Practical Analysis of PBR Mortality Credibility for Term Insurance

Background and Purpose

In determining principle-based reserves (PBR) for U.S. life insurance, the credibility level of company mortality experience often has a large impact on the level of PBR deterministic reserves for term insurance. Generally the lower the credibility of company experience, the higher the blended mortality rates since industry mortality often is higher than individual company mortality experience. In addition, the mortality margin increases with lower credibility levels of company experience. Other factors impacting the blended mortality rates are a company’s own mortality experience and mortality improvement assumptions used to project reserves in future nodes needed for pricing products.

The purpose of this study is to provide a resource for actuaries and others to enhance understanding of the impact of VM-20 mortality credibility requirements** on life insurers and of the potential solutions for increasing credibility levels.

Research Objective

The Society of Actuaries Smaller Insurance Company Section and other sponsors are seeking researcher(s) to examine the impact of PBR mortality credibility rules** for term insurance on a U.S. life insurer. At a minimum, the researcher(s) will compare PBR deterministic reserves (DR) to XXX reserves and discuss findings by size of company. The researcher(s) will:

  1. Determine minimum levels of deterministic reserve (DR) mortality that would result in DR reserves being lower than reserves calculated using The Valuation of Life Insurance Policies Model Regulation (commonly known as XXX).
  2. Given the minimum level of DR mortality determined in item 1, estimate at various levels of credibility, the company mortality experience that would be needed to achieve this level of DR mortality.
  3. Comment on what level of credibility companies of various sizes would have if they used only their own mortality data. Include in this analysis, companies who sell the most term insurance, those who are in the middle of the pack, and also companies who are in the lower part of the range.
  4. Discuss how reinsurance retention levels impact mortality credibility levels, if any.
  5. Identify and discuss the ways life insurers may obtain more data to boost credibility levels from a variety of perspectives (e.g., life insurer, reinsurer, and data aggregator). Compare and contrast the approaches for increasing credibility levels emphasizing the cost and benefit of each approach.

Note that the above list is not meant to be exhaustive but establish minimum expectations for the topics to be included in the study.

Results will be summarized in a paper suitable for publication on the SOA’s website.

The project is expected to be completed within four months from the start date.

**VM-20 MORTALITY CREDIBILITY REQUIREMENTS:
VM-20: REQUIREMENTS FOR PRINCIPLE-BASED RESERVES FOR LIFE PRODUCTS

Section 9. Assumptions, Paragraph C. Mortality Assumptions

All sub sections:

  1. Procedure for Setting Prudent Estimate Mortality Assumptions
  2. Determination of Company Experience Mortality Rates
  3. Determination of Applicable Industry Basis Tables
  4. Credibility of Company Experience
  5. Prescribed Mortality Margins
  6. Process to Determine Prudent Estimate Assumptions, and
  7. Anticipated Experience Assumptions

Proposal

To facilitate the evaluation of proposals, the following information should be submitted:

  1. Resumes of the researcher(s), including any graduate student(s) expected to participate, indicating how their background, education and experience bear on their qualifications to undertake the research. If more than one researcher is involved, a single individual should be designated as the lead researcher and primary contact. The person submitting the proposal must be authorized to speak on behalf of all the researchers as well as for the firm or institution on whose behalf the proposal is submitted.
  2. An outline of the approach to be used (e.g. literature search, model, etc.), emphasizing issues that require special consideration. Details should be given regarding the techniques to be used, collateral material to be consulted, and possible limitations of the analysis.
  3. A description of the expected deliverables and any supporting data, tools or other resources.
  4. Cost estimates for the research, including computer time, salaries, report preparation, material costs, etc. Such estimates can be in the form of hourly rates, but in such cases, time estimates should also be included. Any guarantees as to total cost should be given and will be considered in the evaluation of the proposal. While cost will be a factor in the evaluation of the proposal, it will not necessarily be the decisive factor.
  5. A schedule for completion of the research, identifying key dates or time frames for research completion and report submissions. The Society of Actuaries Smaller Insurance Company Section (and others providing funding) are interested in completing this project in a timely manner. Suggestions in the proposal for ensuring timely delivery, such as fee adjustments, are encouraged.
  6. Other related factors that give evidence of a proposer's capabilities to perform in a superior fashion should be detailed.

Selection Process

The Society of Actuaries Smaller Insurance Company Section and other sponsors will appoint a Project Oversight Group (POG) to oversee the project. The Society of Actuaries Smaller Insurance Company Section and other sponsors are responsible for recommending the proposal to be funded. Input from other knowledgeable individuals also may be sought, but the Society of Actuaries Smaller Insurance Company Section and other sponsors will make the final recommendation, subject to SOA leadership approval. The SOA's Research Actuary will provide staff actuarial support.

Questions

Any questions regarding this RFP should be directed Ronora Stryker, SOA Research Actuary (phone: 847-706-3614); email: rstryker@soa.org.

Notification of Intent to Submit Proposal

If you intend to submit a proposal, please e-mail written notification by December 31, 2017 to Jan Schuh.

Submission of Proposal

Please e-mail a copy of the proposal to Jan Schuh.

Proposals must be received no later than January 12, 2018. It is anticipated that all proposers will be informed of the status of their proposal by the end of January 2018.

Note: Proposals are considered confidential and proprietary.

Conditions

The selection of a proposal is conditioned upon and not considered final until a Letter of Agreement is executed by both the Society of Actuaries and the researcher.

The Society of Actuaries Smaller Insurance Company Section and other sponsors reserve the right to not award a contract for this research. Reasons for not awarding a contract could include, but are not limited to, a lack of acceptable proposals or a finding that insufficient funds are available. The Society of Actuaries Smaller Insurance Company Section and other sponsors also reserve the right to redirect the project as is deemed advisable.

The Society of Actuaries Smaller Insurance Company Section and other sponsors plan to hold the copyright to the research and to publish the results with appropriate credit given to the researcher(s).

Society of Actuaries Smaller Insurance Company Section and other sponsors may choose to seek public exposure or media attention for the research. By submitting a proposal, you agree to cooperate with the Society of Actuaries Smaller Insurance Company Section and other sponsors in publicizing or promoting the research and responding to media requests.

The Society of Actuaries Smaller Insurance Company Section and other sponsors may also choose to market and promote the research to members, candidates and other interested parties. You agree to perform promotional communication requested by the Society of Actuaries Smaller Insurance Company Section and other sponsors which may include, but is not limited to, leading a webcast on the research, presenting the research at an SOA meeting, and/or writing an article on the research for an SOA newsletter.