GMDB less GMDB claims paid - based on company's judgment of risk. Only applies to fixed premium variable life product using the 1983 Variable Life Model Reg

Describe the calculation of the following components of an FPT reserve: 1. Benefit Premium 2. Net Premium for FPT 3. Expense Allowance 4. Expense Premium 5. Net Premium 6. Modified Reserve at t

1. PVFB at 0 divided by annuity factor spread over pay period of the policy. 2. PFFB at 1 divided by annuity factor spread over pay period of policy PAST year 1. 3. PVFB at 1 divided by annuity factor over life of policy, minus COI at year 1 4. Expense allowance at issue divided by annuity factor for life of policy 5. Benefit Premium + Expense Premium 6. Net Level Premium Reserve - Unamortized EA

What are the steps to calculate a CARVM reserve?

1. Project the fund value forward to calculate all future guaranteed benefits using guaranteed assumptions. Must include all benefits including riders. 2. Calculate PV Benefits - PV Premiums for each future policy year and discount back to the val date using valuation interest and mortality (if applicable). For flexible premium deferred annuities, assume zero future premium. 3. CARVM reserve = the greatest of the present values from step 2

What are the 3 main goals of AG49?

1. Provide guidance in determining a max illustrated index credited rate and earned interest rate for the DCS. 2. Limit policy loan leverage for indexed loans 3. Require addl disclosures not required in non-indexed UL illustrations

What are the Option Replication Criteria to meet the Hedged as Required requirement (there are 6, but don't kill yourself to memorize all of them because they kind of suck)? Bonus: If a hedge fails the max tolerance test, what are the different failure levels and repercussions?

1. Required equivalence - options held must have equivalent characteristics with options embedded in the products 2. Each quarter, the notional amount of the target of option replication strategy must be >= sum of specified percentages of each contract's AV. 3. Company must have plan in place for hedging risks associated with interim death benefits, early surrenders, etc. 4. Company must have system in place to monitor hedging strategy effectiveness. 5. Company must state and explicit max tolerance for differences between expected performance of the hedge and actual results of the hedge. 6. Max tolerance test and compliance evaluation test must be performed weekly and compare change in quarterly MV of hedge portfolio with change in MV of options embedded in liability portfolio. Max difference between these two changes permitted is 10%. Failure levels: Between 10% and 25% - Notify commissioner in each state where reserves are hedged by option replication strategy Between 25% and 35% - Notify commissioner of the amount of reserves being hedge by strategy AND the impact on surplus of reporting the reserves based on CARVM-UMV >35% - Out of compliance with HaR - either correct or move to Type 2 calculation.

Describe how to use the Market Value Reserve Method (MVRM) to calculate an EIA reserve under AG35.

1. Simplification of CARVM-UMV. Calculate only the final option cost to fund the index payments (i.e. if it's a 4-year EIA, determine the cost of the option that would fund the difference between the guarantee and index for 4 years). 2. Calculate the benefit payable at end of term = Ending Guarantee + projected option MV Ex. If ending guarantee is 1000 and option value in part 1 was 125, and interest is 4%, final benefit payable at end of term is 1000 + 125*1.04^4. 3. Calculate an implied growth rate r = (Benefit from (2) / single premium)^0.25 - 1 4. Now future account values can be projected using the final rate r from step 3.

What are some reasons companies try to avoid deficiency reserves?

1. They add to first-year strain 2. Seriatim runs usually required 3. Not allowed to be included in tax reserves, and thus no tax relief

What are the two reasons a reserve would be released?

1. To pay out a claim. 2. No need to reserve for a policyholder if they fall out of census (e.g. if they lapse)

State which AG36 methods are subject to each requirement below. 1. HaR criteria must be met. 2. Implied future guarantee rate <= max valuation rate 3. Each index-based benefit term <= 1 year 4. Must demonstrate previous two requirements are met at issue or if changing method. 5. Appointed Actuary must sign reasonableness and consistency of assumptions certification 6. Must test reserves for asset adequacy Bonus: which three of these requirements make up the Type 2a prerequisite criteria?

1. Type 1 only 2. Type 1 and Type 2a 3. Type 1 and Type 2a 4. Type 1 and Type 2a 5. All 3 types 6. All 3 types 2, 3 and 4 make up the prerequisite criteria

Compare/contrast the 3 computational CRVM methods prescribed by AG36.

1. Type 1: Implied Guarantee Rate Method - more of a book value approach, produces the most stable reserves, requires HaR criteria to be met. 2. Type 2a: CRVM with updated average market value: Hybrid of Type 1 and 2, updates with market changes more slowly than type do. Does not require HaR criteria to be met. 3. Type 2: CRVM with Updated Market Value: Most volatile method. Uses only current market information and does not require HaR criteria to be met.

What are some ways companies have come up with for easing the surplus strain caused by AG38?

1. Various forms of reinsurance 2. Letters of credit 3. Securitization 4. Other forms of financial engineering This list isn't really exclusive to AG38 - these methods can be used to relieve surplus strain in a lot of cases.

How do you calculate a mean reserve for a valuation date of 6/1/18 when the policy anniversary is 2/1/18? What additional step would you have to take if the policyholder pays a quarterly premium rather than an annual one?

2/3rds of the year remains. So take 2/3rds of the initial reserve (prior terminal reserve + net premium) as of 2/1/18 and weigh it with 1/3rd of the terminal reserve as of 2/1/19. If a policyholder pays quarterly premium, subtract it out via a deferred premium asset. In this case, premium from 8/1/18 and 11/1/18 would need to be subtracted out.

What are the effective issue dates for each section of AG38?

8A - 2004 or earlier 8B - 2005-2006 8C - 2007-2012 8D - 2005-2012 (supercedes 8B and C if there is a shadow account design) 8E - 2013 and later

What is a deposit-type contract?

A contract containing no mortality or morbidity risk

How are contract segments determined in the calculation of a statutory term life reserve?

A new contract segment is formed in year t when the gross premium ratio from year t to t-1 is greater than the mortality ratio for the same two years. This implies the premiums are increasing faster than the risk. However, the mortality ratio can be moved up or down 1% in any policy year to prevent creating new segments due to rounding.

What limits does AG49 put on participating policy loans in illustrations?

A par policy loan will show a borrowing advantage if the policy loan rate < index rate. So AG49 restricts it such that the policy loan rate can be at most 100 basis points less than the index rate.

How is an AALR calculated under AG 37? (explain conceptually)

AALR = Residue + Payment Payment = (A(x+t)(GMDB) - Residue) / annuity factor the Payment is the additional level premium necessary to fund future excess GMDBs. This could be negative if the AALR brought forward from the previous period is already sufficient to fund additional DBs. Residue is the prior year's AALR brought forward with valuation interest and mortality.

On the topic of variable annuities, what did AG33, AG34 and AG39 each cover, and what were the problems with them? What has replaced them now?

AG33: CARVM for deferred annuities AG34: Original AG for VAs with GMDBs AG39: Original AG for VAs with VAGLBs All replaced by AG43 now. Problems they had: - Reserves may have been too low and didn't capture risk profile of complex VA guarantees - Reserves may have been too volatile - Reserves may have been unintuitive - Reserve may have been too conservative in some cases

What does AG35 cover? Why isn't the topic covered under AG33 instead?

AG35 interprets SVL for EIAs and prescribes several methods for reserving. AG33, the actuarial guideline for fixed deferred annuities, doesn't work well for EIAs since they have a mix of guaranteed values and unknown index-based benefits.

Why was AG38 (AXXX) introduced? Why don't companies like it?

AG38 was introduced to apply XXX Guidelines to universal life with secondary guarantees. Because these can behave similar to term products, companies were "gaming" the system to keep reserves much lower than regulators liked, so the guideline was introduced to fix that. Companies don't like it because they believe the resulting reserve was too high and created redundant reserves.

What is the purpose of AG49? What issues was it intended to solve?

AG49 was created to clarify how to do IUL illustrations. Issues prior to AG49 included: - Overly optimistic index credits due to cherry picking indexes - Too much variation in actuarial judgment - Confusion for consumers due to complexity of contracts.

What changes were there from section 8B of AG38 to section 8C?

Added "CEO compromise" which consisted of two parts, designed as an interim solution until PBR could be established: 1. Split 2001 CSO into preferred and standard for term and ULSG 2. Introduce modest lapse rates for ULSG only ranging from 0-2%. Also required standalone AAT, and for >=20% of company's business to be preferred before using preferred tables. Required tests of PV of DBs at val date on preferred risks using anticipated mortality

What do alpha and beta signify in a FPT calculation?

Alpha is the first year's net premium, which is simply the cost of insurance under FPT Beta is the net premium for all other years

What is the typical cause of a deficiency reserve (or alternative minimum reserve) for UL?

Any product feature that lowers the GMP, such as a guaranteed int rate > valuation int rate, a guar. COI < valuation mortality, or no expense load (since that makes GMP lower with no expenses to cover)

What types of term products are exempt from Guideline XXX?

Attained age YRT and n-year renewable term

Why does NP = c(x) in the first year for the full preliminary term stat method?

Because the idea is that the first year's NP will be exactly enough to pay the mortality cost for the first year, so the reserve is exhausted by EOY 1.

Why can't CRVM be used for variable life blocks?

Because variable life inherently has no guaranteed interest rate, since the policyholder bears the investment risk.

Despite AG 43's methodology being largely driven by C-3 Phase II, what's the main difference in focus between the two?

C-3 Phase II focuses on capital. AG 43 focuses on reserves.

What changes were there from section 8C of AG38 to section 8D? What additional documentation did it require?

Complete overhaul. No more 9-step process, instead reserves are greater of: (a) method used by company already or (b) modified deterministic reserve based on VM-20 PBR and a more limited investment return Alternative: Calculate reserve using lower premium schedule offered and VM-20 mortality and lapse Addl doc required: 1. Standalone act memo for section D business 2. List of reinsurers and reinsurance method and details 3. Additional actuarial and financial details if using primary methodology.

What is the difference between standard CARVM and New York's "continuous CARVM" version?

Continuous CARVM assumes that the contractholder will elect benefits when they have the highest value, at any day of the policy year (rather than just end of year). One key implication is that if there are surrender charges, surrenders for policy year t may occur on the first day of policy year t+1

How does SVL define a deficiency reserve?

Def Reserve = Reserve using GP - Reserve using NP Use valuation minimum mortality and interest

What additional documentation is required by section 8E of AG38?

For a product using safe harbor: - an actuarial opinion and - representation from an officer that the product complies with those requirements is required. For other products - a report describing review and rationale for premium pattern used in reserve calc.

How are GAAP Valuation assumptions different from Stat?

GAAP is much less conservative and generally uses best estimates with PADs rather than prescribed assumptions. GAAP also uses DAC to amortize acquisition costs and avoid first year strain.

What is a Gross Premium Valuation and how is it calculated? What is it used for typically?

GPV = PV(Future Benefits) + PV(Future Expenses) - PV(future gross premiums) Used to determine value of a company or assess solvency

What does AG33 cover?

How to apply CARVM to annuities (specifically, how to treat different types of elective and non-elective benefits in the CARVM calculation)

What is the formula for the Max Interest Rate allowed under SVL post-1980? How do you determine the reference rate to use in it?

I = 0.03 + W(R1-0.03) + (W/2)(R2-0.09) I must be rounded to nearest 0.25% and not changed if less than 0.5% different from prior year. R1 = min (Ref rate, 0.09) R2 = max(Ref rate, 0.09) W = weighting factor Ref rate for life insurance = lesser of 36 and 12 month avg of Moody's corporate bond yields. Ref rate for SPIA = 12 month avg Ref rate for other products = varies W = 0.5 for guarantee duration of 0-10 years W = 0.45 for guarantee duration 11-20 years W = 0.35 for guarantee duration 21+ years W= 0.8 for SPIA and life contingent annuities in general, W goes down the less restrictive the policy is

In 2000, you calculate EIUL reserves using a Type 1 method under AG36. In 2001, the product fails the HaR criteria. However, the criteria is met again in 2003. What are the ramifications for this product over time?

Initially, Type 1 is allowed. However, if HaR fails, must disclose in certification and correct within one quarter. If not corrected within one quarter, must choose Type 2a or 2. Then if HaR criteria is met again later, may switch back to Type 1 with domicile commissioner approval.

What is a common criticism of the backcasting approach prescribed for developing the MIICR under AG49?

It fails to reflect that interest rates, caps, and par rates would have been different in the past than they are today.

What is a CARVM reserve?

It's a statutory reserve for annuities equivalent to the greatest (PVFB - PVFP) for any future policy year, assuming benefits occur at the end of each policy year and discounting them back to the valuation date.

What is a modified statutory reserve method? Name and describe two examples of them.

It's any reserve method that includes an expense allowance (which lowers reserves). FPT method: Expense allowance designed to lower reserves in first year by calculating net level premium separately for year 1 and others. CRVM method: Equivalent to FPT, but expense allowance must be positive and must be less than the EA for a 20-pay whole life contract. This is the smallest reserve allowable by SVL.

Name the key authority figures, purpose, and primary reporting statement associated with statutory reserving.

Key authority figure: NAIC Purpose: Solvency Reporting: Balance sheet

Name the key authority figures, purpose, and primary reporting statement associated with GAAP reserving

Key authority figures: SEC and FASB Purpose: Understanding earnings Reporting: Income statement

Which assumptions are not explicitly defined under statutory accounting? Why?

Lapse and maintenence expense assumptions are not defined. The idea is that the defined mortality and interest assumptions are conservative enough on their own.

How does AG49 limit the earned rate in the disciplined current scale?

Limits it to 145% of the general account net investment rate

How do you formulaically relate a mid-terminal reserve to a mean reserve?

Mean Reserve - DPA = Mid-Terminal Reserve + UPL

Describe methods I and II for determining minimum premiums at issue for section 8E of AG38

Method 1: Safe Harbors - If using shadow acct with single set of charges/credits, set min premiums so shadow account is zero at beginning and end of policy year using guar. charges and credits (credit limited to Moody's index + 3%) - If using cumulative acct with single set of charges/credits, set min premiums so that cumulative prem reqs are satisfied at beginning and end of each policy year (same crediting limit applies) - If using multiple set of charges and/or credits, set min premiums using the set the produces lowest premiums, ignoring necessity of satisfying secondary guar requirement (same crediting limit applies) Method II: For product designs that don't meet safe harbors - Set min prems such that policy stays inforce and produces greatest def reserve at issue with X-factors equal to 100%. - Subject them to certain sensitivities - level for life of SG, increasing over life of SG, and combo of the two.

Name and describe the two types of fixed premium variable life designs discussed in the Variable Life reading.

New York Life Design - Death benefit is max of the Face Value and the Face Value x (actual CV/tabular CV) using assumed interest rate. Equitable Design - Any investment earnings over the assumed interest rate purchase paid-up additions at net single premium rates using assumed interest rate. PUAs can be positive or negative.

What's the difference between Option 1 and Option 2 UL contracts?

Option 1: Death Benefit = Face Amount Option 2: Death Benefit = Face Amount + Cash Value

What is the difference between policy reserves and claim reserves?

Policy reserves are held for uncertain future events, while claim reserves are held for events that have already occurred, but in amounts not yet known.

What are the pros and cons of using a "Type 1" method to calculate an EIA reserve under AG35?

Pros: - Easiest method to use - Requires doing CARVM-UMV or MVRM only once at issue Cons: - Must satisfy "hedged as required" criteria to use, and must continue satisfying that criteria quarterly to keep using.

Why is statutory reserving for term life more complex than for whole life?

Regulations exist that are designed to prevent companies from holding very low or negative reserves when term premium scales increase steeply (Guideline XXX)

What 4 characteristics should a statutory GMDB reserve have?

Remember HARD - it's HARD to price a GMDB 1. Held in the general account 2. Adequate to cover next year's GMDB claims under all but the most extreme circumstances 3. Reacts slowly but steadily during a hypothetical extended period of poor investment experience 4. Does not overreact and cause unnecessary fluctuations in surplus

What are the basic requirements for an appointed actuary to comply with AG48?

Remember: PAID 1. Provide qualified opinion if either primary security requirement or other security requirement is not met, or if one of the affiliated reinsurers issued a qualified opinion 2. Analyze each reinsurance treaty to determine if Primary and Other Security requirements are satisfied. 3. Issue actuarial opinion for whether requirements have been satisfied. 4. Document AG48 analysis in act memo

What items does the NAIC's valuation manual require for an Actuarial Opinion of Reserves?

Remember: SAME - Submitted Annually - Adequacy of reserves in light of assets is stated - Memorandum with detail about how adequacy was tested and that amounts are consistent with prior reported amounts - Effects of assets backing reserves, investment earnings, and contract benefits/expenses are considered

What are the Basic Criteria to meet the Hedged as Required requirement (there are 5)?

Remember: SPARE 1. System must be in place to monitor hedging strategy effectiveness. 2. Plan must be in place in place for hedging risks associated with interim death benefits, early surrenders, etc. 3. Amount of hedge purchases must be >= a specified percentage of the product's AV at issue. The percentage says company can assume no more than 3% annual elective benefit decrements per year (e.g. a 5 yr p-t-p product SP% = (1-.03)^5 = 86%, meaning company must head at least 86% of indexed AV at issue. 4. Required equivalence - options held must have equivalent characteristics with options embedded in the products 5. Explicit max tolerance must be stated for differences between expected performance of the hedge and actual results of the hedge.

What is the key difference between SSAP No. 51 and No. 52?

SSAP No. 51 is for Life Contracts, but SSAP No. 52 is for Deposit-Type Contracts

How do you calculate a mid-terminal (or interpolated terminal) reserve for a valuation date of 6/1/18 when the policy anniversary is 2/1/18? What extra component must be added due to the lack of a net premium reflected in the base calculation?

Take 2/3rd of the previous terminal reserve weighted with 1/3rd of the next terminal reserve. Since net premium isn't reflected, must add an unearned premium liability, which is the portion of received premium that hasn't yet been earned. For example, if the policyholder paid a quarterly premium on 4/1 and the valuation date is 6/1, there is a month left until the next quarterly premium, so the UPL is 1/3*QuarterlyPremium

What is the main rule of relating the CSV of a contract to the reserve? What must happen if this rule is broken?

The CSV always must be <= the total policy stat reserve. Otherwise, an excess cash surrender value must be held to make up the difference.

Why can't tax reserves be higher than stat reserves?

The IRS benefits when a company has higher taxable income. The higher a reserve is, the less income there is. Since stat reserves are focused on Solvency, it wouldn't make sense for tax reserves to require additional conservatism.

How does holding reserves help smooth an insurer's earnings?

The ratio of benefits to premiums usually increases over time. therefore, not holding reserves would result in cash flows going negative in later durations.

How is a statutory expense allowance calculated under CRVM?

The smaller of: 1. EA under FPT for the contract 2. EA under FPT assuming 20-pay WL contract

What's the benefit of using dynamic valuation interest rates? what are they based on?

They adjust interest rates based on moving averages of corporate bond yields. Important for when interest rates are volatile.

What is the purpose of SFAS 115, which covers Fair Value Accounting?

To "realize" unrealized gains and losses for assets in certain categories by reporting them at the price they could be fairly exchanged at today. The goal is to reduce the impact of selling assets when the market value becomes very different from the book value.

What is the purpose of AG36?

To clarify how to apply CRVM to equity indexed universal life insurance.

What is the purpose of Statutory Valuation Law (SVL)?

To define minimum reserves by setting minimum mortality rates and maximum interest rates

What is the purpose of AG37?

To discuss how to hold a reserve for a variable life GMDB benefit.

What are the key differences between Type 1 methods and Type 2 methods for calculating EIA reserves under AG35?

Type 1 method: Requires HaR criteria, but does not require ongoing option valuation at each valuation date. Type 2 methods: Do not require HaR criteria, but do require ongoing option valuation at each valuation date.

What options does an insurer have when computing a reserve for an EIA under AG35?

Type 1: If Hedged as required criteria are met, can use "Enhanced Discounted Instrinsic Method (EDIM)" Type 2: If HaR criteria not met, can use CARVM with Updated Market Values (CARVM-UMV), Market Value Reserve Method (MVRM), or Black-Scholes Projection Method (BSPM), an adaptation of MVRM)

Why is the CRVM process for universal life so different than term of whole life?

UL is a more dynamic product with terms less fixed/guaranteed than with term and WL. Therefore, need to incorporate a more retrospective view into the calculation to reflect performance that transpired since issue.

How do you calculate the 20-pay EA limitation under CRVM for a non-level death benefit?

Use a level DB equivalent to the average actual DB for policy years 2-10.

What assumptions are generally used for tax reserves?

similar to stat reserves assumptions, but with adjustments Interest = max (Applicable Federal Int Rate, prevailing stat assumed int rate) mortality = prevailing commissioner standard table approved by at least 26 states