A2. VM21

Question 1

VM21: Components and calcs for SS, CTE amounts

Answer 1

• VM21 min reserves = SS amount + excess CTE
• excess CTE = max(0, CTE - SS amount)
  1. determine SS amount: deterministic calc done at contract level with prescribed assumptions
  2. CTE amount: CTE (70) using stochastic projections and prudent estimates

SS amounts overview:
1. calc basic adjusted rsv (BAR) for VA w/ gt and basic rsv (BR)for VA w/o gt
2. calc greatest PV of negative accumulated net revenues (NR) at the end of every projection year
- basically looking for deficiencies in future reserves
- NR = gt benefits paid minus prescribed revenue received
- for each year get the PV of the ANR when deficiency occurs. the greatest of these values is added to the BAR
3a. Finace SS amount for VA w/o gts
= BR
3b. VA w/ Gts
= MAX(csv, BAR + pv largest ANR)

CTE 70 is used to calculate the PV og accumulated deficiencies

1. project cf under prudent estimate assumptions
2. calc accumulated deficiencies for each scenario = working reserve - accumulated assets
3. for each scenario, PV the accumulated definciencies at the end of every projection year back to the val date
4. calc the greatest PV of accumulated Deficiencies
5. sort each scenario and calc the CTE 70

Question 2

VM 21 overview

Answer 2

principles

• determine stat reserve needed based on risk
• CTE amount is based on stochastic analysis of asset and liability cfs
• model disconnects in reality should be accounted for in the margins of prudent estimate assumptions
• approximations should not be used to exploit methodology

1. insurance products are long-term conrtactual commitments
2. commitments are based on uncertainty
3. accounting methods are based on the long term fiduciary responsibility insurers have to phs

Scope:
VM21 includes all individual, gorup, deferred, and Imm VAs

Question 3

VM 21 risks reflected

Answer 3

risks reflected:
asset risk:
- SA fund performance
- credit risks
- mortgage loan rollover rates
- asset duration risks
- performance of equities in real estate
-call risk
-hedging risks
-currency risk

Liability risk:

• reins default risk BEFORE valuation date
• mortality, persistence, wd, premium payment risks
• GLB utilization rate
• trends in mortality
• annuitization risks
• additional premium dump ins

combination risks:

• disintermediation
• risks associated with revenue sharing income

risks that should NOT be reflected:

• reins default risk AFTER valuation date
• liquidity “run on the bank” events
• catastrophe events
• major medical breakthroughs impacting mortality
• General business risk

Question 4

VM21: How to allocate excess CTE to contract level

Answer 4

factor based alternative methodology for CTE amount

• only for VAs with no gts
• floored at aggregate CSV

for a group of contracts where CTE > SS amount. the excess CTE can be allocated to contract i in a group of N contracts as:

excess CTE(i) = 
(individual SS amount - CSV) / (GROUP SS amount - CSV) *  total excess CTE 

if CSV amount is not defined, just set to 0 and use the same formula

Question 5

VM21: projection of accumulated deficiencies

Answer 5

• Ignore FIT
• reflect all product features (gts, MVAs)
• reflect hedging and reins
• reflect revenue sharing
• assets can grouped into proxy funds for modeling
• contracts can be grouped into model cells
• projection period should be long enough so that the reserves would not increase materially if a longer projection was run
• AVR and IMR should be handled consistently with the CFT model
• set starting assets = approx starting rsv
• include all SA assets allocated, then add GA assets until matched
• (GA assets may be negative)
• reinvestment modeled similarly to existing assets

Question 6

VM21 CTE amount vs RBC requirements

Answer 6

• GPVAD is similar between VM21 and RBC
• VM21 uses CTE 70
• RBC uses CTE 90, but similar CTE calc
• RBC includes FIT, VM21 ignores
• FIT doesnt impact VM21 discount rates, but does impact RBC

Question 7

VM21: how to reflect reins and hedging

Answer 7

CTE adn SS amounts are both determined before and after reins ceded

1. calc both on a direct bases ignoring reins
2. calculate both net of reins

similar to Reins, the CTE amount must be calculated with and without hedges

Question 8

VM21 certification requirements

Answer 8

• actuary certifies that work complies with ASOPs
• develop actuarial memorandum documenting methodology, assumptions, sensitivity tests, other analysis
• note any material changes in the models
• actuary should identify qualification
• identify scope
• certify the reserves are calculated IAW VM21
• certify prudent assumptions were used
• State that the qualified actuary is not opining on the adequacy of the company’s
  surplus or its future financial condition
• management certifies that valuation appropriately relfects managements intent and ability to carry out specific courses

Question 9

VM21: contract holder considerations

behavior assumptions

Answer 9

GLBs:

• assume very low surrender rates for GLWB, GMIB owners over 65 taking withdraws
• low surrenders when owner is taking systematic withdraws
• low surrenders for those under 65 that have NOT taken withdraws
• Behavior assumptions can vary by product and fund performance
• embedded options impact ph behavior
• more ITM = more likely to utilize contract options
• behavior can be rational and irrational

Question 10

VM21: projection of Annuitization Benefits

Answer 10

• projection of annuitization rates must be based on Market interest rates
• if using point estimates, include a margin that adjusts the implied future rates downward
• this increases the chances that the PV of annuitization benefits > contract CSV

projecting election of GMIBs, 2 methods allowed:

1. assume contact is fully surrendered at an amount equal to the stat reserve that would be required for the payout annuity benefits
2. contract is assumed to stay inforce, projected annuity benefits paid, and working reserve is projected thereafter

Question 11

VM21: determining discount rates

Answer 11

3 allowed methods for determining scenario-specific discount rates:

1. point estimates: forward interest rates implied by the swap curve in effect as of val date
2. C-3 Phase I scenario set (200 scenarios) coupled with the chosen equity return scenarios
3. An integrated model of stochastic equity return and interest rate scenarios

• The actuary may switch between the above methods in the following directions without approval from the domiciliary commissioner:
– From 1 to 2 or 3
– From 2 to 3