Tag Archives: principle-based reserving

Annual Milliman survey reveals a staged approach in implementing recent regulatory changes for UL/IUL products

Results from participants in Milliman’s annual comprehensive study of universal life (UL) and indexed universal life (IUL) issues indicate a staggered approach in implementing recent regulatory changes. Principle-based reserves (PBR) may be implemented as early as January 1, 2017, and 27 survey participants reported they expect to implement PBR for all of their UL/IUL products spread over the three-year phase-in period allowed. Resource issues, time needed, financial impact/cost/benefits, clarification and finalization of PBR and Internal Revenue Service (IRS) regulations, and PBR implementation of other products first were cited as factors impacting the rationale for implementation plans.

Similarly, the earliest effective date for the use of the 2017 Commissioner’s Standard Ordinary (CSO) mortality table was January 1, 2017. The 2017 CSO is the new valuation mortality table to be used in the determination of the Commissioner’s Reserve Valuation Method (CRVM), net premium reserves, tax reserves, nonforfeiture values, etc. Twenty-two survey participants reported that they would implement this table for all of their UL/IUL products spread over the three-year phase-in period allowed. Ten participants reported implementation of the 2017 CSO would be product-dependent; implementation will be immediate for some products and over the three-year phase-in period for others.

“It’s not surprising that these regulatory changes are not being implemented immediately, given the complexity of the regulations, the potential impact on pricing and the bottom line, and the strain on resources, especially for smaller carriers,” says Sue Saip, consultant in Milliman’s Chicago office.

The 10th annual Milliman study, “Universal Life and Indexed Universal Life Issues,” focuses on current topics relative to universal life with secondary guarantees (ULSG), cash accumulation UL, current assumption UL, and the corresponding indexed UL (IUL) versions. Thirty-two carriers of universal life and indexed universal life products participated in this annual survey.

In addition to PBR and the 2017 CSO information, the survey also indicates that the use of new underwriting approaches is gradually gaining popularity. Scoring models are being used by 11 survey participants to underwrite their UL/IUL policies. Eight of the 11 use these models for fully underwritten policies, one uses them for simplified issue policies, and the final two use them for both fully underwritten and simplified issue business. Eight participants reported using scoring models with automated rules. The types of scoring models used include lab scoring models, credit scoring models, and scoring models relative to motor vehicle records. The survey also revealed that 10 of the 32 participants utilize fluid-less underwriting programs at face amounts where they previously would require fluids.

The study includes detailed information on product and actuarial issues, such as sales, profit measures, target surplus, reserves, risk management, underwriting, product design, compensation, pricing, and illustrations.

The “Universal Life and Indexed Universal Life Issues – Detailed Report” is available for purchase here or by calling Gina Ritchie at (312) 499-5605.

Life insurers and regulators prepping for principle-based reserving

The life insurance industry is preparing to implement a new reserving methodology, principle-based reserving (PBR), to help carriers produce better assumptions for the industry’s new range of products. “A customized approach,” an article in Best’s Review, quotes Milliman’s Karen Rudolph providing perspective on why PBR is needed.

“The evolution of PBR is a proactive response to the current statutory valuation design, which includes many regulatory guidelines meant to interpret the requirements. However, regulators find it difficult to stay in front of product design,” said Karen Rudolph, principal and consulting actuary at Milliman. “While it took a long time for PBR to come to fruition, it will provide a set of rules that accommodate future products.”

As with any change, insurers face several challenges related to PBR, like learning the new system and how to administer it. PBR will also push regulators to enhance their actuarial expertise. Karen and fellow Milliman consultant William Sayre discuss the steps insurers and regulators are taking in advance of PBR’s effective date of January 1, 2017.

The NAIC has launched a PBR Pilot Project with 12 companies, which will implement PBR in the same manner they would for actual PBR reporting and then submit their reports to regulators for review. The pilot is designed to shed light on the process for companies as well as regulators, Rudolph said.

“Companies were in a wait-and-see mode because there was skepticism that PBR would be adopted by the states,” said William Sayre, principal and consulting actuary at Milliman. “But now the industry is moving rapidly to get their ducks in a row. It is a resource-intensive exercise, but once they have those resources, it should become a routine exercise going forward.”

Milliman survey reveals reactions to UL/IUL regulatory changes

Milliman today released new results from participants in its annual comprehensive study of universal life (UL) and indexed universal life (IUL) issues, namely, the reaction of issuers of universal life products to recent and upcoming regulatory changes. Principle-based reserves (PBR) will be effective January 1, 2017, and nine survey participants reported they anticipate implementing PBR immediately. Nineteen expect phasing-in the implementation of PBR over the three-year phase-in period allowed. Factors impacting the rationale for participants’ implementation plans include resource issues, the impact on reserves and capital, the need for preparation and research, and competitive reasons. Fifteen participants do not know what approach they will use for pricing new UL/IUL products in a PBR environment for products that require one of the VM-20 reserve components (VM-20 includes valuation manual minimum requirements for PBR for life insurance products).

On September 1, 2015, sections 4 and 5 of Actuarial Guideline 49 (AG 49) became effective, impacting issuers of IUL contracts. These sections of AG 49 provided guidance regarding the determination of the maximum indexed crediting rate that may be used with IUL illustrations. The survey included 22 IUL participants and the majority (19) reported they had made adjustments to illustrations based on AG 49, but few participants had made changes to their product designs because of AG 49. Eighteen of the 22 IUL participants reported the rate that was calculated for the Benchmark Index Account per Section 4A of AG 49. The rates ranged from 5.02% to 7.77% with a median of 6.87% and an average of 6.72%. This was also the range reported for the rate typically illustrated by reps in IUL illustrations for participants’ most popular strategies. The median illustrated rate was 6.70% and average was 6.59%. This compares with the median illustrated rate one year ago of 7.50%, and average of 7.10%. Twenty of the 22 participants reported the illustrated rate decreased relative to the rate one year prior.

The ninth annual Milliman study, “Universal Life and Indexed Universal Life Issues,” focuses on current topics relative to universal life with secondary guarantees (ULSG), cash accumulation UL, current assumption UL, and the corresponding indexed UL (IUL) versions. A new high of 35 carriers of universal life and indexed universal life products participated in this annual survey.

In addition to PBR and AG 49 information, the survey also indicates that the popularity of IUL products generally and UL/IUL products with living benefits has continued, consistent with the past several years. IUL sales during YTD 9/30/15 accounted for 51% of total UL/IUL sales combined (reported by survey participants) during YTD 9/30/15, increasing from 37% in 2012. During YTD 9/30/15, sales of chronic illness riders as a percentage of total sales were 23% of UL products and 41% for IUL products, at or near peak levels. Despite a shift away from single premium business to limited pay business for sales of UL/IUL with long-term care (LTC) riders, during YTD 9/30/15 sales of LTC riders as a percentage of total sales by premium were 19.2% for UL products and 9.4% for IUL products, both at peak levels.

The study includes detailed information on product and actuarial issues, such as sales, target surplus, reserves, risk management, underwriting, product design, compensation, pricing, administration, and illustrations.

The 444-page “Universal Life and Indexed Universal Life Issues – Detailed Report” is available for purchase by visiting the Milliman website or by calling Gina Ritchie at (312) 499-5605. Participating companies receive a complimentary copy of the detailed report, as well as individual company responses reported on an anonymous basis.

Issues and challenges in a principle-based reserving world

The formal adoption of principle-based reserving (PBR) in the United States is coming with a likely effective date of January 1, 2017. This Milliman report, authored by James Stoltzfus, Karen Rudolph, William Sayre, and Uri Sobel, considers sample blocks of business representative of current cohorts that are subject to the new requirements. The authors attempted to do the calculations prescribed by Actuarial Guideline 48, considering both level term business and universal life business with secondary challenges. The findings provide an indication as to what issues the insurance industry might need to anticipate as it prepares for the wider implementation of PBR in the coming years.