Draft Pending Adoption s1

Draft Pending Adoption

Draft: 8/16/17

Life Actuarial (A) Task Force Philadelphia, Pennsylvania August 4–5, 2017

The Life Actuarial (A) Task Force met in Philadelphia, PA, Aug. 4–5, 2017. The following Task Force members participated: TBD, Chair, represented by Mike Boerner (TX); Jillian Froment, Vice Chair, represented by Peter Weber (OH); Lori K. Wing-Heier represented by Jacob Lauten (AK); Jim L. Ridling represented by Steve Ostlund (AL); Dave Jones represented by Rachel Hemphill and Perry Kupferman (CA); Marguerite Salazar represented by Michael Muldoon (CO); Katharine L. Wade represented by Wanchin Chou and Mike Colburn (CT); David Altmaier represented by Lisa Parker (FL); Doug Ommen represented by Mike Yanacheak (IA); Stephen W. Robertson represented by Karl Knable (IN); Ken Selzer represented by Nicole Boyd (KS); Mike Rothman represented by Fred Andersen and John W. Robinson (MN); Chlora Lindley-Myers represented by William Leung (MO); Bruce R. Ramge represented by Rhonda Ahrens (NE); Richard J. Badolato represented by Peter L. Hartt (NJ); Maria T. Vullo represented by Dwight Hazzard (NY); and John D. Doak represented by Cuc Nguyen (OK). Also participating was: Tomasz Serbinowski (UT).

1. Adopted its Interim Minutes

Mr. Yanacheak made a motion, seconded by Mr. Weber, to adopt the Task Force’s July 13 (Attachment One), June 29 (Attachment Two), June 22 (Attachment Three), June 15 (Attachment Four), June 8 (Attachment Five), June 1 (Attachment Six), May 18 (Attachment Seven), May 11 (Attachment Eight) and May 4 (Attachment Nine) minutes. The motion passed. During these meetings, the Task Force took the following action: a. Exposed 2016 default cost tables. b. Adopted revisions to the Valuation Manual (VM) companywide exemption. c. Adopted revisions to the frequency for calculation of quarterly VM-20, Requirements for Principle-Based Reserves for Life Products, investment spread tables. d. Adopted the proposal for the VM-22, Maximum Valuation Interest Rates for Income Annuities, method for determining the valuation interest rate for income annuities more responsive to the economic environment. e. Adopted the proposal requiring the 2017 Commissioners’ Standard Ordinary (CSO) when calculating the net premium reserve (NPR) in the actuarial method. f. Adopted revisions to VM-31, PBR Actuarial Report Requirements for Business Subject to a Principle-Based Reserve Valuation.

2. Exposed the Recommendation for AUW Data Elements for VM-51

Mary Bahna-Nolan (Joint American Academy of Actuaries (Academy) Life Experience Committee and Society of Actuaries (SOA) Preferred Mortality Project Oversight Group—Joint Committee) said that as the Joint Committee looked at what is necessary to best support simplified issue (SI) and accelerated underwriting (AUW) within principle-based reserving (PBR) and experience studies, it became apparent that the data being collected is not sufficient to differentiate the market and identify business written with different underwriting requirements. She said in order to address that issue, the Joint Committee is proposing new data fields for VM-51, Experience Reporting Formats, which are necessary to best segment and understand the mortality. She noted that a lot of the data elements currently are not collected, stored or easily obtained. She asked that the list of data elements and the cover letter be exposed for public comment in order to begin the conversation on what data elements are needed. The Joint Committee is hoping to learn if the data elements are readily available. If the data elements are not readily available, the Joint Committee is interested in what the effort would be, in terms of number of days and amount of expenses, to provide the data elements. She said suggestions for additional data elements any companies believe may be helpful in helping segment the mortality are also welcome.

Mr. Andersen made a motion, seconded by Ms. Ahrens, to expose the AUW report and data elements (Attachment Ten) for a 90-day public comment period ending Nov. 7. The commenters are asked to provide feedback on the availability of the data elements or, if the elements are not readily available, how much time and expense might be required in order to provide them. The motion passed unanimously.

Ms. Bahna-Nolan discussed the work of the SI/AUW VM-20 Practice Work Group (Attachment Eleven) of the Joint Committee. The work group is focused on the application of AUW in the deterministic and stochastic reserve. She said the work group attempted to identify current practices and areas where additional guidance is needed, but refrained from addressing the appropriateness of the underwriting technique. The work group also sought to ensure that any guidance would

© 2017 National Association of Insurance Commissioners 1 Draft Pending Adoption be relevant to future innovation. She said a Delphi study is being developed as a long-term approach to move this effort forward. As a short-term approach, the group is proposing that the Task Force consider providing interpretations, similar to those provided for Actuarial Guideline XXXVIII—The Application of the Valuation of Life Insurance Policies Model Regulation (“Model 830”), (AG 38), to provide guidance on implementation of the Valuation Manual (VM). Mr. Boerner said the AG 38 interpretations were in response to a charge to the former Emerging Actuarial Issues (E) Working Group. However, he said the Task Force may still be able to consider interpretations but will need to discuss procedures and their role given the ability to use guidance notes that me serve a similar purpose.. Mr. Boerner noted a timing consideration that any guidance notes adopted during a year would become effective the following Jan. 1st.

Two examples of interpretations (Attachment Twelve and Attachment Thirteen) were provided to the Task Force for its consideration. Matt Monson (Academy) discussed the interpretations related to margins and credibility and mortality segments. He asked the Task Force to consider whether the interpretations are presented in the right format and with an appropriate degree of rigor. Mr. Boerner said a call will be scheduled to further address the issue.

3. Adopted the Report of the Experience Reporting (A) Subgroup

Mr. Andersen asked about the status of the NAIC takeover of the data collection responsibility for VM-51. He said the Subgroup is receiving technical questions that are routinely forwarded to MIB, Inc. He noted that if the NAIC is assuming the experience data collection responsibility, it should also be prepared to address the technical questions. Larry Bruning (NAIC) said it is expected that at the joint meeting of the Executive (EX) Committee and the Internal Administration (EX1) Subcommittee, the NAIC will receive a directive to move forward with changes to VM-50, Experience Reporting Requirements, that would allow the NAIC to assume the experience data collection responsibility on behalf of the states.

Mr. Ostlund made a motion, seconded by Mr. Chou, to adopt the report of the Experience Reporting (A) Subgroup. The motion passed unanimously.

4. Heard an Update on SOA Research and Education

Dale Hall (SOA) presented a list of the SOA’s research and education projects (Attachment Fourteen) currently in progress. He said the SOA focus on U.S. population mortality analysis continues. He noted that the SOA works with the Social Security Administration to highlight mortality trends of the U.S. population. He said the U.S. population tables produced from the trend analysis may have application for mortality improvement for insured products. The study noted a continuation of the slowdown in U.S. population mortality improvement, which has been consistent over the past five years. Mr. Hall said additional subreports are available on the SOA website.

Mr. Hall highlighted the SOA Actuarial Modeling Controls Update, which is a survey of companies’ approaches to governance surrounding projection models. He also noted that use of the relative risk tool continues to grow. More than 400 user accounts with 600 underwriting structures have been established to date.

Mr. Boerner asked about the timing and content of the Simplified Methodologies project. Mr. Hall said the goal is to provide a summary list of the simplified methods being considered for implementation of VM-20, Requirements for Principle-Based Reserves for Life Products.

5. Exposed GI Mortality Report and the Accompanying Tables

Ms. Bahna-Nolan showed a slide presentation (Attachment Fifteen) that provided an overview of the guaranteed issue (GI) mortality report, GI basic table, GI valuation table and GI definition (Attachment Sixteen) that were exposed at the Spring National Meeting.

She said the report on the development of the tables was exposed at the Spring National Meeting, along with the GI tables and the working definition of GI. She said the basic table is a five-year anti-select and ultimate table and the valuation table is an ultimate only table. She noted that the formats are different due to a reverse select period that creates challenges when considering nonforfeiture and the impact on reserves. Ms. Bahna-Nolan said the loading applied to the valuation table is approximately 17% and varies by attained age. The loading covers almost 99% of the exposure and 55% of contributing companies. Although no comments were received during the exposure period, one company submitted a comment letter afterward. The comment indicated concern that, based on the company’s experience, the mortality for the GI table could possibly be too low, particularly as applied to final expense products. Ms. Bahna Nolan said that, while final expense products were not excluded from the data call, final expense insurance was excluded from the table development because

© 2016 National Association of Insurance Commissioners 2 Draft Pending Adoption most final expense products have health conditions that must be met, which conflicts with the GI definition. She said the comment letter also requested modification of the GI definition to clarify the treatment of final expense products. She said the Joint Committee is considering the request.

Ms. Bahna Nolan said further analysis revealed that the collected data was heavily weighted by direct mail solicited products, which tend to have lower mortality than agent-driven business. She noted that final expense products are generally sold by agents.

She said two amendment proposals for inclusion of the GI tables into the VM have been developed. The first proposal (Attachment Seventeen) would include GI products in the VM, for PBR purposes, in a manner similar to whole life products, with the net premium reserve calculated using VM-A, Appendix A – Requirements, and VM-C, Appendix C – Actuarial Guidelines. That approach will also allow GI term policies to be eligible for the deterministic exclusion test. The proposal also recommends the use of the GI tables for the development of nonforfeiture values as appropriate. The second proposal (Attachment Eighteen) recommends the exemption of GI products in a manner similar to preneed products. The Joint Committee has reconsidered and has chosen not to submit the second proposal.

Ms. Bahna Nolan said the margins and credibility required for GI products subject to the calculation of deterministic and stochastic reserves have not yet been developed. Mr. Boerner noted that a change to VM-20 Section 2.A.1 is necessary to address the GI term policies. Ms. Bahna-Nolan agreed to provide the change prior to the exposure of the proposal.

Mr. Leung made a motion, seconded by Ms. Parker, to expose the GI PBR amendment, including the change to VM-20 Section 2.A.1 to be provided by Ms. Bahna-Nolan, for a 45-day public comment period ending Sept. 24. The motion passed unanimously.

6. Discussed Simplified Issue Mortality

Ms. Bahna-Nolan showed a slide presentation (Attachment Nineteen) that provided an overview of the simplified issue (SI) mortality report (Attachment Twenty), including the SI tables. She said that, similar to the GI tables, SI has a five-year anti- select and ultimate basic table and an ultimate only valuation table, with the different formats due to a reverse anti-select period. Ms. Bahna-Nolan said the loading applied to the valuation table is approximately 20%. The loading covers almost 95% of the exposure and 71% of contributing companies. She noted that one of the challenges with the SI mortality is the definition. She said that when the definition was initially proposed, SI business looked a lot different than what is currently being issued as SI. The proposed SI table is a composite table, not smoker distinct like some currently issued SI business. The SI definition being proposed tries to clearly delineate SI business from simplified underwriting business. She noted that simplified underwriting business typically includes more health questions or provides authorization that allows the underwriter to obtain potentially invasive and noninvasive information.

The presentation and the report included model office results for the proposed SI tables.

Mr. Ostlund made a motion, seconded by Mr. Leung, to expose the SI report, including the SI mortality tables and the SI definition for a 45-day public comment period ending Sept. 24. The exposure includes a request for comments on the whether the tables should be used for nonforfeiture. The motion passed unanimously.

7. Exposed the 2018 GRET

Leon Langlitz (SOA) provided a presentation (Attachment Twenty-One) of the 2018 Generally Recognized Expense Tables (GRET). He said the tables are based on annual financial statement data and a survey sent to companies to get information on the distribution systems used to generate the business. The 2017 response rate for companies receiving survey requests is 30%, which is 7% higher than the previous year.

Mr. Andersen made a motion, seconded by Mr. Chou, to expose the GRET report (Attachment Twenty-Two) for a 30-day public comment period ending Sept. 7. The motion passed unanimously.

8. Adopted and Exposed VM Amendments

a. Adopted 2016 VM-20 Default Costs

Mr. Boerner said the 2016 VM-20 default costs were exposed, with no comments received. Ms. Parker made a motion, seconded by Mr. Weber, to adopt the 2016 VM-20 default costs (Attachment Twenty-Three). The motion passed unanimously.

b. Exposed the June 30 VM-20 Investment Spreads

Mr. Bruning discussed the VM-20 investment spreads cover letter (Attachment Twenty-Four), which details the actions related to interest rates and yields on U.S. Treasuries. He said the federal funds rate continued to increase and is now in the target range of 100 basis points (bps) to 125 bps. He said the yield on U.S. Treasuries decreased over the second quarter of 2017, on average, by 8 bps. He noted that for maturities of less than four years, Treasury yields increased an average of 21 bps. He reminded the Task Force that the methodology for determining current spreads was changed from taking an average of daily spreads over the previous calendar quarter to determining the spread on the last business day of the calendar quarter. Investment grade current spreads declined an average of almost 9 bps. Below investment grade current spreads declined an average of 10 bps. Investment grade long-term spreads declined an average of 0.79 bps. Below investment grade long-term spreads declined an average of 11 bps.

Mr. Ostlund made a motion, seconded by Mr. Leung, to expose the June 30 VM-20 investment spreads for a 14-day public comment period. The motion passed unanimously.

c. Adopted Proposal 2017-6

Reggie Mazyck (NAIC) said proposal 2017-6 is a companion proposal to VM-22, Maximum Valuation Interest Rates for Income Annuities. The proposal clarifies that reserve requirements for single premium immediate annuities (SPIAs) are defined in VM-22. Tom Campbell (Actuarial Resources Corporation—ARC) suggested that the term “minimum valuation interest rate” should be revised to align with the language of VM-22.

Ms. Parker made a motion, seconded by Mr. Weber, to adopt proposal 2107-6, including the change to align the wording with the language of VM-22 (Attachment Twenty-Five). The motion passed, with New York dissenting.

d. Adopted Proposal 2017-19

Proposal 2017-19 clarifies an inconsistent reference in the definition of “non-material secondary guarantee” to recognize that the appropriate table is the unloaded CSO mortality table. Mr. Weber made a motion, seconded by Mr. Leung, to adopt proposal 2017- 19 (Attachment Twenty-Six). The motion passed unanimously.

e. Adopted Proposal 2017-42

Ms. Hemphill said the intent of proposal 2017-42 is to clarify that it is the dollar amount, not the claim counts, to be considered when applying the conservation of deaths principle. Ms. Parker made a motion, seconded by Mr. Kupferman, to adopt proposal 2017-42 (Attachment Twenty-Seven). The motion passed unanimously.

f. Adopted Proposal 2017-44

Ms. Hemphill said proposal 2017-44 replaces the term “PBR valuation,” which is not defined in the VM, with the term “principle-based valuation” in the various sections of the VM. She noted that the proposal recommends changes that will be necessary if the Task Force adopts a recommendation to remove VM-05, Standard Valuation Law, from the VM. Ms. Hemphill recommended excluding those changes from consideration when adopting the proposal. Proposal 2017-44 (Attachment Twenty-Eight), excluding the changes related toVM-05, was deemed to be an editorial change and was adopted without objection.

g. Adopted Proposal 2017-54

Ms. Hemphill said proposal 2017-54 corrects typographical errors and provides clarity in VM-50. Proposal 2017-54 (Attachment Twenty-Nine) was deemed to be an editorial change and was adopted without objection

h. Adopted Proposal 2017-58

Ms. Hemphill said proposal 2017-58 corrects references that require updating as a result of changes made in another amendment proposal. Proposal 2017-58 (Attachment Thirty) was deemed to be an editorial change and was adopted without objection.

i. Adopted Proposal 2017-59

Ms. Hemphill said proposal 2017-59 corrects references and provides clarification. Proposal 2017-59 (Attachment Thirty- One) was deemed to be an editorial change and was adopted without objection.

j. Exposed Proposal 2017-60

Mr. Mazyck said that the drafting group reviewing the VM is proposing to move all common definitions appearing in more than one section of the VM to VM-01, Definitions. He noted that if the term was defined in more than one section, the group assessed and retained the better of the two definitions. He said in addition to the moving of definitions, the drafting group is recommending the removal of VM-05. Mr. Boerner mentioned that the proposal includes replacing VM references to VM-05 with references to the Standard Valuation Law (#820). Paul Graham (ACLI) suggested that instead of retaining VM-05, a link to Model #820 can be appropriately located within the VM. Bill Weller (America’s Health Insurance Plans—AHIP) recommended retaining the parenthetical location indicators in VM-01. He said the location indicators serve to show where the definitions are applicable. Mr. Graham said the drafting group did a thorough review to ensure that the defined terms were used consistently in the all sections in which they appear.

Mr. Weber made a motion, seconded by Mr. Ostlund, to expose proposal 2017-60 (Attachment Thirty-Two), without the removal of VM-05, for a 21-day public comment period ending Aug. 28. The motion passed unanimously.

k. Exposed Proposal 2017-61

Mr. Mazyck said the drafting group reviewing the VM identified definitions that required enhancement or clarification. The enhanced definitions are provided in proposal 2017-61. Mr. Leung made a motion, seconded by Ms. Parker, to expose proposal 2017-61 (Attachment Thirty-Three) for a 30-day public comment period ending Sept. 7. The motion passed unanimously.

l. Exposed Proposal 2017-14

Ms. Hemphill said proposal 2017-14 has been changed significantly since its previous exposure. She said the intent of the proposal is to provide clarification of the allowable simplifications and approximations by providing examples in the VM-20 Section 2.G guidance note. Mr. Andersen made a motion, seconded by Mr. Weber, to expose proposal 2017-14 (Attachment Thirty-Four) for a 21-day public comment period ending Aug. 28. The motion passed unanimously.

m. Exposed Proposal 2017-45

Ms. Hemphill said proposal 2017-45 clarifies that the scenario picker tool provided within the prescribed scenario generator should be used to generate a smaller set of scenarios when necessary. Ms. Parker made a motion, seconded by Mr. Leung, to expose proposal 2017-45 (Attachment Thirty-Five) for a 21-day public comment period ending Aug. 28. The motion passed unanimously.

n. Adopted Proposal 2017-46

Ms. Hemphill said proposal 2017-46 provides clarifying language regarding policies subject to a principle-based valuation. She said the portion of the amendment that references changes to VM-31, Actuarial Report Requirements for Business Subject to a Principle-Based Reserve Valuation, will be addressed in phase 3 of the VM-31 project and should be deleted from this proposal. Ms. Hemphill said the proposed changes to VM-20 Section 1.A should be extracted from this proposal

© 2016 National Association of Insurance Commissioners 5 Draft Pending Adoption and exposed separately, with the phrase “and subject to a principle-based valuation with an NPR floor under the Standard Valuation Law” restored to the text. Proposal 2017-46 (Attachment Thirty-Six), after extracting the changes to VM-20 Section 1.A, which was renamed proposal 2017-62, and deleting the changes to VM-31, was deemed to be an editorial change and was adopted without objection.

o. Exposed Proposal 2017-62

The proposed changes to VM-20 Section 1.A extracted from proposal 2017-46 were resubmitted as proposal 2017-62. The proposal clarifies the policies subject to the requirements of VM-20. Ms. Parker made a motion, seconded by Mr. Leung, to expose proposal 2017-62 (Attachment Thirty-Seven) for a 21-day public comment period ending Aug. 28. The motion passed unanimously.

p. Exposed Proposal 2017-50

Ms. Hemphill said proposal 2017-50 clarifies inconsistencies between the definition of “weighted average life” in VM-20 Section 9.F.2.c and its use in Table J. Mr. Weber made a motion, seconded by Ms. Parker, to expose proposal 2017-50 (Attachment Thirty-Eight) for a 21-day public comment period ending Aug. 28. The motion passed unanimously.

q. Exposed Proposal 2017-55

Ms. Hemphill said proposal 2017-55 adds clarity to VM-51. Mr. Andersen made a motion, seconded by Mr. Leung, to expose proposal 2017-55 (Attachment Thirty-Nine) for a 21-day public comment period ending Aug. 28. The motion passed unanimously.

9. Exposed Responses to VM Questions

Mr. Mazyck said the drafting group reviewing the VM has received a number of questions from various sources. The group has developed responses to those questions based on a clear reading of the VM. Those questions and responses were presented to the Task Force for its consideration. The drafting group requested that the Task Force expose the questions and responses for public comment. Comments should include thoughts on how to maximize the visibility and availability of the document.

Mr. Ostlund made a motion, seconded by Ms. Ahrens, to expose the questions and responses (Attachment Forty) for a 60-day public comment period ending Oct. 6. The motion passed unanimously.

10. Discussed Model Validation and the Economic Scenario Generator

Mr. Bruning said the model validation process will be discussed at the PBR Review (EX) Working Group session at this national meeting. He said the discussion will cover the building of the standard portfolio of assets and liabilities, as well as the determination of distribution of the business across various underwriting classes. He said the assumptions used in the calculation of deterministic reserve will be discussed and the prescribed assumptions for the NPR will also be reviewed. The results of sensitivity testing on the term component of the standard portfolio will also be shared.

Mr. Bruning said Task Force volunteers are being sought for initial brainstorming efforts on how to proceed to an initial recommendation on the process for maintaining the economic scenario generator. He said the initial issue that needs to be addressed is whether state insurance regulators agree that the scenario generator should be prescribed. He noted that Actuarial Guideline XLIII—CARVM for Variable Annuities (AG 43) allows a company to use its own scenario generator subject to the calibration criteria in the guideline. Mr. Bruning said anyone interested in volunteering should contact him.

11. Heard an Update on Experience Reporting Data Collection

Mr. Bruning said the NAIC has completed beta testing of a secure online software application that allows companies to submit their experience data to the NAIC on behalf of the states. More than 20 million company experience data records have been received from 27 companies participating in the Kansas company experience pilot program. All records were run through the online software application. Having completed the beta test, the application is ready for production. He noted that, once the application is in production, individual company data will be available to state insurance regulators. The NAIC is continuing to work with the SOA to develop a data-sharing agreement. 12. Heard an Update on International Issues

Josh Windsor (NAIC) provided an update (Attachment Forty-One) on the process and workstreams of the International Association of Insurance Supervisors (IAIS) subcommittees. He provided an overview of the progress being made in the area of the insurance capital standard (ICS). A simulation tool is being provided to ICS stakeholders.

13. Heard an Update from the IIPRC

Jeanne Daharsh (Interstate Insurance Product Regulation Commission—IIPRC) presented the IIPRC report to the Task Force (Attachment Forty-Two). She said the IIPRC and the Management Committee will meet at this national meeting to consider approval and adoption of revisions to the standards listed under phase 7 of the five-year review process published in March. There also will be a public hearing on the proposed death benefit proceeds amendment to core annuity standards and to the bylaws.

Ms. Daharsh noted that the Product Standards Committee (PSC) continues its work on the five-year review of uniform standards and will present its recommendations to the Management Committee regarding comments received for standards under phase 7 of the five-year review. She said an initial report for phase 8 of the five-year review on individual disability income insurance has been completed by the IIPRC office. The PSC will consider and discuss the report, seeking input from the Actuarial Working Group as needed. The PSC discussed the development of a new uniform standard for incidental benefits for life insurance products but, based on public input, will solicit further input before drafting continues.

Ms. Daharsh said the IIPRC is working on a survey of IIPRC member states regarding the application of rider charges, specifically those deducted from annuity account values of non-variable annuities, and how the retrospective and prospective tests are applied in those situations.

Becky McElduff (IIPRC) said 215 companies have registered to use IIPRC in 2017. Almost 600 products have been approved so far this year. The turnaround time for filing review has decreased to 26 days this year, down from 30 days in 2016. The number of states eligible for an IIPRC filing has increased to 41, and 46% of the filings are mix-and-match filings, which is an all-time low. She said the IIPRC is continuing to receive 2017 CSO table filings. Most of the 2017 CSO filings have been for term and whole life products.

14. Heard an Update on the Work of the Model #805 Drafting Group

Mr. Serbinowski said the Model #805 Drafting Group has met twice to discuss the thought and intent behind the prospective test. The discussion was supported by material obtained from NAIC Proceedings from 1976. He said the group discussions will continue.

15. Discussed Possible Life Insurance and Annuities (A) Committee Request to the Task Force

Mr. Boerner said the Model Law Review (A) Subgroup will be surveying regulatory actuaries to determine how the Standard Nonforfeiture Law for Individual Deferred Annuities (#805) is being implemented in the absence of state adoption of the Annuity Nonforfeiture Model Regulation (#806). He said the Task Force will continue to report on the development of the actuarial guideline for Model #805 while awaiting a request from the Life Insurance and Annuities (A) Committee to assist with the survey.

16. Adopted the Report of the VM-22 (A) Subgroup

Mr. Robinson said the NAIC will begin publishing the VM-22 valuation interest rates for jumbo and non-jumbo SPIA contracts. Automation of the process for determining the rates is currently being tested. He noted that the Academy has received feedback that there is a discrepancy between the spreadsheet used to calculate the weights used in the determination of the valuation interest rate and the documentation of the rate determination process. The Subgroup will work with the Academy to address the issue.

Mr. Robinson said the Subgroup is observing the Academy Annuity Reserve Work Group (ARWG) work on reserves for non-SPIAs and the work of the Academy Standard Valuation Law Interest Rate Modernization Work Group (IMWG). He said the reserve methodology being pursued is similar to the methodology for AG 43, with the exception that there will be permitted exclusions to allow the use of formula-based reserves. He noted that for non-SPIAs, a valuation interest rate determination process similar to the SPIA process is being developed for both model-based reserves and formula-based reserves.

John Miller (ARWG) said the work group is considering ways of modifying AG 43 such that it is applicable to fixed annuities and other non-variable annuities. He discussed a presentation (Attachment Forty-Three) of an approach for further developing VM-22. He said principles for an exclusion test have been identified. Mr. Miller said the ARWG has identified a number of discussion points on which it is focusing, including hedge modeling, discount rates, stochastic scenarios and standard scenario policyholder behavior. Mr. Hazzard said the New York State Department of Financial Services prefers using the Commissioners Annuity Reserve Valuation Method (CARVM) approach for fixed annuities. Mr. Miller said that would be the case for a number of fixed annuity products. He said the products with optional benefits would more likely be subject to more stochastic testing, which is not captured in cash flow testing. He noted that the ARWG is still looking into which approach is most appropriate. Mr. Serbinowski said the Work Group should consider the possibility of companies designing products to intentionally fail the exclusion test in order to use the stochastic methods, which allow for the use of actuarial judgment.

Chris Conrad (IMWG) said the work group is working on the charge from the Task Force to modernize the process of setting valuation interest rates for non-variable annuities and non-SPIAs. He discussed a presentation (Attachment Forty-Four) of the IMWG’s overall approach for developing those rates. He said the initial approach will build on SPIA work and will result in a single rate that will be locked in at issue. Mr. Conrad said a sophisticated modeling approach is needed to reflect the additional complexity, such as policyholder optionality, in non-SPIAs. He said the IMWG will focus on differentiating the interest rates based on features such as liquidity, interest rate guarantees, the duration of guarantees and guaranteed living benefits. He noted that the IMWG is still considering whether to determine the interest rate at issue date, annuitization date or have the rate vary based on circumstances. He said the IMWG recognizes the need to coordinate with the ARWG.

Mr. Kupferman made a motion, seconded by Mr. Andersen, to adopt the report of the VM-22 (A) Subgroup (Attachment Forty-Five). The motion passed unanimously.

17. Adopted the Report of the Longevity Risk (A/E) Subgroup

Ms. Ahrens said the Subgroup continues to discuss the work of the Academy Longevity Risk Task Force. She said the Academy Task Force is currently working on incorporating longevity risk into the risk-based capital calculation. She noted that the Academy is considering issues such as basis risk and stresses on mortality improvement.

Mr. Ostlund made a motion, seconded by Mr. Kupferman, to adopt the report of the Longevity Risk (A/E) Subgroup, including its May 16 (Attachment Forty-Six) and April 25 minutes (Attachment Forty-Seven). The motion passed unanimously.

18. Adopted the Report of the C-3 Phase II/AG 43 (E/A) Subgroup

Mr. Weber said the Subgroup is awaiting the completion of the work of the Variable Annuities Issues (E) Working Group. He said Oliver Wyman is conducting a second quantitative impact study (QIS2). The first cycle of QIS2 focused on stochastic reserve; the second cycle is focused on policyholder behavior in the standard scenario; and the third and final cycle will be initiated in September and will be a final test of all revisions. Mr. Weber said it is expected that Oliver Wyman will propose changes, based on the results from QIS2, to AG 43; VM-21, Requirements for Principle-Based Reserves for Variable Annuities; and C-3 Phase II. He said it is uncertain whether QIS2 will be completed before the Fall National Meeting.

Mr. Yanacheak made a motion, seconded by Ms. Ahrens, to adopt the report of the C-3 Phase II/AG 43 (E/A) Subgroup. The motion passed unanimously.

19. Heard an Update from the Academy Council on Professionalism

Maryellen Coggins (Academy) said the first exposure draft on the proposed Actuarial Standard of Practice (ASOP), Setting Assumptions, received 45 comment letters and is currently being worked on. The exposure draft of the proposed ASOP, Modeling, will be presented to the Actuarial Standards Board (ASB) in December, with plans to re-expose it in the first quarter of 2018. The first exposure draft of the proposed ASOP, Capital Adequacy Assessment, is due to return to the ASB in September. The exposure draft of the proposed ASOP, Principle-Based Reserves for Life Products, received 14 letters. An update to the exposure draft is expected to be presented to the ASB in September. The ASB approved a second exposure of ASOP, Pricing Life and Annuity Products, with an Oct. 31 comment deadline. Updates and revisions to ASOP No. 2, Nonguaranteed Charges or Benefits for Life Insurance Policies and Annuity Contracts, and ASOP No. 11, Financial

Statement Treatment of Reinsurance Transactions Involving Life or Health Insurance, are being considered by the Life Committee of the ASB.

Janet Carstens (Academy) said the Actuarial Board for Counseling and Discipline (ABCD) had 33 inquiries in 2016, of which 14 cases resolved in 2016. She said seven new cases have been received in 2017. Through the first six months of 2017, eight cases have been resolved and six cases have been dismissed. One case resulted in a recommendation for public discipline. She said there have been 54 requests for guidance in the first six months of 2017.

20. Heard an Update on Academy’s PBR Boot Camp

Donna Claire (Academy) said the next two-and-a-half-day intensive “PBR Boot Camp” is scheduled for Sept. 11–13. Registration can be completed on the Academy website. She said the seminar will have a regulatory focus that is designed for examiners, financial analysts and others performing the auditing function.

Having no further business, the Life Actuarial (A) Task Force adjourned.

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