Slides supporting workshop on upcoming developments in annuity valuation (Valuation Actuary Symposium 2015, Boston)

1. Upcoming Developments in Annuity
Valuation
August 31, 2015
Guillaume Briere-Giroux, FSA, MAAA, CFA
Chris Conrad, FSA, MAAA

2. Agenda
I. Annuity valuation actuary’s radar
II. AG 43 issues refresh
III. CCAR primer
IV. Group discussion and audience polling

3. Annuity valuation actuary’s radar
Contingent deferred annuities
C3 Phase 2 and AG 43
CCAR
Revisions of AG 33 for non-
elective benefits
VM-22
Indexed-linked variable
annuities
Variable annuity captives
2012 IAR valuation table
Potential changes to valuation rates

4. AG 43 issues refresh
Select observations1 Commentary
1 Counterintuitive impact of hedging
• Increases in TAR
• Asymmetry across hedging strategies
2 Standard scenario dominates more than
what may have been intended
• Survey showed prominence of standard scenario as driver of
reserves
• Dependence of results on hedging strategy
3 Statutory sensitivity is not aligned with
risk fundamentals
• Use of greatest present value can cause distortions relative to long
term economics
• Impact of hedging in standard scenario vs. stochastic calculations
Other highlighted complicating factors included treatment of reinsurance, taxation,
and seriatim vs. aggregate calculations of reserves. An all encompassing observation
was that the “volatility of capital requirements has increased with the potential for
undue, pro-cyclical changes in results”.
1Source: Observations on emerging variable annuity statutory accounting results, Oliver Wyman 2010

5. CCAR annuity primer
CCAR requires robust and granular nine quarter forecasts
Need Description
1 Realistic projections of economics
• Explicit projection of dynamic hedging strategy and other
management actions (e.g., credited rate setting)
• Modeling of existing assets and reinvestments (general account
business and assets backing guarantee reserves)
2 US Statutory financials
• AG 43 reserves revaluation
• C3-Phase 2 and / or rating agency capital
• Cash Flow Testing, potentially C3 Phase 1
3 US GAAP financials
• FAS 133 / 157 for embedded derivatives
• SOP03-1 for life contingent benefits
• Dynamic unlocking of DAC and SOP 03-1 (including assumptions)
• Income statement, balance sheet and profit by source analysis
4 Economic scenarios
• Real world scenarios for AG 43, Cash Flow Testing and SOP 03-1
• Risk neutral scenarios for hedging and FAS 133
5 Other
• Corporate taxes
• New business
• Reinsurance

6. Group discussion and audience polling