The release of Financial Accounting Standards Board (FASB) Accounting Standards Update 2018-12, Targeted Improvements for Long-Duration Contracts (ASU 2018-12, also referred to as LDTI) has created a flurry of activity in the life insurance industry, as actuaries and other professionals try to interpret and apply the new accounting standard.
Among other major changes, the standard creates a new category of liabilities for “Market Risk Benefits” (MRBs), which must be held at fair value, as defined under existing GAAP standards. The definition of an MRB encompasses, among other possibilities, all kinds of guaranteed living benefits and guaranteed death benefits (GMxBs) on deferred annuity contracts, including both variable annuities (VAs) and fixed indexed annuities (FIAs). Under current, pre-LDTI GAAP, many kinds of GMxBs are valued under an insurance benefit model, with reserves calculated under a Statement of Position (SOP) 03-1 methodology and typically not using market-consistent assumptions. Thus, the new fair value MRB model represents a significant change for some products, with both financial and operational implications.
This paper by Milliman actuaries offers perspective that can help insurers as they shape their new valuation methodologies for MRBs on FIA contracts. The paper focuses on the cash flow modeling aspects of MRBs on FIA contracts, especially the methodology for projecting indexed account growth.
Milliman recently released the results of its biennial broad-based survey on term life insurance. The survey captured historical data for key industry competitors as well as company perspectives on a range of issues pertaining to these products into the future. The Term Life Insurance Issues report is based on a survey of 28 term insurance companies. It includes detailed information on underwriting trends and other product and actuarial issues such as sales, profit measures, target surplus, reserves, risk management, product design, compensation, and pricing.
Key findings of the study include:
- Term sales were fairly stable over the
survey period (calendar years 2015 to 2018), with 20-year level premium term
sales at 41% to 42%, followed by 10-year at 23% to 25%, 30-year at 14% to 15%,
15-year around 11% to12%, and yearly renewable term at about 5%.
- The predominant profit measure relative
to the pricing of new term products is an after-tax, after-capital statutory
return on investment/internal rate of return (ROI/IRR). The average ROI/IRR
target for term products reported by survey participants was 9.8%.
- Of the 26 survey participants planning
to implement principle-based reserves (PBR), 14 intend to implement PBR in
calendar year 2020. The other 12 participants implemented PBR in calendar years
2019 or prior. Also, 23 of the 28 survey participants implemented the 2017 Commissioner’s
Standard Ordinary (CSO) mortality table in calendar year 2019 or prior. Four
will implement the 2017 CSO in calendar year 2020. For one participant
implementation is taking place in both periods.
- In both 2017 and 2018, the percentage of
new term business that participants ceded to reinsurers ranged from 1% to 100%,
with an average of 44%. The median was 45% in 2017 and 38% in 2018.
- Currently, 20 of the 28 survey
participants use accelerated underwriting programs for term life insurance,
with an additional five participants planning to implement such programs.
- The use of predictive modeling in the
life insurance industry continues to increase. Fifteen survey participants use
predictive analytics in the accelerated underwriting algorithms. Six participants
reported using predictive analytics in underwriting of term products under
other underwriting approaches (i.e., other than accelerated underwriting).
Similar to the past several years, carriers continue to deal with the implementation of PBR, the 2017 CSO, accelerated underwriting programs, and predictive models. The implications of these significant changes are yet to be seen fully, and monitoring of results will be important in the years to come.
The 146-page “Term life insurance 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.
Solvency II came into effect on 1 January 2016 and introduced a number of disclosure requirements for European insurers. Under the new rules, European insurers are required to publish a Solvency and Financial Condition Report (SFCR). The third set of SFCRs contains a significant amount of information, including details on business performance, risk profile, balance sheet, and capital position. Insurers are also required to publish quantitative information in the public Quantitative Reporting Templates (QRTs) included within the SFCRs. This analysis by Milliman’s Matthew McIlvanna, Sinéad Clarke and Aisling Barrett highlights some interesting information published in the SFCRs of life insurance companies in Ireland at year-end 2018, focussing on premiums, investments and solvency coverage.
In the third quarter of 2019, Milliman consultants and actuaries conducted a survey to establish market best practices in the application of VM-21: Requirements for Principle-Based Reserves for Variable Annuities. Written into the requirements are several decision points for the application of the standard which are at the discretion of the carrier. The survey summarizes responses from 25 variable annuity carriers regarding these decision points. The carriers surveyed are diverse in terms of total in-force account value and material account value exposure to living and death benefits.
Recent developments in data science ethics over the last number of months have shown that support and guidance for professionals has become an increasingly important topic; the European Insurance and Occupational Pensions Authority (EIOPA) established a ‘Consultative Expert Group on Digital Ethics in Insurance’ in September last year, the Actuarial Association of Europe published a document outlining its current perspective on the ethics and responsibility of data scientists and the European Actuarial Academy is hosting its first ‘Data Science and Data Ethics Conference‘ on the 29th and 30th of June in 2020. Much of the activity has discussed the evolving role of actuaries in data science, noting the opportunities within the space but acknowledging that a number of risks still need to be addressed.
To assist in navigating some of the risks posed by the ethical considerations of data science, in October 2019 the Institute and Faculty of Actuaries (IFoA) and the Royal Statistical Society (RSS) Data Science Section jointly published ‘A Guide for Ethical Data Science.’ This guide aims to address the challenges faced by their members while complementing existing ethical and professional guidance. It is non-mandatory and does not impose any obligations upon RSS or IFoA members.
The development of the guide began in 2018
with four workshops with data science professionals. These workshops centred on
four key questions raised by the RSS and IFoA:
- What does a good data science
workflow look like?
- How should data science fit
into the structure of an organisation?
- What do executives and managers
need to know about data science?
- What is a data scientist’s
responsibility to wider society?
Although the data science practitioners found that best practice for data science is dependent on industry and even company-specific factors such as organisational design, historical workflows and the availability of skills within teams, they did broadly agree on several high-level principles and practices which have informed the guide. The guide does highlight, however, that some of the more complex issues faced by practitioners will require further thought and input from professionals.
The guide looks at five recurring ethical
themes from existing frameworks relating to data science and artificial
- Seek to enhance the value of data science for society.
- Avoid harm.
- Apply and maintain professional competence.
- Seek to preserve or increase trustworthiness.
- Maintain accountability and oversight.
Milliman today announced the third quarter 2019 results of the Milliman Mortgage Default Index (MMDI), which shows the latest monthly estimate of the lifetime default risk of U.S.-backed mortgages. Default risk is driven by various factors including the risk of a borrower taking on too much debt, underwriting risk (such as loan term, loan purpose, and other influential mortgage features), and economic risk as measured by historical and forecast home prices. The goal of the MMDI is to provide a benchmark to understand trends in U.S. mortgage credit risk.
During Q3 2019, the MMDI for government-sponsored enterprise (GSE) acquisitions (purchased and refinanced loans backed by Freddie Mac and Fannie Mae) decreased to an estimated average default rate of 1.81%, down from 1.96% in Q2. This means that the average lifetime probability of default for all Freddie or Fannie mortgages originated in Q3 2019 was 1.81%. Default risk for the quarter is down thanks to low interest rates that continue to drive activity in the refinance market, which tends to have borrowers with higher credit quality as measured by the original loan-to-value ratio and debt-to-income ratio.
Ginnie Mae loans, the MMDI rate increased from 7.84% in Q2 to 8.00% in Q3. This
uptick is consistent with the overall trend for these loans since 2014, as
higher credit quality originations shift toward GSE loans and away from Ginnie
From 2014 through 2019, home price appreciation has been strong, reducing the credit risk for borrowers who purchased or refinanced over the past five years. However more recently we’re beginning to see slower home price growth—and negative growth in some areas—which may elevate mortgage default risk in the future.
For more information on the MMDI, click here.