Vol 7 | No. 1
Date:03/01/2024
Investment Actuaries’ Corner
Investment Actuaries’ Corner is a new column that will be featured in Actuarial Update, and in Life Perspectives.
Commercial Real Estate in a Post-COVID Environment
Amid vacant or nearly vacant office buildings, not a day passes without seeing an article about the fate of the commercial real estate (CRE) sector. COVID-19 shutdowns, remote work, pullbacks in bank lending, rising rents and interest rates, and general macroeconomic conditions are often cited as explanations for the deteriorating performance of the CRE sector.
In search of higher yields, life insurers’ exposure to the CRE sector has increased, as life insurers invest in different CRE-based investment vehicles: direct commercial mortgage loans, commercial mortgage-backed securities (CMBS), wholly owned real estate, and unsecured bonds issued by real estate investment trusts (REITs). For example, U.S. insurers’ percentage of assets invested in commercial mortgage loans increased 8.6% between year-end 2021 and year-end 2022. U.S. insurers’ percentage of assets invested in CMBS increased 5.6% between year-end 2021 and year-end 2022.
Have you considered how the recent stresses in the CRE sector affect your work and company? Questions to be considered include:
- How much granularity (i.e., how many separate investment types and subsectors) is needed to accurately model cash flows? Consider assets with equity features as well as fixed-income features. Consider differences in property type (e.g., office, multifamily, retail properties, etc.).
- What are the risks of investing in the CRE sector? What are the key metrics for monitoring those risks?
- How much do the risks of investing in CRE contribute to the firm’s appetite for all investment risks and all risks in aggregate?
- What are reasonable assumptions to project future cash flows (e.g., defaults, recoveries, etc.)? Historical experience may differ from the future, as systemic shifts ripple through the CRE sector.
- How are restructuring/refinancing options reflected in the modeling of future cash flows? How does the implicit option to restructure affect defaults and future cash flows? How is the availability of future capital considered in the risk profile of the CRE portfolio?
- As assets become impaired, how are those impairments reflected in the modeled cash flows?
- What level of expenses are appropriate, especially in light of the extensive monitoring (e.g., inspections, appraisals, etc.) typical in the CRE sector?
- How do occupancy rates affect future cash flows? Note that occupancy is still lower than pre-pandemic levels.
- How are property valuations reflected in the modeling? How should future valuations be modeled, particularly given the subjective nature of real estate valuation?
- How do transactions with a private party affect assumptions?
- What stress scenarios should be modeled?
There is a wealth of information available on the CRE sector. Here are some additional resources on the CRE sector:
- “Commercial Mortgage Loans”(NAIC & the Center for Insurance Policy and Research)
- “U.S. Insurance Industry’s Mortgage Loan Exposure Rises at Year-End 2022 as Commercial Real Estate Trends Deteriorate” (NAIC, Capital Markets Special Report)
- “U.S. Insurance Industry’s Exposure to Commercial Mortgage-Backed Securities Totals Almost $300 Billion at Year-End 2022” (NAIC, Capital Markets Special Report)
- “Commercial Real Estate Risks” (Goldman Sachs. “Top of Mind” newsletter)
Actuaries should consider developments in the CRE sector as they conduct their work. The impact of such developments will be much greater for those actuaries directly involved with the investment function; however, actuaries involved with asset adequacy analysis, financial and capital planning, and product pricing should also consider the changing dynamics of the CRE sector in their work.
Our professional standards require us to understand these risks in carrying out our actuarial responsibilities and disclose the basis for forming opinions. For example, Actuarial Standard of Practice (ASOP) No. 57, Statements of Actuarial Opinion Not Based on an Asset Adequacy Analysis for Life Insurance, Annuity, or Health Insurance Reserves and Related Actuarial Items, states: “The opining actuary should form an overall opinion without claiming reliance on the opinions of other actuaries” (section 3.1).Other ASOPs discuss the responsibilities for the actuary performing certain tasks, including communications and reliances (e.g., ASOP No. 41, Actuarial Communications) and ASOP No. 56, Modeling, discusses responsibilities for the modeling actuary.
Life insurers continue to evaluate new and existing asset classes that will maximize return while balancing the risk appetite for the organization. Actuaries perform an important role in understanding and communicating how investment risks could affect the insurer’s ability to meet its financial objectives, such as those posed by the CRE sector.
Academy Recap on Spring NAIC Meeting Available On-Demand
Life Practice Council (LPC) volunteers and staff presented on professionalism and life and other practice-area public policy issues and engaged with stakeholders from other organizations at the National Association of Insurance Commissioners (NAIC) Spring National Meeting in Phoenix in mid-March.
“Post-NAIC Spring Conference Recap: Hot Topics from Phoenix,” available now, features Academy policy analysts recapping key highlights and looking ahead to issues likely to be discussed at NAIC’s Summer National Meeting in Chicago in August. It includes updates on priority projects and identifies ongoing opportunities to provide an actuarial perspective with state insurance commissioners, other regulators and stakeholders, and industry professionals.
Academy professionalism presentations included President Lisa Slotznick, who presented on behalf of the Academy and the Committee on Qualifications to NAIC’s Life Actuarial (A) Task Force (LATF), Health Actuarial (B) Task Force (HATF), and Casualty Actuarial and Statistical (C) Task Force (CASTF). Actuarial Standard Board (ASB) Chairperson Kevin Dyke presented on behalf of the ASB to HATF and CASTF, and ASB Co-Vice Chairperson Laura Hanson presented to LATF.
(L–R) Academy Secretary-Treasurer (and past Life VP) Ben Slutsker, Life Policy Analyst Amanda Barry-Moilanen, and Life VP Jason Kehrberg at NAIC
Life presentations included:
- Life Policy Analyst Amanda Barry-Moilanen presented to LATF on behalf of the LPC on current and future workstreams.
- Asset Adequacy and Reinsurance Issues Task Force Chairperson Patricia Matson presented on reinsurance issues and discussed the recent issue brief Asset-Intensive Reinsurance Ceded Offshore From U.S. Life Insurers (With Focus on Bermuda).
- The LPC’s C1 Subcommittee presented to NAIC’s Risk-Based Capital (RBC) Investment Risk and Evaluation (E) Working Group, offering an update on the committee’s work on asset-backed securities for RBC.
- The LPC’s Variable Annuity and Capital Subcommittee and the Society of Actuaries Individual Annuity Experience Committee presented to LATF on mortality adjustment factors.
- The LPC’s Annuity Reserve and Capital Subcommittee, along with representatives from EY, presented updates on the upcoming VM-22 Field Test.
Live From Philly—June PBR Bootcamp Back in Person This Year
Early registration rates are available for the Academy’s popular PBR Bootcamp, back in person this year and set for June 11–13 in Philadelphia. Offering a comprehensive look at hot topics in principle-based reserving (PBR), attendees will gain valuable insights on applying PBR and meeting implementation challenges, and will have the opportunity to pose questions directly to experts. Secure your early registration discount by May 1 and save $300—register today.
Early Registration Open for November’s LHQ Seminar
A session from last year’s seminar
Lock in your discount and register early for the Academy’s 2024 Life and Health Qualifications Seminar, coming in November.
The annual LHQ Seminar is considered to be the best way to get basic education or relevant continuing education (CE) credit necessary to qualify to issue statements of actuarial opinion (SAOs) for either the NAIC Life and Accident & Health Annual Statement or the NAIC Health Annual Statement. Up to 27 hours of CE are available, including up to 2.7 professionalism hours.
“The LHQ Seminar provides a unique educational experience that combines beginning-to-end education for individuals in roles affiliated with the appointed actuary through a combination of lectures and case studies that reinforce application of presented material,” said Academy President-Elect Darrell Knapp, who chaired the seminar committee for the past several years.
“For over 20 years, the seminar has provided a valuable continuing education experience as well as allowing certain actuaries to fulfill basic education requirements for signing SAOs filed with NAIC annual statements,” Knapp said.
The LHQ Seminar will be held Nov. 4–7 at the Hyatt Regency Crystal City in Arlington, Va. Lock in your early discount—register today.
Cross-Practice Letter on NY Proposed Circular on AIS and ECDIS in Insurance Underwriting and Pricing
The LPC, along with the Academy’s Casualty and Health practice councils, submitted comments on New York State Department of Financial Services’ proposed insurance circular letter on the use of Artificial Intelligence Systems (AIS) and External Consumer Data and Information Sources (ECDIS) in insurance underwriting and pricing. The councils support efforts to curb underwriting and pricing methods that “reflect systemic biases and can reinforce and exacerbate inequality.”
Committee Releases Issue Paper on Dynamic Lapses
The Life Experience Committee released an issue paper, Considerations Regarding Dynamic Lapses in Actuarial Modeling, which explores items that impact lapses and discusses the impact of dynamic lapses on various life and annuity products, offers sample formulas for use in modeling, discusses how predictive analytics could be an alternative approach to model lapse behaviors, and provides sources of information on lapses.
Reminder—Comments Wanted on ASOP Nos. 7, 12
A reminder that the Actuarial Standards Board (ASB) is seeking comments on two open exposure drafts of revised ASOPs.
ASOP No. 12—Comments are due May 1 for revised ASOP No. 12, Risk Classification (for All Practice Areas); for more, see the February Professionalism Counts.
ASOP No. 7—The ASB is seeking comments on revised ASOP No. 7, Life, Health, or Property/Casualty Insurance Cash Flow Risk, which affects multiple practice areas. Comments are due June 1; for more, see the January Professionalism Counts.
Life/Pension Webinar Examines Pension Risk Transfer
A Jan. 25 pension/life webinar, “Group Annuity Contracts for Pension Risk Transfer,” followed up on the popular Envision Tomorrow breakout session in bringing together subject matter experts for a discussion covering regulatory and structural evolution of insurance companies that provide pension risk transfer group annuity contracts.
Moderators were Brent Dooley, a member of the Academy Research Committee and the Annuity Reserves and Capital Working Group, and Pension Committee Vice Chairperson Grace Lattyak. An on-demand recording is available as an Academy member benefit.
Highlights From
Life Perspectives
Prefer to watch your news? Check out this “Highlights From Life Perspectives” video for a quick recap of what you need to know.
Asset Adequacy and Reinsurance Issues Task Force Chairperson Tricia Matson offered an actuarial perspective to InsuranceERM’s subscriber-only coverage of NAIC discussions on offshore-ceded reinsurance, drawing from the recently released issue brief developed by the task force.
Retirement Income Journal noted Matson’s presentation on reinsurance issues, in a preview of the NAIC Spring National Meeting.
The subscriber-only Asset Securitization Report and FundFire newsletters mentioned the Academy’s role in providing the actuarial perspective to regulatory discussions surrounding collateralized loan obligations.
A Milliman article referenced the Academy’s work related to the implementation of Colorado’s antidiscrimination law in insurance.
Legislative/Regulatory Activity
State
Three states have recently seen regulatory activity related to the NAIC’s Model Regulation #787. The Delaware Department of Insurance adopted the NAIC’s language on March 11, establishing uniform, national standards governing reserve financing arrangements pertaining to life insurance policies with secondary guarantees and ensuring that funds consisting of primary security and other security are held in the forms and amounts required. The Colorado Department of Regulatory Agencies approved a new term and universal life insurance reserve financing rule related to the NAIC language, while the Arkansas Department of Insurance proposed a new rule to implement the model regulation.
The Missouri Department of Commerce and Insurance proposed changes to the state’s Suitability in Annuity Transactions language implementing NAIC Model Regulation #275 in February, requiring producers to act in the best interests of the consumer when making a recommendation of an annuity. The changes also require insurers to establish and maintain a system to supervise such recommendations, so that the insurance needs and financial objectives of consumers at the time of the transaction are effectively addressed. The Vermont Department of Financial Regulation published a rule in January implementing NAIC Model Regulation #275.
South Dakota Gov. Kristi Noem signed HB 1091 on Feb. 27, enacting the Interstate Insurance Product Regulation Compact. The compact is an agreement between member states to promote and protect the interest of consumers of individual and group annuity, life insurance, disability income, and long-term care insurance products by developing uniform standards for insurance products covered under the compact.
New York Gov. Kathy Hochul signed S 5890/A 2853 in late December—legislation allowing life insurance providers to establish a wellness program in conjunction with its issuance of life insurance policies. The insurer is prohibited from increasing policy premiums because of participation or non-participation in the wellness program.
The Mississippi House approved HB 1213 on March 12. The legislation prohibits life insurers from discriminating against living organ donors when it comes to declining or limiting their access to life insurance policies.
The Iowa Insurance Division proposed a rule in late January regulating the activities of insurance producers while establishing minimum standards of conduct with respect to the replacement of existing life insurance and annuities.
New Jersey Assemblywoman Ellen Park introduced A 1910 in January, a measure that prohibits life insurance providers from discriminating against consumers in the issuing or rating of life policies based on transgender status or other gender identity information.
New York Sen. Kevin Parker introduced S 7931 in January, which seeks to bar life insurers from requiring individuals to disclose a HIV diagnosis before being issued an insurance policy.
Life Public Policy in Brief
- A year-in-review Academy alert offers highlights of 2023 state and federal legislative and regulatory actions—life-related issues included final IRS regulations on the use of actuarial tables in valuing annuities and the Colorado Division of Insurance’s final rule establishing the governance and risk management requirements for life insurers.
- The Economic Scenario Generator (ESG) Subcommittee submitted comments to the LATF on the exposure of the updated Generator of Economic Scenarios (GOES) Targeting Criteria and Evaluation Statistics.
- The ESG Subcommittee presented to LATF’s GOES (E/A) Subgroup on proposed “quadrant” criteria for the joint distribution of interest rates and equity returns.
- The Life Valuation Committee submitted a comment letter to LATF on the re-exposure of APF 2023-12 concerning equity return volatility in VM-30 cash-flow testing.
- The Annuity Reserve and Capital Subcommittee commented to LATF’s Valuation Manual (VM)-22 (A) Subgroup on the November exposure of VM-31, VM-G, and the VM-22 PBR Supplement Blank.
- The Financial Reporting Committee and the Life GAAP Reporting Committee sent a comment letter to the Financial Accounting Standards Board on the exposure draft of Chapter 6: Measurement, of Concepts Statement No. 8, Conceptual Framework for Financial Reporting.