Valuation of Life Insurance Liabilities - Chapter 5

Valuation of Life Insurance Liabilities - Chapter 5 - VALUATION OF ANNUITIES

Overview

Commissioners Annuity Reserve Valuation Method (CARVM) - 1976 amendments
- Vx = greatest excess of PV @ valn date of future guar benefits @ end of each contract year over PV future considerations from future gross considerations
- many companies slow to adopt CARVM and held more conservative reserves
- tax law changed to say use CARVM as methodology for FPTR
  - cos forced to implement at that point

Basic Application of CARVM to SPDAs

project fund balcne forward at guar basis in policy, then calc all future benfits guar under policy
take PV of all these possible benefit streams
subtract out PV required considerations
considered a "worst case" valn method
ususually possible to determine which benefit produces the greatest PV eliminating most paths
accumulation phase uses policy guarantees
how to determine which dur will produce largest PV (for SPDA)
- if guar annuity purchase rates less liberal thatn valn basis and CSV used to calc guar annuity payments, future guar annuity payments will never be used in CARVM b/c PV(future annuity pmts) < CV @ annuitization
- if contract has no SC, guar fund accum rate < i_valn, then CV @ valn date is largest CV
- if contract has no SC, guar fund accum rate > i_valn for n years after valn, CV @ last year i_guar > i_valn
- if contract has no SC, guar fund accum rate always > i_valn , CV @ latest mat date
- if SC, combined effect of i_guar & reduction in SC > i_valn for n years, CV @ end of year n
if this is ignored @ product design, might have to do complete CARVM w/ each valn
Mid-Policy Year Values and Continuous CARVM
- projecting 1 more day causes cash values to jump b/c of SC changing day after valn
- CARVM specifically state EOY
- NY reg states any point during year aka Continuous CARVM
- other states now following NY example

Common Product Features

Contingent Benefits (not elected by annuitant)
- Death Benefits in Excess of CSV
  - such as SC waived at death or min DB = sum(prems paid)
  - AG33 - each benefit be considered in calc of CARVM Vx
  - in practice - DB reserve calsed as an add-on as PV excess DB over CSV
  - common approx - mort Vx = sum(PV(DB-CSV)) @ valn int and mort
  - more exact - only do above calc to policy year w/ largest CARVM reserve
- Nursing Home Waiver
  - SC waived if annuitant enters nursing home
  - reserved similar to DV but using q_nursinghome instead of q_valn
Bailout Provisions
- surrender charge waived if i_credited fall more than a specified amt below initial rate
- if bailout provision is in effect, SC s/b ignored for CARVM
- AG13 - 1985 - can't include "significant" contingent SC in CARVM calc
- NY126 - Vx if contract as significant SC = max(a,d) where
  - a = fund @ valn w/o SC
  - b = CARVM reserve w/o SC
- "signficant" SC - SC% > i_guar
Market Value Adjustments (MVAs)
- MVAs expressed as formulas
- questions
  - should MVAs be include in CV calc @ valn if operable
  - possible future MVAs, shoudl they be taken into account
- if assets in general account, ignore MVAs in CARVM calc since GA assets not revalued under SAP
- Modified Guar Annuity Reg - MVA annuity assets s/b in sep account
  - min Vx - CSV including MVA effect
  - NY127 has specific definitions
    - max(a,b) where a = CSV @ valn including MVA and b = PV guar contract benefits
      - where PV(b) - i =
        
        annual mkt yeild S/A assets - inv expenses - 2.5% for junk - 0.25% PADs
        Moody's Corp Bond Yield Avg (month - 1)
    - if assets held at book, max(a,b) where
      - a = CSV @ valn excluding MVA and b = PV guaranteed benefits assuming "B" type contract
Free Partial Withdrawals (FPWs)
- PO can w/d % of fund w/o SC
- sometimes limited to x days after anniversary
- need to reflect this free % in actual SC
- for valn, two approaches
  - aggregate - adjust SC% (ie 5% SC adjusted to 5.0% - 0.5%free = 4.5%)
  - seriatim - test each and every partial w/d that could be made
- some state ins depts have taken issue w/ aggregate approach and require seriatim
Annuity Purchase Rates
- often purchase rate incentives to encourage annuitization
- purchase rates more favorable than guarantees
  - typically use current rates which are more favorable than guarantees
  - discontinuities in CARVM reserve
  - AG33 - if co guarantees that PO can annuitize @ then current rates, then CARVM Vx >= 93% of contracts fund value @ valn
- waiver of SC
  - take into account when valuing
  - often limited to 10 yr+ options
- two-tiered interest credits
  - one fund for nonf values and DB
  - one for for annuitization (and possibly DB)
  - second fund typically has higher int rate
  - first fund used for CARVM CVs
  - second fund for CARVM annuity purchase funds
  - if 93% rule in effect, then it is used against second fund
Interest Index
- if indexed - NAIC Int-indexed Model Reg says
  - future int crediting rates = stat int rate for contracts defined in SVL
  - if actuarial opinion not filed, a 115% rule is in effect
- reg not adopted by all states
- most cos ignore indexing unless in effect @ valn
  - except to extent CFT indicated need for additional reserves

Practical Considerations in Calculation of CARVM Reserves

Calendar Year Valuations
- same basic principles apply
- even though cal year, fund balances need to be accum to end of policy year
- some co's calc CARVM @ end of next policy year and discount back
Current Cash Values
- NAIC blank requires max(CV, CARVM Vx)
- even though CARVM doesnt specify off anniv CVs, it is necessary b/c of this
- when comparing CV vx CARVM, CARVM needs to include any DB reserve
Grouping Methods
- common and accepted to calc Vx on a group basis (vs seriatim)
- assume groups of policies occur mid-year (unless known skewing)
- SVL says OK
- may not be appropriate for two-tiered or toher complicated product designs
Change-in-fund Valuation Basis
- SVL allows either issue-year or change-in-fund basis for PVFB calc
- issue year basis - i_valn determined based on issue date of policy
- change-in-fund basis - different discount rate depending on when increase in funds occured. Looks like IYM
- AG33 - election of method @ issuance of contract and cant' be changed w/o written approval of ins commissioner

Annual Premium Annuities under CARVM

same basic principles apply
difference - PV appropriate future "valuation considerations" is subtracted from PV of each of the future benefits
"valuation considerations" - portions of teh respective gross considerations applied under the contract
not as easy to "analytically" determine where CARVM reserve will be, therefore lots of calcs

Flexible Premium Annuities Under CARVM

since prems flexible, they aren't "req'd by the terms of such contract"
reserved as SPDAs
- if contract has no SC, guar fund accum rate > i_valn for n years after valn, CV @ last year i_guar > i_valn
- Valn Actuary should still use judgement

Immediate Annuities

generally no problem under CARVM
AG9 and AG9B define Immediate Annuity
- 1st payment due not more than 13 mos from issue date
- suceeding payments at least annually for at least 5 years
- pattern of payments due in any contract year not > 115% of those in prior contract year
can value annuity as settlement option or annuitized DA using immediate annuity rate from original contract issue or current rate
- must be consistent
AG9A and AG9B have special guidelines for structured settlements

Determination of Appropriate Int Rates under SVL

80 amendments introduced annuity valn int rate categories
SPIAs and annuity benefits w/ life cont arising from other annuities w/ cash settlement options and GICS w/ cash settlement options
Other ANnuities
- whether or not policy offers cash settlement options
- issue year or change-in-fund basis
- whether or not policy contains future int guarantees applicable to future considerations (future > 1 year off)
- w/ cash settlement options - # years int guar in excess of long life rates (guarantee duration)
  - and w/o cash settlement option - # years from purchase date to 1st payment date
- plan type
  - A) at any time the PO may w/d funds only
    - 1) w/ adjustment to reflect i or assets values changes since reciept of funds
    - 2) w/o adjustment, but in installments over 5+ years
    - 3) immediate life annuity
    - 4) no w/d permitted
  - B) Before expiriation of int rate guarantee, PO may w/d funds
    - 1) same as a1)
    - 2) same as a2)
    - 3) no w/d permitted
    - at end of int rate guar, funds may be w/d w/o such adjustment in single sum or installments < 5 years
  - C) before expiration of int rate guarantees, PO may w/d funds in single sum or installments < 5 years
    - 1) w/o adjustments to reflect i or asset value changes since reciept of funds
    - 2) subject only to fixes surrender charge stipulated in contract as % of fund
AG33 - different benefits under SPDA may be valued assuming different plan types
- defines guarantee duration as # years from contract issue to date of annuitization

Copyright © 2004 Steve Welander.
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