Edition

PBR Considerations and Benefits for Smaller Insurance Companies

By Ali Balestra, Calvin Yeung and Jeffery Stoller

Small Talk, December 2021

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After years of discussion and debate, Principles Based Reserving (PBR) is finally a reality. While a handful of life insurance companies elected for early implementation of PBR, for most, 2020 was their first filing. As smaller insurance companies have a unique opportunity to elect the Life PBR Exemption or adopt PBR methods, we suggest special attention to the benefits of each option.

PBR: A Quick Overview

Although the ideation of PBR has been discussed for many years, as of 2020, all non-exempt life insurance companies are required to file under VM-20. Moving to a principles-based approach alleviates some products' redundant reserves and instead seeks to establish a right size reserve. Currently, PBR excludes products such as annuity, pre-need, guaranteed issue and group life and health. While products such as Whole Life (WL) and Universal Life with Secondary Guarantee (ULSG) might have a more neutral impact, products like term have experienced significant benefits. Additional consideration should also be given to specific product features, potential exclusions and exemptions.

PBR & the Small Insurance Company

Many smaller companies have found themselves in a unique position specific to the adoption of PBR. A commonly posed question remains, should the company take the Life PBR Exemption, or should they make the move to PBR? For further consideration, the company-wide exemption has specific requirements that must be met:

  • Less than $300 million in ordinary life premiums or less than $600 million in ordinary life premiums for insurance groups combined.
  • ULSG policies issued meet definition of non-material secondary guarantee.

These requirements should be carefully considered. Additionally, we recommend companies assess if the potential exists to exceed these requirements in the coming years.

Smaller companies who qualify and elect the company-wide exemption will benefit from a minimal impact to current processes. These minimal impacts include resources, training, costs, regulatory and filing documentation required as opposed to efforts needed to implement PBR. PBR has many additional noteworthy benefits for consideration including:

  • PBR has helped right-size reserves for many products. With a right-sized reserve, these companies may have a competitive advantage to reduce their retail prices.
  • Some smaller companies have decided to forgo the company-wide exemption and make the move to PBR. While added resources and efforts may be needed to adhere to PBR's prescribed assumptions, these efforts will ensure better and more frequent experience review and analysis.
  • The company-specific assumptions help fit assumptions for innovative and complex products with unique features and designs.
  • PBR also allows for quicker adaptation to evolving economic conditions and easier maintenance of reserving models.

How to Navigate Your Mortality Assumptions under PBR?

The decision to move to PBR comes with additional questions of implementation. Calculating the PBR-specific reserves requires company best estimates and experience credibility to determine margins. Companies with less than 20 percent credibility must rely solely on the industry margin tables, which may cause over-reserving compared to their experience. Additionally, concerns regarding the balance between credibility and relevancy of data are common. Fortunately, there are options to alleviate concerns of smaller companies feeling they are at a disadvantage under PBR due to limited credibility.

To overcome limited credibility, some have decided to use older data and claims to bolster their credibility. This approach may cause regulatory concern regarding relevancy of the experience. Because updated preferred underwriting criteria tends to have improved experience, using less recent data may lead to a less optimal experience and decreased relevancy. Currently, there are no limitation on issue years included in studying mortality experience but the VM-20 requires companies to limit exposure to a maximum of 10 years. Relying solely on internal experience for credibility may avoid external dependencies and/or additional cost. Companies should balance the costs and benefits of looking externally for support.

External solutions are also available to companies as prescribed by the VM-20. Some companies have turned to their reinsurance partner for additional, innovative solutions. Additionally, smaller companies can look to reinsurers, consultants, and public studies for relevant data to boost credibility, although, these additional sources come with several considerations:

  • Public studies relevant to company specific experience are not always readily available.
  • Additional documentation and justification to regulators of the external solution’s relevancy and credibility will be required. Justification should consider underwriting criteria, policyholder demographics, target markets and distribution channels.
  • If using reinsurer’s data for additional credibility support, the underlying business' reinsurance structure should also be considered. As an example, excess deals may skew experience to higher face amounts.

An additional thought for smaller companies is to approach reinsurers for additional remote risk coinsurance with funds withheld. These agreements help achieve right-fit reserves by providing companies with a reserve credit, another alternative for companies with conservative reserves and low credibility from internal experience. This allows similar results to the reinsurance experience, nonetheless holds the potential to add significant complexity.

Ongoing Considerations and Best Practices

Making the switch to PBR can feel overwhelming but understanding how to navigate the hurdles to implementing PBR for the first time can help a smooth transition. For reference, we have categorized additional key considerations and best practices when transitioning and maintaining PBR filings:

Experience and Modeling

  • Determine if current modeling software and administrative systems have the capability to accommodate PBR's requirements.
  • Decide what resources, training and costs are needed to study experience as well as setup, maintain and update the model.
  • Consider available in-house data and current experience study practices that can be leveraged for assumption setting.
  • Follow VM-20's guidance to create subsets for PBR—this will likely be different than existing experience studies groupings.
  • Consider the two PBR exclusion test (Deterministic Exclusion Test and Stochastic Exclusion Test) and determine which blocks of business would qualify for these exclusions—this can be a great simplification when modeling, but these tests must be demonstrated annually.
  • Adjust already existing relationships between Investments and Valuation to fit PBR-specific policies and processes.

Sensitivity Testing

  • Prepare for annual, PBR-specific sensitivity testing used to perform exclusion tests and to analyze assumptions and margins—this should also help you better understand your business and assumptions.

Reports and Audits

  • Establish an open relationship with your regulator early on.
  • Begin work on documentation early to avoid unnecessary stress around filing time.
  • Similar to modeling section, decide what resources, training and costs are needed to fulfill reporting and documentation requirements.
  • Dedicate or hire knowledgeable resources to fulfill VM-20 Supplement, VM-31 and VM-50.
  • Organize reports according to the section headers and numbers in VM-31 for auditors and regulators to easily follow.
  • Expect additional questions during the initial PBR filing, but fewer in the following years.
  • Set aside resources to fulfill additional questions and requests from auditors or regulators including supplemental data or reports outside of the original VM-31.
  • Monitor updates and adopted APFs to the valuation manual.

Governance

  • Leverage existing assumption and model governance processes.
  • Decide if a new review and approval process is needed for PBR-specific assumptions.

After 2020, PBR has been adopted by many life insurance companies. Smaller insurers who qualify for the Life PBR Exemption should still consider implementing PBR as the benefits of right-fitting reserves can outweigh the additional efforts. While the move to PBR can be overwhelming for small companies, there are many resources and external solutions available to alleviate the challenges of implementing.

Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries, the newsletter editors, or the respective authors’ employers.

Ali Balestra, ASA, MAAA, is Assistant Vice President, Actuarial Analyst at SwissRe. She can be reached at Ali_Balestra@swissre.com.

Calvin Yeung, FSA, MAAA, is Vice President, Inforce Solutions at SwissRe. He can be reached at calvin_yeung@swissre.com.

Jeffery Stoller, FSA, MAAA, is Vice President, Senior Actuary at SwissRe. He can be reached at Jeffery_Stoller@swissre.com.