Life Perspectives, Spring 2022

Q&A—LTC Life Insurance Combination Product Valuation Practice Note Released

To set the stage, what are we referring to when we’re talking about “combo products” in this context?

Combo products here mean life insurance policies with some non-life insurance benefits, typically included as a rider. There are various types of combo products such as those with terminal illness riders and chronic illness riders that accelerate the death benefit. The practice note discussed combo product offerings with more substantial health benefits such as long-term care LTC riders that both accelerate the life insurance death benefit, and then provide additional LTC benefits for policyholders with longer LTC claims.

Why was now the right time for this practice note? Are combo products seeing an uptick in popularity in the marketplace?

The market for combo products—especially LTC and chronic illness riders to life insurance contracts—has grown in the past decade as standalone long-term care insurance (LTCI) has continued to decline. Combo products typically provide customers with a contract that will pay benefits under many scenarios: a death benefit or a long-term care benefit, and in many cases a nonforfeiture benefit if the policy lapses.

For insurers—many of which are reticent to issue standalone LTCI policies given the unfavorable experience of the past 15 years—these combo products (sometimes also called “hybrid” products) present a more palatable risk profile. There is a natural hedging of liability risk, such as among mortality and morbidity, and combo products can attract different customers than those purchasing traditional, standalone LTCI products.

The market for these products is growing in retail or individual sales as well as through the workplace.

Long-term care is typically in a health actuary’s bailiwick. Why was this practice note developed by the LPC?

The prior Long-Term Care (LTC) Combination Product Valuation Practice Note (2019) was developed by a work group of the Health Practice Council. Most individually sold combo products, and particularly those offering LTC extended benefits, are sold by life insurers where the valuation actuary is interested in the reserving considerations of both the life insurance chassis and the LTC (or other non-life) benefit.

What financial reporting considerations come into play when dealing with combo products?
One key consideration for a valuation actuary is how to represent the combo product in the financial statements: whether the whole product is reported as life insurance, or if the life and health components are reported separately. There are at least a dozen places in the financial statements where this decision will impact how the actuary reports company financial amounts. We detail these in question #3 of the practice note.

How does the principle-based reserving (PBR) framework fit in?

Principle-based reserving requires under certain circumstances that the valuation actuary reserve for a combo product’s life and health benefits under the PBR framework. This is a departure from reserving prior to PBR where, for instance, an LTC benefit on a life insurance contract could be reserved for independently and according to LTC reserving standards.

Reserving for some LTC benefits in accordance with VM-20 raises substantial considerations for the actuary, and these were the real impetus for creating this practice note.

The practice note, for instance, addresses the following issues:

• Determination of whether a combo product is subject to VM-20;
• Inclusion of combo riders in the exclusion tests;
• Morbidity assumptions and margins setting;
• Calculation of a claim reserve; and
• Reinsurance.

What can an actuary do if they have questions not answered in the practice note? Does the Academy have other resources—either already released or in the works—that may be helpful?

The Principle-Based Approach Projections Practice Note provides some guidance on projecting policyholder behavior, and the Life PBR Under VM-20 Practice Note addresses riders and supplemental benefits.

Other questions can be submitted to lifeanalyst@actuary.org, where they can be submitted to the LPC and/or the Combo Product Valuation Practice Note Working Group.

Early Registration Rates Now Available for 2022 LHQ Seminar

Academy Past President D. Joeff Williams leads a session at last year’s LHQ Seminar

The Academy’s 2022 Life and Health Qualifications Seminar is open for registration. This seminar, held annually, delivers the highest-quality and most efficient way to obtain any needed basic education or relevant continuing education (CE) credit necessary to qualify to issue actuarial opinions for either the NAIC Life and Accident & Health (A&H) Annual Statement or the NAIC Health Annual Statement. The event will be held Nov. 14–17 at the Crystal Gateway Marriott in Arlington, Va. Register now to take advantage of early registration rates—early registration will close on June 30.

Upcoming Life Webinars to Offer CE Opportunities

Two upcoming Academy webinars will focus on life issues, and offer continuing education (CE) opportunities.

“Life Practice Webinar—Spring 2022 Policy Update”—This webinar will provide updates on current and emerging life public policy issues, including:

• The work of the new National Association of Insurance Commissioners' (NAIC) Innovation, Cybersecurity, and Technology (H) Committee;
• High-yield asset adequacy testing actuarial guideline;
• The economic scenario generator field test; and
• Academy model office for economic scenario generator testing.

The webinar will be held on Wednesday, May 4, from noon to 1:15 p.m. Register today.

“The Revised ASOP No. 11: Understanding Important Changes”—This webinar will look at recently revised ASOP No. 11, Financial Statement Treatment of Reinsurance Transactions Involving Life or Health Insurance. The presenters, who participated in the revision, will discuss why the standard was revised and highlight changes practitioners need to be aware of, including the expanded scope and new and expanded guidance on financial reporting aspects of nonguaranteed reinsurance elements, retained risks, modeling, counterparty risk, and health benefit plans. The speakers also plan to walk through case studies from life insurance and health insurance. It will be held on May 12, from noon to 1:30 p.m. EDT. Register now.

Life Practice Council Committees, Work Groups Comment to NAIC

Several Life Practice Council (LPC) work groups and committees commented to the National Association of Insurance Commissioners’ (NAIC) Life Actuarial (A) Task Force (LATF) and the Accelerated Underwriting (A) Working Group on life issues.

• Academy Life Vice President Ben Slutsker gave a presentation to LATF at its virtual national meeting on March 31 on recent LPC activity.
• The Economic Scenario Generator Work Group presented to LATF on model office testing scenarios of the new economic scenario generator.
• The Life Reserves Work Group, Annuity Reserves and Capital Work Group (ARCWG), and Variable Annuity Reserves and Capital Work Group submitted an amendment proposal form and presentation to LATF on swap spreads and the transition from London Inter-bank Offered Rate (LIBOR) to the Secured Overnight Financing Rate (SOFR).
• ARCWG submitted recommendations of aggregation principles as outlined in the Academy’s “Preliminary Framework Elements for Fixed Annuity PBR” to LATF’s VM-22 Subgroup.
• ARCWG submitted a letter and spreadsheet to LATF’s VM-22 Subgroup regarding a reinvestment credit quality assumption consistent with the current VM-22 mix.
• The Life Underwriting and Risk Classification Work Group sent a comment letter to NAIC’s Accelerated Underwriting Working Group.
• The Life Valuation Committee sent a letter to LATF on APF 2020-12 and hedging strategies in VM-20 and VM-21.
• The Asset Modeling and Reporting Task Force submitted a comment letter to LATF on asset adequacy testing, and submitted comments to LATF on a proposed second exposure draft of an actuarial guideline (AG) regarding asset adequacy.
• The Index-Linked Variable Annuities Work Group submitted a comment letter to LATF’s Index-Linked Variable Annuity (A) Subgroup on a proposed AG regarding index-linked variable annuities.
• The Life Illustrations Work Group submitted a comment letter to LATF on its exposure draft regarding the indexed universal life illustrations post-Actuarial Guideline (AG) 49-A.
• The Life Underwriting and Risk Classification Work Group submitted comments to the Accelerated Underwriting (A) Working Group on the working group’s paper summarizing what  it has learned on using external data and data analytics in accelerated underwriting and provides recommendations for regulators and insurers when evaluating accelerated underwriting.

Work Group Releases VM-21 Practice Note Supplement

The Variable Annuity Reserves and Capital Work Group released a supplemented VM-21 practice note,  Implementation of Requirements for Principle-Based Reserves for Variable Annuities—2022 Edition of VM-21. The supplemented practice note was exposed for public comment in 2021, and the final product has been published to reflect comments received.

Academy Engages on New Colorado Insurance Discrimination Law

Academy President Maryellen Coggins sent a letter to Colorado Insurance Commissioner Michael Conway on that state’s 2021 law to protect consumers from unfair discrimination in insurance.

The statute, enacted last July, prohibits unfair discrimination based on certain personal characteristics—race, color, national or ethnic origin, religion, sex, sexual orientation, disability, gender identity, or gender expression—in any insurer practice. The law will regulate insurers that use external consumer data and information sources, algorithms, and predictive models.

“It is our belief that we can continue to provide useful professional input as you work on the implementation of [the regulations],” Coggins wrote.

Stakeholder Engagement Session

The Academy participated in the Colorado Division of Insurance Feb. 17 stakeholder engagement meeting on implementation considerations for the law from a life underwriting perspective. The meeting, chaired by Conway, was the first in a series of meetings called for as part of the process for implementing the new law. Although it affects all lines of insurance, this engagement session focused only on life issues. Future stakeholder engagement meetings will address other lines of insurance.

Sue Bartholf, chairperson of the Academy’s Life Underwriting and Risk Classification Work Group, reiterated the Academy’s support of efforts to prevent unfair discrimination in insurance and outlined the principles for approaches to identify and address unfair discrimination, noting that differences between practice areas—such as the types of underlying risks, statistical modeling methods, and whether coverages are mandated or voluntary—will likely require different approaches in implementation, because the approaches that apply to one practice area may not apply to others.

A subsequent stakeholder engagement meeting focusing on life underwriting was held April 12 to which the work group provided a response through a submitted comment letter.