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

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
Index-linked variable
annuities
Variable annuity captives
2012 IAR valuation table
Potential changes to valuation rates
ORSA

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. Polling Question - AG 43 and C3 Phase 2
In your opinion, which of the following is the
most problematic for AG 43 and C3 Phase 2?
6
1 2 3 4 5 6
28%
35%
2%4%
19%
12%
1. Standard scenario
2. Hedge treatment
3. CTE measure / greatest
present value of
accumulated deficiency
4. Pro-cyclicality
5. Taxation
6. Other

6. Polling Question - AG 43 and C3 Phase 2
If your company writes VA business, does the
standard scenario dominate in the AG 43
calculation?
7
1 2
44%
56%
1. Yes
2. No

7. Polling Question - AG 43 and C3 Phase 2
If your company writes VA business, does the
standard scenario dominate in C3 Phase 2
calculation?
8
1 2
58%
42%
1. Yes
2. No

8. 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

9. Polling Question – CCAR
Prior to today, were you aware of CCAR?
11
1 2
55%
45%
1. Yes
2. No

10. Polling Question – CCAR
How likely do you think is it that “CCAR like”
requirements will emerge for non-SIFIs within three to
five years (e.g., from state regulators, rating agencies or
shareholder expectations)?
12
1 2 3
19%
25%
56%
1. Very likely
2. Somewhat likely
3. Not likely

11. Group discussion and audience polling

12. Polling Question – VM-22
For which of the following products could current
reserving methodology be improved (choose all that
apply)?
15
1 2 3 4
27%
63%
27%29%
1. SPIAs
2. Jumbo Annuities
3. Deferred Annuities
4. GLIBs

13. Polling Question – VM-22
In your opinion, should VM-22 be formulaic of
principles-based?
16
1 2 3
13% 11%
77%1. Formulaic
2. Principles Based
3. Depends

14. Polling Question – VM-22
If principles-based, should it use the Representative
Scenarios Method (RSM), deterministic, or stochastic?
17
1 2 3 4
52%
7%
30%
11%
1. RSM
2. Defined
Deterministic
3. Stochastic
4. Depends

15. Polling Question – Valuation rates
Are the current annuity valuation rates working
well?
19
1 2
74%
26%
1. Yes
2. No

16. Polling Question – Valuation rates
Should there be multiple SPIA valuation rates,
e.g., by age, gender, duration bucket, etc.?
20
1 2
22%
78%
1. Yes
2. No

17. Polling Question – Valuation rates
Should valuation rates be fixed at issue or
‘unlocked’?
21
1 2 3
18%
36%
46%
1. Set at Issue
2. Unlocked
3. Depends

18. Polling Question – Valuation rates
How often should valuation rates be updated?
22
1 2 3 4
43%
0%
15%
43%
1. Yearly
2. Quarterly
3. Monthly
4. More frequently
than monthly

19. Polling Question – Valuation rates
Is the current time horizon for averaging the
yield index (Moody’s) appropriate?
23
1 2
67%
33%
1. Yes
2. No

20. Polling Question – Future of annuity valuation
Of the following, which upcoming development
will have the biggest impact on your company or
firm?
25
1 2 3 4 5 6
2%
21%
2%
25%
9%
42%
1. AG 33 changes
2. AG 43 and C3 Phase 2
3. VM-22
4. ORSA
5. CCAR
6. Other

21. Polling Question – Future of annuity valuation
Have you increased or expect to significantly
increase staffing levels to meet upcoming
annuity valuation requirements?
26
1 2
55%
45%
1. Yes
2. No

22. Polling Question – Future of annuity valuation
Have you made or expect to make significant
technology and / or software investments to meet
upcoming annuity valuation requirements?
27
1 2
30%
70%
1. Yes
2. No

23. Polling Question – Future of annuity valuation
Overall, do you think that annuity valuation
requirements are headed in a sustainable direction
with sufficient balance between transparency, accuracy,
auditability, consistency and comparability?
28
1 2
61%
39%
1. Yes
2. No

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