Do you know about - theory Based Valuation - Should Small clubs Be Steamed by This Steam Roller?
Health Insurance New York! Again, for I know. Ready to share new things that are useful. You and your friends.Recently, the theory Based Valuation advent (Pbv) has enjoyed primary sustain and momentum within the life and health insurance industry. Instead of prescribed methods, assumptions, and tables for statutory reserves, they would be computed based on actuarial judgment in accordance with standards of practice. A key requirement would be peer tell of such reserves by another professional actuary, before reserves were officially released.
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Many actuaries have already spent primary hours of professional time in developing the framework for a viable valuation structure. Our customary trade association, the American Council of Life Insurers, has endorsed the advent in late 2005. However, one regulator has referred to the theory Based Valuation sustain as a "steam roller." This should be the time for small insurers and others to voice their reservations about the whole theory Based Valuation proposal. Literal, opposition may not be appropriate, but key questions should be asked.
Reservations
These reservations include:
1. Is there a burning need for theory Based Valuation? Supposedly, it would sacrifice redundancies inherent in current statutory sustain requirements. The 3 or 4 industry groups who seem most involved with alleged redundant statutory sustain levels are: High amount competitive term writers (through requirements for scantness reserves); universal life writers whose minimum guarantees ensue in policies that are defacto term (and who may not hold reserves at all, or perhaps not even half the cost of insurance after inventory values have run out); term insurers who have designed policies creatively to lessen sustain requirements of Regulation Xxx; and variable life and annuity writers who apparently believe the New York insurance Department's acceptable scenario to cover minimum normal inventory guarantees is too high a sustain basis. There may be insurers of other products also. Mostly, there are large companies, but small insurers may also be part of this constituency. However, do these industry groups report a majority of insurance companies?
2. Would adoption of theory Based Valuation lead to still lower statutory reserves, even without the above portions, and bring their prevailing levels closer to reserves under generally acceptable accounting principles? Would this be desirable from a solvency viewpoint?
3. Some small fellowships are involved about a "level playing field." Large companies, willing and able to pay for an actuarial peer review, could hold smaller statutory reserves under theory Based Valuation. Would this supply them an unfair competitive advantage?
4. Statutory reserves under theory Based Valuation need continued qualification for federal earnings tax purposes. Proposals so far have called for a cash value floor as a minimum reserve, in hope that this would safe tax suited status. However, this floor would not apply to term life or health insurance reserves. Also, the Treasury has sometimes implied that they will not allow reserves that do not correspond to a table specifically mentioned in National association of insurance Commissioners regulations.
5. The New York insurance department recently proposed a model law and regulation to implement theory Based Valuation. Some aspects of it may have merit. For example, it seems to wish enough margins in reserves that would keep theory Based Valuation liabilities more conservative than under generally acceptable accounting theory (if not very close to current statutory levels). Also, the model law describes theory Based Valuation as an option, while expressing no preference for formulaic versus stochastic calculations.
6. On the other hand, at least one objection could be raised to New York's proposal. For testing reserves with minimum sustain scenarios (gross superior reserves), they seem to advise that minimum test reserves use a Treasury rate of interest, regardless of the company's investing rate of return. New York had previously demanded that these minimum or best estimation reserves be increased to 7.5 percent as lawful tests. This latter seems sufficiently conservative. An added requirement for a Treasury rate of interest when a company is earning more than this (even in the current low interest environment) seems unrealistic.
7. Some regulators have expressed concern that, under theory Based Valuation, small companies, left to their own devices, would hold unacceptably low reserves. If peer reviewing actuaries, for these purposes, are deemed agents of regulators, and their responsibilities are sufficiently defined, this could retort their concern.
8. Some proponents of theory Based Valuation have referred to the modern bankruptcy of Equitable Life in the United Kingdom. They seem to claim that this demonstrates the need for theory Based Valuation in the United States, so that actuaries can use all their professional judgment in setting sound reserves.
This discussion seems weak. For many years, in Britain and other countries, actuaries have been setting reserves under an equivalent of theory Based Valuation. Peer reviews or enough peer tell standards may have been lacking. However, Britain seems to be backing away from theory Based Valuation, so as to hold actuaries to very Literal, oversight from a government Board. In effect, the whole actuarial profession in that country received a black eye (deserved or not) from existence of defacto theory Based Valuation.
9. One implied discussion for theory Based Valuation, not so far explicitly stated, is that its adoption will raise the status of actuaries. This would come at a time when the profession is very involved about its image, its status in the normal field of risk management, and concern over inroads to actuarial prerogatives from other professions.
First, sustain calculations have all the time been tied to unique actuarial expertise. Also, actuaries institute current formulaic reserves and sustain standards. Community of Actuaries members, both from industry and departments, have prepared new sustain tables as experience has evolved. Actuaries have designed guidelines and sustain standards for even more complicated products.
In other words, even before actuarial judgment and peer tell have been emphasized in the new proposal, actuaries have all the time been closely complicated with statutory sustain developments of all sorts.
10. One customary concern over theory Based Valuation is the reliance of some actuaries that stochastic processing techniques should be used in all sustain calculations. They claim that stochastic is inherently classic to formulaic approaches, such that actuaries should be forced to illustrate why they don't pick the stochastic approach.
The dictionary defines stochastic as "a process enchanting a randomly carefully sequence of observations, each of which is carefully as a sample of one element from a probability distribution." The key words here are "probability distribution." The distribution is chosen in develop and is itself an assumption. It may be based on statistical experience and expertly compiled, but it is still an assumption.
Proponents have stated that stochastic calculations can capture the outlying risks inherent in many coverage's i.e. Very low probabilities, but extremely damaging if actualized. Again, these low probabilities themselves are assumptions within an unabridged distribution.
All or roughly all formulaic sustain scenarios call for alternative calculations. The greater the tail risk, the more likely that large numbers of alternative reserves are needed to capture the range of outcomes. This could well ensue in higher reserves. The more numerous the advantage options, and the more unabridged the variety of policyholder behaviors that could work on results, the greater the amount of alternative scenarios that should be tested. This involves sound actuarial judgment. In short, this does not seem to demonstrate the superiority of the stochastic approach.
11. A key element of the current stochastic advent is the Conditional Tail anticipation (Cte). It involves use of reserves based on the arithmetic midpoint of the desired amount of worst-case scenarios. In other words, "65Cte" uses the midpoint of the 35 worst-case scenarios. An "80Cte" uses the midpoint of the 20 worst-case scenarios. This means that "80Cte" would have worse results and higher reserves than "65Cte."
However, these worst-case scenarios are themselves assumptions within the probability distribution. Many adverse scenarios, unless weighted by a probability, would mean insolvency of the company. It would only make sense to use them if so weighted. Actually, true worst-case scenarios involve:
a. All policyholders dying.
b. All policyholders under health insurance entering nursing homes for 20+ year stays.
c. For variable coverage, the stock market tumbling to zero and all policyholders transferring to the normal inventory and then dying.
No one uses these scenarios, because they mean the breakdown of our society.
12. Some proponents of theory Based Valuation have stated that small fellowships could ask exemptions from stochastic processing requirements. However, as stated above, enough justification for the inherent superiority of this advent has not been provided. Only then could stochastic be touted as a required exchange for the customary formulaic option.
13. It is a legitimate concern that these proponents could insert requirements for use of stochastic processing into Actuarial Standards of Practice.
14. In regard to the stochastic processing approach, some actuaries have stated, "If we don't do it, somebody else will." In other words, if actuaries don't uniformly adopt the stochastic approach, other statisticians or non-actuaries will replace the profession as those suited to presuppose reserves. One retort to this discussion is that there are activities that no one should be doing. In other words, even today, stochastic processing will authentically be used extensively in calculating or testing reserves for positive products. For it to become a uniform standard, though, it must be subjected too much more careful tests and critiques than employed so far.
Summary of Issues
Small fellowships should be aware of inherent pluses, but also, primary pitfalls, from the theory Based Valuation proposals. Pluses include:
1. perhaps lower statutory reserves, especially for a company writing positive types of products that originate large scantness reserves or other types of reserves mentioned above.
2. inherent to enter into positive goods lines where previous sustain requirements would have kept them out.
Minuses include:
1. Onerous expenses from peer review.
2. Onerous expenses from software and computer engine time complicated in stochastic processing.
Possible Approaches for Small Companies:
1. Oppose theory Based Valuation over the board.
2. Lobby for theory Based Valuation laws and regulations to be normal and not wish or in any way favor whether the formulaic or stochastic approach.
3. Insist that whether formulaic or stochastic approaches remain optional.
4. Actuaries for small insurers should remain watchful and oppose any attempt to mandate use of stochastic approaches in Actuarial Standards of Practice.
5. Lobby for theory Based Valuation requirements for peer tell and for margins that are "appropriate to the risk profile of the particular insurer." In other words, small fellowships with relatively uncomplicated portfolios of products and investments should be able to employ theory Based Valuation with the least amount of added expenses.
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