Life Insurance Valuation Interest Rate

Transcription

1 Life Insurance Valuation Interest Rate Scott Gibson, FSA, MAAA Actuaries and Consultants (972)

2 Important Facts About the Standard Valuation and Standard Nonforfeiture Laws Prescribe formulas for setting reserves and cash values Formulas include maximum interest rates indexed to Moody s Corporate Bond Yield Formulas include defined mortality tables

3 Valuation Interest Rates Current valuation rate for long life contracts is 4.50% Last changed in 1995 Formula for valuation interest rate uses the lesser of 36-month or 12-month average ending June 30 prior to the year of policy issue

4 Moody s Corporate Bond Yields Month Year Yield Month Year Yield Month Year Yield % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % %* % % %* Projected 36-Month Average = 6.39% Projected 12-Month Average = 6.21% Projected 2006 Long Life Valuation Interest Rate = 4.00% * Maximum Average Moody's Corporate Bond Yield that would result in a reduction in the long life valuation interest rate

5 Valuation Interest Rate Change A change will occur if the 12-month average Moody s Corporate Bond Yield is less than 6.21% To avoid a change, Moody s Corporate Bond Yield would need to average at least 8.02% for May and June, 2005 Moody s Corporate Bond Yields have not been this high since June 2000 Therefore, we expect the long life valuation interest rate to drop to 4.00% for 2006!

6 Example Impact of Valuation Interest Rate Change Traditional Whole Life Age 45 Male Nonsmoker 4.50% Reserve & 5.75% CV 4.00% Reserve & 5.00% CV ROE % Prem Breakeven ROE % Prem Breakeven 15.20% 6.05% 7.52 Yrs 11.34% 3.93% Yrs A 4.00% increase in the premiums are needed to reestablish profit margins

7 Deficiency Reserves Could occur on any plan where guaranteed gross premiums are set equal to the valuation net premiums using the 4.50% rate This results in deficiency reserves which can be sizeable Most likely to affect term plans, term riders and traditional life plans Deficiency reserves deplete up surplus and decrease profitability Universal life contracts with 4.50% guarantees could result in additional reserves

8 Nonforfeiture Values One year deferral on the maximum nonforfeiture interest rate changes Maximum 5.00% rate would not be required until 2007 Nonforteiture values may now be required for previously exempt term products Universal life surrender charges may no longer comply

9 Disability Income and Long-Term Care Changes in the long life valuation interest rate also affect disability income and long-term care reserves As under life contracts, the lower interest rate will increase reserves for these contracts, deferring the recognition of profits New reserve factors will be needed for business issued in 2006 and later

10 2001 CSO Mortality Table If products are repriced and refiled for a valuation rate change, should the new 2001 CSO Mortality Table be considered? Consider incorporating the 2001 CSO Mortality Table when repricing and refiling products Most states have now adopted the 2001 CSO Mortality Table. Remaining states should be onboard soon.

11 2001 CSO Mortality Table States Adopted (WY Permitted) States Considering Adoption

12 Company Options Recompute reserve factors based on the new valuation rate. Do not adjust gross premiums or nonforfeiture values. Do not incorporate 2001 CSO. Recompute reserve factors and gross premiums based on the new valuation rate. Do not adjust nonforfeiture values. Do not incorporate 2001 CSO. Recompute reserve factors, gross premiums and nonforfeiture values based on the new valuation rate. Do not incorporate 2001 CSO. Recompute reserve factors, gross premiums and nonforfeiture values based on the new valuation rate. Incorporate 2001 CSO.

13 Issues To Consider Product Margins and Competitiveness Surplus Strain and Statutory Earnings Administrative Systems Filing and Compliance Requirements Illustration Systems

14 Questions? Call L&E at: Dallas Office: Kansas City Office: