PD 27 CLIFR Update2008 General Meeting
Assemblée générale 2008Toronto, Ontario
Canadian Institute
of Actuaries
L’Institut canadien desactuaires
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Valuation of Group Life and Health Policy Liabilities
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Agenda• Educational Note• Group Experience Rating Refunds
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Background• First Educational Note on Group
valuation in Nov 2000• Companion piece to draft Life SOP• Reduced to Research Paper Sep 2001
• Recently revisited by CLIFR• Educational Note to be re-published with
modifications
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Facts• Varieties in groups and their risks
• Employee groups, association, creditor• Size of groups• Industries and occupations
• Varieties in benefit provisions• Many products, variations within products
• Varieties in financial arrangements• Fully pooled, prospectively rated, refund
accounting, hold harmless, ASO, etc.
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Valuation Challenges• Customization
• Specific client needs complexity• Refund accounting
• Additional complexity• Data issues
• Policies may be administered by the insurer, or the client, or a third party
• Some contract information may exist but not available to the valuation actuaries
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What’s in the Educational Note• General descriptions
• Group business characteristics, benefit descriptions, financial arrangements
• CALM, term of the liability• Cash flows
• Reported claims, IBNR• Future claims (premium rate guarantees)• Experience rating refunds (ERR)
• Other miscellaneous guidance
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Experience Rating Refund• Applicable to refund accounting
• Policyholder (PH) eligible for refund if experience better than assumed
• Typically one-way: head you win, tail I lose• Refund to PH similar to income to insurer
ERR = premium – retention charges – claims + interest credited – increase in PH reserves
(Income = premium – expenses – claims + investment income – increase in reserves)
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Where Come the Profits?• Retention charges• Interest spread• Premiums?
• Only if already in deficits, additional premiums could generate profits by recovering past deficit losses
• Pooling charges
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Managing Refund Risks• Financial arrangement
• CFR, cross-rating, hold harmless provisions alleviate but do not eliminate the risk
• Risk charges• Conservative PH valuation basis• Other management
• Prudent underwriting, effective deficit management practice, pooling charges
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Liabilities for ERR• Margin returnable to PH• Policy by policy calculation
• John’s win does not offset Joe’s loss• Complex due to varieties in arrangements
• Guidance• No one-size-fits-all approach, always more
peculiarity, exception and variation• Focus on key considerations• Discuss approximations and limitations
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Accrued ERR (retrospective)• Refund based on past experience• Calculation reflects terms in agreement
• Expenses, risk and profit charges to be deducted from premiums; interest to be credited; policyholder reserves to be held
• Refundable surplus recorded as liability• Paid out as refund, or used to fund CFR
• Deficit may or may not reduce liability
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Future ERR (prospective)• Margins in existing PH reserves
• Mort/morb assumptions• Valuation expense• Valuation interest rate
• Margins in future premiums• Premiums to the end of the guarantee period
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Projecting Future ERR• Not projected on expected basis
• Projected experience follows CALM, that is, with MfAD projected ERR less than what is expected
• PH reserve does not follow GAAP• PH cash flow assumptions expected +
MfAD in CALM• PH valuation expense what is charged• PH valuation interest rate credited rate and
not based on investment return
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Benefit Cash Flows (Mort/Morb)• PH valuation benefit cash flows – CALM
benefit cash flows (expected + MfAD)• 0 no contribution to future ERR• +ve may contribute to future ERR• -ve generates future deficits, may reduce
future ERR cash flows from other sources• Analogy: head you win, but I won’t pay
if you still owe me money; tail I lose, but not if I have collateral to draw on.
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Valuation Expense• Expenses charged in calculating ERR
based on retention formula in contract• PH valuation expense ≠ formula• Valuation expense in PH reserve –
expense charge• 0 / +ve / -ve same treatment as for ERR
due to difference in benefit cash flows• Insurer actual expense has no impact on
ERR
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Interest Credit• Interest crediting often based on GICs• Interest rate used to calculate PH reserve
not tied to crediting basis• Interest credit – interest assumed in PH
reserve• 0 / +ve / -ve same treatment as for ERR
due to difference in benefit cash flows• Actual investment yield by insurer has no
impact on ERR
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Premium Margins• Only to the end of rate guarantee period• Premium – retention charges – PH
reserves on future claims• 0 / +ve / -ve same treatment as for ERR
due to difference in benefit cash flows• A -ve amount alone does not imply
premium inadequacy due to presence of strains in PH reserves
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Other Considerations …• Project ERR cash flows by duration• Consider effect of accumulated deficit or
CFR at each duration• +ve contributions first reduce deficit before
becoming refund cash flow• -ve contributions … CFR … hold harmless
… increase accumulated deficits• If policy terminates, cash flows change
• Adjust for policy persistency?
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So Complicated?! • Does it have to be so complicated? • YES - do this if you can• NO - use of approximation is more
common than not, be sure to understand the limitations
• MAYBE you were using approximation without fully understanding the principles supporting it Evaluate
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A Common Approximation• Approximate future ERR liability (by
policy) ≈ (PH reserve – statutory reserve) – PH deficit, subject to zero floor
• Understand the limitations, which are deviations from key principles ( )
• Apply judgment and materiality principles
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Questions• To all your good questions, here is my
answer: “It’s a very good question. I’ll get back to you.”
• Have a good lunch
