Life Insurance conference Session 3 1 Life Insurance

Life Insurance conference Session 3. 1 Life Insurance Product Update Timothy C. Pfeifer, FSA, MAAA Pfeifer Advisory LLC 1 April 10, 2018

Life Insurance Conference — Session 3. 1 Life Insurance Product Update Topics — Pfeifer A Regulation B Principles-Based Reserves C Underwriting D Reinsurance E Investments F Post-Issue Topics 2

Life Insurance Asset Portfolios Key Trends in Life Portfolios: Relatively less emphasis on credit play More emphasis on duration play Digging for yield enhancements through alternatives, structured assets, and equities Use of niche asset managers for special expertise Some return to straight commercial mortgage loans 3

Life Insurance Asset Portfolios Key Trends in Life Portfolios: Re-allocation of existing assets to support targeted liability streams (asset musical chairs) Impact of PBR on insurer investment practices Reinvestment policies in light of greater persistency How indexed products have changed the investment landscape 4

Life Insurance Product Update Principles-Based Reserves § Replaces formula-driven statutory reserve framework with actuarial modeling framework § Approach is high calculation-intensive and require insurers to develop experience data on key assumptions in order to avoid highly conservative approach § Applies only to life insurance now, not annuities § Reserve is greatest of net premium reserve, deterministic reserve, and stochastic reserve § Some exceptions and exclusions exist for certain companies and certain products § Mandatory Effective Date is January 1, 2020 for new life sales, but can adopt earlier on a product-by-product basis 5

Life Insurance Product Update Implications of Principles-Based Reserves on Products In concert with the 2017 CSO Table, will spark a large amount of new product re-pricing in 2017– 2020 Term re-development already began in 2017, with the net effect being lower term prices In 2018, look for more Secondary Guarantee Universal Life re-development (results may be mixed in terms of impact on prices) Accumulation-oriented products and combo life/LTC products will be the final product category to undergo PBR pricing, in late 2018, 2019 Timeline for development must reflect filing logjam at states and Interstate Compact Pricing actuaries must prepare for a whole new world of complexity in pricing in a PBR world 6

Underwriting Trends in Life Insurance In two words. . . “less invasive” § § Reinsurers playing a key role § Identifying protocols § Measuring protective value § Change in expected mortality Cutbacks on blood tests and EKGs More database searches including MIB, MVR, RX, Lexis Nexis Use of social media and Internet for leads All in an effort to speed and streamline process Challenges in implementing PBR in a world of rapidly changing underwriting Changes in Underwriting staffing § Different roles for underwriters—less routine § Reductions in staffing 7

Underwriting Trends in Life Insurance Predictive Analytics Emergence § Consultants and reinsurers providing support § What is decisionable? (e. g. , FCRA) § Integration with expert underwriting systems Structure of Accelerated Underwriting Programs § Stand-alone programs, with final decisioning (accept/reject) § Triage programs, which screen which applicants eligible for streamlined underwriting and which must submit to more comprehensive underwriting § Choice of alternative underwriting programs Speedbumps on Accelerated Underwriting Road § Smoker misrepresentations § Drug and alcohol abuse 8

Reinsurance Topics are Currently an Active Area A. After several years of increasing direct industry retention, the amount of ceded reinsurance increased in 2016 B. Role of reinsurers continues to evolve into sources of guidance and partnerships in predictive analytics, expert underwriting systems, PBR experience data, and capital management solutions C. D. Tentative activity in new lines like combination contracts, survivorship contracts E. Continued reinsurer interest in developing presence as product development arm for small to mid-size life insurers Consolidation has reached a plateau 9

Reinsurance Topics are Currently an Active Area Ability of reinsurers to raise YRT rates after issue—speaks to contractual language, industry custom and practice, etc. Numerous Areas of Arbitration Underwriting practices of direct companies on policies which have become questionable claims STOLI/IOLI underwriting and claims practices Requiring re-thinking of reinsurer/ceding company relationships and nature of audits/communications 10

Life Insurance Product Update Regulation New York DFS: 11 NY CRR 48 (Insurance Regulation 210) § Standards for determination and redetermination of non-guaranteed elements that are changed at the insurer's discretio § § Applies to life insurance and annuities § § Routine credited interest rate changes and dividend scale changes are exempted Insurers cannot increase projected profitability measured from the date of revision Costs associated with reinsurance may not be recognized Significant disclosures requirements and actuarial requirements with 120 day advanced regulatory notice for adverse changes Effective March 19, 2018 11

Life Insurance Product Update • Re-drafting of Life Insurance Buyers Guide • State movement on life insurance suitability standards • N. Y. review of data-based underwriting decisions • Re-examination of Illustration Model Regulation and ASOP 2 • Revisions to Tax Act, including impact of life settlements' treatment 12

Life Insurance—Post Issue Topics Importance of In. Force Platforms § Sparked by Indexed UL § Monitoring/projecting of policy performance § Maintaining engagement of policyholder Changes in Non-Guaranteed Elements § Primary COI Charges and interest crediting parameters § Removal of non-guaranteed bonuses § Heavy amounts of litigation, even when no changes in NGEs § Annual Statement Interrogatories Responses 13

Life Insurance—Post Issue Topics Tax Law Changes § Lower tax rates, revised DAC Tax treatment applies to inforce business § Generally, net effect is to improve inforce profitability— but what to do about it? Evaluation of In. Force Blocks § § Part of overall business strategy Sell, reinsure, retain and run off Variable annuities were in cross-hairs, now term life Partnerships involving new business also 14

Thank You Timothy C. Pfeifer, FSA, MAAA Pfeifer Advisory LLC www. pfeiferadvisory. com 15