High Level View of PBR Educational Brief

1. High Level View of PBR Educational Brief SVL unchanged for current and inforce business PBR is a system of rules and methodologies to replace old formulaic valuation system PBR initiates a valuation system for reserves based on a company’s experience factors such as mortality, policyholder behavior and expenses.

2. PBR and Standard Valuation Law • Standard Valuation Law #820 (SVL) remains unchanged for current policies • The revised SVL will include new sections to authorize the use of a Valuation Manual (VM) and require insurers reporting of data experience • The revised SVL preserves commissioner authority on insurers to require appropriate assumptions or methods, and engage qualified actuaries to review compliance with the VM requirements

3. PBR and Standard Nonforfeiture Law • Standard Nonforfeiture Law #808 (SNL) sets minimum benefit values if policies are surrendered or lapsed • The revised SNL will include new sections to refer to the SVL and VM as source for mortality and interest rates used for nonforfeiture calculations • The SNL value calculations for older policies prior to the SVL implementation remain the same.

4. Valuation Manual • The Valuation Manual (VM) provides reserve calculations requirements such as experience reporting, actuarial opinion, PBR reportings, and corporate governance requirements • Dynamic in nature, adaptability to insurance marketplace and changes to the current economy • VM change process similar to AP&P Manual changes through NAIC

5. Valuation Manual (cont.) • Future changes to VM will require supermajority (42 states and 75 percent of total US premium • Insurer implementation of approved VM changes can occur anytime within three years • March update: • Nine states comprising 9.2 percent of premium have enacted (PBR) • Four states comprising 4.6 percent of premium awaiting governors' signatures • Another nine states to introduce legislation in 2014 and • Another eight states are expected to introduce legislation in 2015. • This would total 30 states with market premium of 60.3%.

6. What is PBR? Currently, formulas and assumptions are used to determine these reserves. Companies will hold the higher of a) the reserve using prescribed factors or b) the reserve which considers a wide range of future economic conditions and is computed using justified company experience factors, such as mortality, policyholder behavior, and expenses. The Valuation Manual is established by the Standard Valuation Law and would be used to detail the reserve calculation requirements. The new Standard Valuation Law and Valuation Manual are built to encompass requirements for all life and health insurers. Initially, reserving methods only change for life insurance. However, over time, PBR is expected to be developed for other product lines.

7. Need for PBR • Old formulaic reserve approach needs frequent updating for new products • PBR alleviates this need • While current system locks in assumptions, PBR adjusts reserves to the current economic environment • This should provide a more viable and robust life insurance market

8. Is PBR More Conservative? • Some reserves will go down (term) • Some reserves go both ways (ULSG) • Overall, NAIC impact study estimated life reserves will go down approximately 5% • This is considered to be “right-sizing” the reserves

9. What will make PBR successful? • Regulators will collectively review PBR through NAIC activity and can easily adjust the Valuation Manual, if needed. • Companies will be able to appropriately reflect their own company experience (i.e. mortality, lapse, expenses, etc.) in the reserves with an appropriate level of conservatism. Companies must justify their calculations. • Regulatory resources will be enhanced. At present, the NAIC is studying the need for resources at the states and the ability for collective sharing of experience with the new requirements at the NAIC to aid the states. • Regulators will be building more analytical tools and will be implementing data requirements to enhance regulatory oversight. • PBR will allow better alignment of regulatory requirements with company risk exposures and risk management practices.

10. Impact on Consumers • PBR should have a positive impact on consumers in that products should be cheaper • PBR may stimulate the introduction of new and innovative products

11. Impact on companies • Additional actuarial resources will be needed • Companies can reflect own experience • Rewarding good performance should be good for the company • Freeing up capital and promoting its efficient use should be good for the company and consumers

12. How will PBR Affect Insurance Regulators? • While PBR and the Valuation Manual are new, more modern valuation methods that have been in development for more than 20 years. • Gradual implementation of PBR will give regulators more time to familiarize themselves with the new requirements. • Regulators will need to consider how PBR fits into the risk-focused approach to financial examination & analysis; materiality of PBR reserves of blocks of business will be a consideration. • A better understanding of the range of results and best practices will lead to appropriate changes to the Valuation Manual (dynamic model). • PBR may reduce the un-level playing field created by product designs developed with the express intention to take advantage of the limitations of the formulaic approach.