CONCURRENT SESSION D-2 ACTUARIAL PRIMER

1. CONCURRENT SESSION D-2 ACTUARIAL PRIMER Moderator Charles D. Friedstat Friedstat Actuarial Consulting Speakers Brian G. King LECG Peter A. Marion Sun Life of Canada

2. Purpose of Life Insurance Reserves • Ensure Solvency of Insurance Company • Focus is on the Balance Sheet • Proper Measurement of Income • Focus is on the Income Statement • Qualification as Insurance Company and Life Insurance Company for Federal Income Tax Purposes • Insurance Company Qualification • Life Insurance Company Qualification

3. Reserving under Different Accounting Systems • Reserves and Accrual Based Accounting  • Statutory Reserves – Company Solvency • Prescribes methodology for calculating reserves • Defines minimum standards • Prescribes interest and mortality assumptions • Conservative assumptions aimed at solvency • Tax Reserves – Determination of Tax Income • Looks to Statutory reserve methodology • Prescribes interest rate and mortality assumptions • Reduces conservatism that may result in an understatement of income • GAAP reserves – Measurement of Earnings • Company specific assumptions with respect to interest and mortality • More realistic assumptions to better measure income

4. Prescribed Methodology for Calculating Reserves • Standard Valuation Law • Defines reserve method, interest rate assumption and mortality tables • Reserve method for: Life Insurance - CRVM Annuities – CARVM • Accounting Practices and Procedures Manual (Codification) • Effective for 2001 NAIC Annual Statements • NAIC Model Regulations and Actuarial Guidelines • Provide interpretations of the SVL

5. General Types of Insurance Reserves • Reserves for Future Policy Benefits • Insured event has not yet occurred  • Reserves for Claims Already Occurred • Claim reserve • Claim liability • Role of Expenses in Calculating Reserves • The concept of “loading” • Net v. gross premium

6. General Approaches for Calculating Reserves for Future Policy Benefits • Retrospective Methodology • Net premiums accumulated with interest, less benefits paid • Prospective Methodology • Present value of future benefits, less • Present value of future net premiums • Required approach for NAIC reserves under SVL • Present Valuing Premiums and Future Benefits Necessarily Requires Discounting • Interest rate assumptions • Mortality assumptions

7. Reserve Calculation

8. Reserve Calculation: Retrospective

9. Reserve Calculation: Prospective

10. Net Level Reserve v. “Modified Reserve” • First Year Loading • Full Preliminary Term • CRVM Reserve

11. Non-level Expenses

12. Annuities • Deferred Fixed Annuities • Reserves arise primarily from accumulation of assets • Deferred Variable Annuities • Separate Account reserves arise from deposits and investment results, similar to fixed annuities • General Account reserves arise from guaranteed benefits • Reserve on Guaranteed Minimum Death Benefit, for example, is similar to life insurance reserve; some differences, as dollar amount of benefit varies with investment performance of separate account assets • Payout Annuities • Reserves represent the value of future benefits, using mortality and interest

13. Principles Based Reserves • Formulaic v. Stochastic Methodology • Actuarial Guideline 43 for Annuities • Life PBR is Coming!