Q&A—Future Mortality Improvement Update
Bahna-Nolan
To discuss the Academy/Society of Actuaries ongoing work with the National Association of Insurance Commissioners (NAIC) on future mortality improvement, Life Perspectives talked to the Life Practice Council’s (LPC) Mary Bahna-Nolan (also former vice president, life) who offered her insights into where the NAIC might be headed on the future mortality improvement (FMI) recommendation relative to VM-20, life insurance and its significance.
Can you provide some historical context on FMI considerations for life insurance products? What has been the Academy’s involvement on this topic in the past?
FMI has long been a consideration for life insurance products. It is often a consideration in company best estimate assumptions used in pricing, planning, and forecasting as well as internal capital models. When it comes to reserves, however, the inclusion of FMI generally reduces the level of prudency in the reserves. As such, excluding FMI from reserves was considered by some, including many regulators, to be prudent and add a level of conservatism to life reserve and capital determinations.
With principle-based reserves (PBR), the lack of FMI in VM-20 calculations resulted in an implicit margin for company reserves which was in addition to the explicit margins already added for mortality. The Academy’s Life Practice Council had identified inclusion of FMI as something to revisit with regulators once there was a bit more comfort with PBR calculations. However, as more analysis was performed on how to treat certain nonguaranteed reinsurance structures within VM-20 modeling, it became apparent that the lack of FMI was a confounding factor that, if addressed, could simplify how nonguaranteed reinsurance was to be handled in the VM-20 context.
What is the importance of including FMI considerations in VM-20 products and how will they be incorporated in VM-22?
The overall mortality assumption for a company consists of the actual expected mortality level, the expected mortality trend or FMI, and a component for volatility. The combination of the mortality level and mortality trend often comprise a company’s best estimate mortality assumption for pricing and forecasting, whereas the volatility component is often considered as part of the capital calculations. Therefore, by allowing FMI within the VM-20 modeled reserves, it aligns better with the level and slope of mortality a company actually expects to occur. The inclusion removes the implicit margin that was previously in the mortality calculations and thus, will likely reduce the modeled reserve levels.
Mortality assumptions for annuity contracts under VM-22 already incorporate a level of FMI through the various published scales. In contrast to life contracts, the inclusion of FMI for longevity contracts increases the reserve levels and is therefore considered more prudent.
Can you provide a bit of background on how FMI is calculated and the methodology for this?
The determination of the FMI for inclusion within VM-20 will follow a methodology that is approved by the NAIC’s Life Actuarial (A) Task Force (LATF). Determining the methodology took significant debate, as there are many different factors to consider. These included the following:
- The underlying population upon which to base the assumption—today, there is a significant amount of “noise” in the life mortality experience studies due to changes in contributing companies, changes in underwriting practices, changes in mix of business, etc., so less homogenous than general population data;
- The period of time in which to incorporate FMI;
- Both the starting level and long-term normative rate;
- The pattern of grading between the starting and long-term rate;
- Whether to include differences by sex or smoker status;
- Special considerations as to drivers of certain historical experience that may or may not be present in a future view (such as the significant impact of smoking cessation that has leveled out more recently and the impacts of COVID-19); and
- Explicit margin for conservatism.
The resulting FMI assumption that has been proposed uses the best estimate of historical mortality improvement (HMI) as a starting point. The HMI is determined and adopted by LATF annually using an established methodology. To maintain a level of consistency with the underlying data used for HMI, the long-term mortality improvement rate is defined as the average of the projection rate for years 10-15 from the general population mortality improvement as determined by the Social Security Administration’s intermediate projection (Alt 2) as published in the annual Social Security Trustees Report. The FMI uses linear interpolation to grade from the HMI rate to the long-term mortality improvement rate by the 10th year, then remains level for years 11–15 before grading back to no further improvement by year 20. The FMI rates vary by gender and attained age.
Two FMI rate scales will be published annually, a Basic (or best estimate) and Loaded (or with margin), where the margin will be a percentage reduction in the FMI rate, with special consideration for application when rates are near 0%. The current margin is set at a 25% reduction in the best estimate or Basic scale. This level of margin, however, is expected to remain consistent year over year but will be an area of focus for reconsideration by LATF in upcoming years.
What factors and considerations could alter FMI rates? Do actuaries predict significant changes in the upcoming year?
The FMI scale will be developed and updated annually, though updates will likely be limited to a threshold of materiality. Through the annual review, consideration will be given to changing dynamics related to mortality trends. Specifically for 2022, the potential impact from COVID-19 will be a big focus for discussion as more information emerges for differences between insured and general population mortality impacts from COVID-19, especially for the long haulers. For the current development of the scale, there was insufficient information to make any adjustments. Similarly, over time, additional considerations will be given for potential differences between insured and general population data.
What else should Academy members know about forthcoming FMI developments?
The FMI rates may be positive or negative. Similar to the underlying mortality rates, under VM-20, a company may use an FMI scale that is more conservative than that published but may not use anything less conservative. That means that if a company’s best estimate assumption for future mortality improvement is more conservative than what is published, it should not use the published FMI scales. The determination and judgments should also be well documented.
Another important consideration is that the FMI scale will not be locked in under VM-20, as there is the ability to change the best estimate FMI scale each year as trends change.
Life Policy Webinar to Look at Mortality Factors, COVID-19
Join the LPC later this month for the webinar, “Life Practice Public Policy Update.” Presenters will be Marianne Purushotham, a member of the Life Experience Committee; Amy Kemp, chairperson of the Social Security Committee; Chris Trost, chairperson, and Ryan Fleming, vice chairperson, of the C2 Mortality Risk Work Group; and Angela McNabb, NAIC. They will examine mortality improvement; COVID-19 mortality as it pertains to Social Security; C-2 mortality; and a VM-50/VM-51 update. Continuing education credit will be available. The webinar will be held on Wednesday, Jan. 26, from noon to 1:30 p.m. EST. Register now.
For information on the last “Academy Life Policy Update“ webinar held in September, slides and audio are available free for logged-in Academy members. This webinar featured risk-based capital (RBC) update, an LATF update, and a look at future mortality improvement issues.
Annual Meeting & Public Policy Forum Examines Life Issues
Philip Barlow, chair of NAIC’s Life RBC Working Group, asks a question at a plenary session
The Academy’s Annual Meeting and Public Policy Forum, held Nov. 4–5 in the nation’s capital as a hybrid event, covered multiple topics pertaining to life insurance and of interest to life actuaries in both breakout and plenary sessions. Jeff Johnson, a former Academy vice president, life, and co-chairperson of the LPC’s Diversity, Equity & Inclusion (DE&I) Task Force, took part in a DE&I panel in a plenary session that looked at equity issues across all practice areas. Andrew Stokes, assistant professor of global health at Boston University’s School of Public Health, spoke in a COVID-19 session, covering in part indirect deaths with other comorbidities such as diabetes factored in, and discrepancies based on socioeconomic factors.
Breakout sessions included “Updates on Emerging Issues in the Use of Reinsurance Structures in the Acquisition of Life Insurance and Annuity Business,” “A Discussion of Long-Term Care Insurance From the Life Perspective,” and “A Look Into Index-Linked Variable Annuities.” For a complete recap of this outstanding event, including deep dives into the life breakout sessions, be sure to check out the Annual Meeting and Public Policy Forum supplement, published alongside the November Actuarial Update.
Academy Comments to LATF, NAIC Groups
The LPC provided input to LATF and other NAIC groups late last year on several life-related topics.
AIRG Update
A comment letter was sent to the chairs of LATF and the NAIC’s Life Risk-Based Capital (E) Working Group, indicating an “as-is” availability of its economic scenario generator, the Academy Interest Rate Generator (AIRG), for regulators and interested parties wishing to modify the AIRG parameters as a basis for producing an updated model.
Academy Updates LATF on LPC Activity
Former Academy Life Vice President Laura Hanson gave an update of LPC activity to LATF as part of the NAIC 2021 Fall National Meeting.
AG & Adequacy Testing
An LPC ad-hoc task force submitted comments to LATF on a conceptual actuarial guideline (AG) regarding asset adequacy testing.
Variable Annuity WG Comments on APF
The Variable Annuity Reserves and Capital Work Group submitted comments to LATF on an amendment proposal form regarding the proposed assumption disclosure requirements in VM-31.
C-2 Work Group Comments on Reserve Implications
The C-2 Longevity Risk Work Group submitted a comment letter to NAIC’s Longevity Risk (A/E) Subgroup on reserve implications of expanding the scope of C-2 Longevity Capital to include longevity reinsurance contracts.
Work Group Comments on C-2 Factors
The C-2 Mortality Work Group presented on its report to NAIC’s Life Risk-Based Capital Working Group on recommendations for updated C-2 factors. The presentation was made by work group Chairperson Chris Trost and Vice Chairperson Ryan Fleming.
ASB Adopts Revisions of ASOP Nos. 2, 22
The Actuarial Standards Board (ASB) adopted revisions of two actuarial standards of practice (ASOPs) related to life insurance.
ASOP No. 2, now titled Nonguaranteed Elements for Life Insurance and Annuity Products, applies to actuaries when performing actuarial services with respect to the determination and, if applicable, illustration of nonguaranteed elements (NGEs) for life insurance and annuity policies written on individual policy forms where NGEs may vary at the discretion of the insurer, with exceptions identified in the ASOP. It also applies to actuaries when performing similar actuarial services for group master contracts with individual certificates where NGEs are determined in a similar manner to products written on individual life and annuity policy forms. The revised ASOP No. 2 is effective for work performed on or after June 1, 2022.
ASOP No. 22, now titled Statements of Actuarial Opinion Based on Asset Adequacy Analysis for Life Insurance, Annuity, or Health Insurance Reserves and Other Liabilities, applies to actuaries when performing actuarial services with respect to providing a statement of actuarial opinion (SAO) based on asset adequacy analysis of life insurance, annuity, or health insurance reserves and other liabilities, when the SAO is prepared to comply with applicable law based on the model Standard Valuation Law and VM-30 of the NAIC Valuation Manual; or when the SAO is prepared for an insurance company to comply with other applicable law. The revised ASOP No. 22 is effective for all SAOs covered by the scope of the ASOP issued on or after June 1, 2022.
Task Force Comments to ASB on ASOP No. 24
An LPC task force submitted comments to the ASB on the exposure draft of Actuarial Standard of Practice (ASOP) No. 24, Compliance with the NAIC Life Insurance Illustrations Model Regulation.
PBR Boot Camp Mini-Seminar Covers Variety of Topics
Lam during the Q&A session
The Academy presented a successful virtual interactive PBR Boot Camp on Oct. 13, held as a two-hour mini-seminar with a focus on sharing the regulatory perspective.
Presenters—who included officials from the insurance departments of California, Illinois, and Ohio—covered a range of issues relevant to principle-based reserving (PBR), including lessons learned through implementation of VM-20, mortality, variable annuities, long-term care, and state regulatory issues:
- Elaine Lam, senior life actuary with the California Department of Insurance, shared findings from PBR reserve reporting including on mortality and mortality aggregation, simplified issue, accelerated underwriting, mortality improvement, lapses, expenses, assets, and reinvestment strategy.
- California Department of Insurance members Rodney Haviland, senior life actuary, and Thomas Reedy, chief systems actuary in the department’s PBR office, elaborated on the Actuarial Guideline 51 review process, which focuses on PBR reserve issues for long-term care insurance companies.
- Vincent Tsang, an actuary with the Illinois Department of Insurance, provided insight from the perspective of a domestic regulator and explained the charges of the NAIC’s Valuation Analysis Working Group.
- Pete Weber, chief life actuary with the Ohio Department of Insurance, provided an update on VM-21 Reserves and provided an overview of various VA reporting pitfalls and recommendations to fix them.
- Ben Bock, member, Life Valuation Committee; Senior Life Actuary, Office of Principle Based Reserving, California Department of Insurance.
In a concluding Q&A session led by Donna Claire, chairperson of the PBR Implementation Work Group, participants engaged directly with regulators.
PBR in Practice Webpage: Looking for a one-stop shop for your PBR-related questions? The Academy’s PBR in Practice webpage contains helpful materials to assist actuaries and regulators in their practice and oversight of PBR for life insurance and variable annuities, including a toolkit that provides resources to support actuaries on PBR valuations.
The Tax Work Group published updated FAQs regarding certain insurance reserves held by insurance companies for the purpose of determining U.S. taxable income under the Tax Cuts and Jobs Act of 2017.
Academy Hosts Successful In-Person LHQ Seminar
The Academy’s annual Life and Health Qualifications (LHQ) Seminar returned as an in-person event in 2021. Held Nov. 15–18 in Arlington, Va., the highly regarded and well-attended LHQ Seminar featured sessions on professionalism, actuarial opinions, and cash flow, and interactive case-study breakout sessions that have long been highly valued by attendees—many return every few years to brush up on skills and knowledge.
Attendees gained required basic education and continuing education to be qualified to sign NAIC Life and Health annual statements of actuarial opinion, and a range of topics were discussed, including principle-based reserving, risk adjustment data validation, and risk-based capital. David Dillon was a new member of the LHQ Seminar faculty, and ASB Chairperson Darrell Knapp chaired the subcommittee that organized this year’s seminar.
In This Issue
- Q&A—Future Mortality Improvement Update
- Life Policy Webinar to Look at Mortality Factors, COVID-19
- Fall 2021 Life Policy Webinar
- Annual Meeting & Public Policy Forum Examines Life Issues
- LPC Comments to LATF
- ASB Adopts Revisions of ASOP Nos. 2 and 22
- Task Force Comments on ASOP No. 24
- PBR Boot Camp Mini-Seminar Covers Variety of Topics
- Tax Work Group Publishes FAQs
- Academy Hosts Successful In-Person LHQ Seminar
- Life & Health Valuation Law Manual Available
- Legislative/Regulatory Activity
- In the News
Life & Health Valuation Law Manual Available
The Academy’s Life and Health Valuation Law Manual is available online for immediate access. Updated for 2022, the manual contains information to help appointed actuaries and others know the requirements of the NAIC model Standard Valuation Law and the model Actuarial Opinion and Memorandum Regulation. Place your order today.
Legislative/Regulatory Activity
Following is a roundup of recent life-practice-related legislative and regulatory activity.
Federal Activity
The House Ways and Means Committee approved draft legislation as part of congressional Democrats’ proposed tax plan to fund President Biden’s Build Back Better social and economic spending package, with potential impacts for life insurance. Specifically, the bill included provisions under Sec. 138209—Certain Tax Rules Applicable to Grantor Trusts—containing language intended by proponents to reduce the size of taxable estates at death for Americans holding life insurance policies. The language would amend current law to require that life insurance in a grantor trust become a part of a person’s taxable estate upon their death. Before the bill passed the House, lawmakers removed those provisions. The provisions could resurface in future deliberations on this bill or in other legislation.
State Activity
Illinois Gov. J.B. Pritzker signed Public Act 102-0542. The law requires a company issuing a life insurance contract to notify an applicant of their right to designate a secondary addressee to receive the notice of the cancellation of their policy if they do not pay their premium.
Delaware Gov. John Carney signed House Bill No. 229 which authorizes the state to enter into the Interstate Insurance Product Regulation Compact, a state-based agreement to modernize the regulatory approval of asset-based insurance products like individual and group annuities, life insurance, and disability income insurance. The compact is intended to enhance the efficiency and effectiveness of the way insurance products are filed, reviewed, and approved by application of uniform product standards embedded with strengthened consumer protections. Delaware is the 47th jurisdiction to join the compact.
North Carolina Gov. Roy Cooper signed Senate Bill 299, containing provisions that will allow the North Carolina Department of Insurance to maintain its NAIC accreditation (e.g., credit for reinsurance). The law also incorporates language from the NAIC’s “Term and Universal Life Insurance Reserve Financing Model Regulation.” The language sets requirements for the types and amounts of assets that can be used to secure reserve financing arrangements for life insurance policies and establishes consistent methods to calculate the reserves.
ThinkAdvisor’s in-depth retrospective on the Academy’s Annual Meeting and Public Policy Forum featured reporting from life breakout sessions, covering registered index-linked annuities/indexed-linked variable annuities, and private equity reinsurance and other insurance topics that were presented. In a separate story, it noted the Academy’ work on mortality improvement issues.
A Washington Post column cited the jointly sponsored Actuaries Longevity Illustrator as a retirement planning tool. An excerpt from a new book on retirement planning reprinted in Financial Advisor used data generated from the Actuaries Longevity Illustrator, and a ThinkAdvisor column on improving understanding of longevity cited the illustrator as a valuable tool.