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LONGEVITY RISK (A/E) SUBGROUP Monday, November 25, 2019 3:00 P.M Date: 11/22/19 Conference Call LONGEVITY RISK (A/E) SUBGROUP Monday, November 25, 2019 3:00 p.m. ET / 2:00 p.m. CT / 1:00 p.m. MT / 12:00 p.m. PT ROLL CALL Rhonda Ahrens, Chair Nebraska Mike Yanacheak Iowa John Robinson Minnesota Seong-min Eom New Jersey Bill Carmello New York Peter Weber Ohio AGENDA 1. Consider Adoption of the Subgroup’s Recommendation to the Life Risk-Based Capital (E) Working Group—Rhonda Ahrens (NE) Attachment 1 2. Discuss the American Academy of Actuaries Offer of Additional Assistance on Correlation—Rhonda Ahrens (NE) Attachments 2 & 3 3. Discuss Any Other Matters Brought Before the Subgroup—Rhonda Ahrens (NE) 4. Adjournment W:\QA\RBC\LRBC\Longevity Risk Subgroup\2019\Calls and Meetings\11_25_2019 Call\Longevity Risk 11-25-19 Agenda.doc © 2019 National Association of Insurance Commissioners 1 This page intentionally left blank. Attachment One -- TO: Philip Barlow, Chair, Life Risk-Based Capital (E) Working Group FROM: Rhonda Ahrens, Chair, Longevity Risk (A/E) Subgroup DATE: November 25, 2019 RE: Recommendation for incorporating an RBC charge for longevity risk The NAIC’s Longevity Risk (A/E) Subgroup was formed in 2016 with the charge to provide recommendations for recognizing longevity risk in statutory reserves and/or risk-based capital (RBC), as appropriate. The Subgroup has worked closely with the American Academy of Actuaries’ (Academy) Longevity Risk Task Force (Academy Task Force) over the ensuing three years to focus efforts on addressing RBC for longevity risk after determining that statutory reserves would be addressed through the work of other NAIC groups. After many discussions and considerable input from the Subgroup, the Academy Task Force conducted a field study in 2018. The intent of the field study was to quantify longevity risk coverage at an appropriate confidence level. The results of that field study were presented to the Life Risk-Based Capital (E) Working Group at the 2018 Summer National Meeting. Those results were used to produce a proposal for an RBC charge for longevity (the proposal) which was exposed for comment by the Subgroup, along with a list of questions on which the Subgroup requested input, on its March 5, 2019 conference call. The proposal was presented to the Working Group at the 2019 Spring National Meeting (Attachment 1a). The comments and the responses to the Subgroup’s questions were discussed on its July 17, 2019 conference call. The Subgroup wants the Working Group to be aware that special consideration was given to the proposal’s assumption of statutory reserves being at the 85th percentile. While differing views were expressed, the Subgroup’s consensus is that any deviation in reality from this assumption should be addressed as part of consideration of reserves and not as a factor in determining a capital charge. The Academy Task Force did produce potential factors that would address the gap if reserves were actually at the 75th or 80th percentile. Those factors are not included in the proposal being recommended as the Subgroup reached consensus on the after-tax factors as presented on page three of the proposal. These factors are then included on a pre- tax basis in the RBC instructions The Subgroup has also evaluated longevity reinsurance transactions (LRT), a reinsurance arrangement initially in scope for longevity C-2. LRT is a relatively new type of arrangement which involves the transfer of longevity risk associated with group annuities to a reinsurer and is discussed on slide nine of the proposal. While the Subgroup has held several discussions on LRT, we believe further analysis of the arrangement addressing key considerations is necessary for the Subgroup to issue a recommendation. These key considerations include: • The basis for the factors – Statutory reserves may not be the appropriate basis to which the factor applies since reserves are generally zero at inception. The present value of future payout benefits using VM 22 criteria was discussed as a potential basis, however this would not be a statutory reporting item that could be pulled from the financial statement. The basis needs to be determined and the process for including it in the RBC pages needs to be established. • Premium offset – Whether and how to approach allowance of future premiums due to the reinsurer under a reinsurance arrangement to offset the capital requirement resulting from applying the factor to the present value of benefits. • Treatment for primary insurer – How capital would be reflected for a primary insurer that has reinsured longevity risk to a reinsurer. The Subgroup recommends LRT arrangements should ultimately be included in scope for longevity C-2, however, additional time is needed in order to further review and consider these key issues. Therefore, for purposes of our current recommendations to the Working Group, the Subgroup supports scoping out LRT and seeks support on forming a drafting group to continue evaluation and development of a recommendation. Attachment One Another aspect the Subgroup discussed at length with differing viewpoints expressed was possible correlation between longevity and mortality risk. Correlation is an aspect that the Subgroup feels extends beyond our charges and is an issue for the Working Group to decide. The proposal includes the Academy Task Force’s recommendation that updated C-2 mortality factors and new C-2 longevity factors be implemented concurrently along with a covariance adjustment within C-2. Various correlation factors of 0%, -25% and -50% were included to demonstrate hypothetical company impacts related to implementation with or without correlation noting that additional work on coordinating and consideration of the proper level of covariance was needed. An update on this by the Academy Task Force was included in a presentation to the Working Group at the 2019 Summer National Meeting (Attachment 1b). The Subgroup believes the factors presented by the Academy Task Force may be reasonable but believes the Working Group is in a better position to consider this as it involves more than just the longevity component. As such, the Subgroup is only providing a recommendation for the factors as presented in slide three of the proposal, and is raising the topic of correlation for the entire Working Group to address. The proposal, as produced and presented by the Academy Task Force, is included as Attachment 1a and includes the Academy Task Force’s objectives and analysis approach along with the results of the field study and the calibration of the longevity factor. Attachment 1c presents the RBC blank and instruction changes necessary to implement the proposal. © 2019 National Association of Insurance Commissioners 2 Attachment 1a Longevity Risk Task Force (LRTF) Update Paul Navratil, MAAA, FSA Chairperson, Longevity Risk Task Force American Academy of Actuaries NAIC 2019 Spring National Meeting—Life Risk-based Capital (E) Working Group—Orlando, Fla. © 2019 American Academy of Actuaries. All rights reserved. May not be reproduced without express permission. Discussion Topics Attachment 1a Preliminary Factor Proposal Objectives & Analysis Approach Field Study Results & Longevity Factor Calibration Next Steps 2 © 2019 American Academy of Actuaries. All rights reserved. May not be reproduced without express permission. Preliminary Proposal Summary Attachment 1a Recommend capital structure with longevity C-2 factors applied to base Statutory Reserves Factor applied to present value of benefits for longevity reinsurance Propose that updated C-2 mortality factors (e.g., C-2a) and new C-2 longevity factors (e.g., C-2b) be implemented concurrently along with a covariance adjustment within C-2. Anticipated factors (working version below) vary with the total size of company reserves for in scope products, where reserves are a proxy for the credibility and volatility of company-specific longevity Total Reserves C-2 Longevity (in scope products) After-Tax Factor up to $250M 1.35% next $250M 0.85% next $500M 0.75% over $1B 0.70% 3 © 2019 American Academy of Actuaries. All rights reserved. May not be reproduced without express permission. Objective & Philosophy Attachment 1a The objective of our work is to develop a recommended method to incorporate longevity risk into the NAIC’s Life Risk-Based Capital (LRBC) formula. The scope of our work is LRBC. Statutory Reserves reflect longevity risk through prescribed mortality assumptions and asset adequacy testing requirements. Our proposal was developed in line with the overall objective of LRBC as being a tool for regulators to identify potentially weakly capitalized companies. We took a practical approach in developing an initial longevity risk factor for LRBC that is not intended to precisely reflect all drivers nor align to an internal view of economic capital for all companies We balanced several competing objectives in developing a longevity risk factor within LRBC: Clear linkage of the calculation to statutory financial statements & regulatory ability to audit calculation Accuracy and reasonability of the charge as a measure of longevity risk at the company level Simplicity of the calculation Consistency with the existing RBC framework 4 © 2019 American Academy of Actuaries. All rights reserved. May not be reproduced without express permission. Overall Approach Attachment 1a Scope to include longevity risk to payout annuity products and pension risk transfers. Other products such as variable annuities (VA), long-term care (LTC), and traditional deferred accumulation
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