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#1
03-08-2018, 12:45 PM
 umich Member SOA AAA Join Date: Mar 2016 Location: Detroit, MI College: University of Michigan Alum Posts: 144
GAAP Valuation Rate for Payout Annuities

Hi! I'm in an entry level position in my company's annuity valuation team. Every month we calculate a GAAP rate for each line of the payout annuity business for the current issue year. The mechanics are pretty simple, a rate is solved such that PV(Prem) - DAC Exp = PV (Benefits & Expenses). Then the rate is used as the discount rate to calculate the GAAP reserve for the current year issues.

We get premium and DAC Exp from accounting/admin, and the ben&exp streams are generated by our model. Then we solve for a rate. I understand that the rates can be very volatile in the early stage of the year and then tend to stabalize as we get more inforce. However, I always have a hard time explaining the month-to-month fluctuation of the rates should there be a big change (usually > 5-10 bps). I do have the detailed seriatim information of inforce, e.g., premium, issue age, guaranteed years, min guar rates, etc. I can query whatever I need to compare current month YTD inforce vs prior month YTD inforce, or current month new issues vs prior month YTD inforce, but I don't really know what I need to look at in order to explain the ups and downs of the rates. Could someone shed some light on what needs to be looked at? Like how issue age affects PV of future benefits? etc. You can use any payout product as an example. Thank you very much!
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Last edited by umich; 03-08-2018 at 02:35 PM.. Reason: clarification
#2
03-08-2018, 01:36 PM
 JMO Carol Marler Non-Actuary Join Date: Sep 2001 Location: Back home again in Indiana Studying for Nothing actuarial. Posts: 37,660

Do you understand how the business uses the valuation rate that you calculate? It's not clear to me why this calculation is being done, and also why anybody cares if the number changes.

Also, why not use a rolling 12 month period instead of year-to-date?
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#3
03-08-2018, 02:11 PM
 umich Member SOA AAA Join Date: Mar 2016 Location: Detroit, MI College: University of Michigan Alum Posts: 144

Quote:
 Originally Posted by JMO Do you understand how the business uses the valuation rate that you calculate? It's not clear to me why this calculation is being done, and also why anybody cares if the number changes. I think more information about context is needed to even address the question. Also, why not use a rolling 12 month period instead of year-to-date?
Hi! Thanks for your reply. The rates are used as discount rates to calculate the GAAP Reserve for current year issues. Each issue year gets its own GAAP discount rate and once the year ends, the rate for that issue year is locked forever, unless there is loss recognition when all the assumptions for the LR portfolio are unlocked. I don't know if the way we calculate the GAAP rates is common practice or company specific, since i have not taken the Life Valuation Exam.

As I mentioned, these rates are very volatile at the beginning of the year and tend to stabalize over the course of the year (especially true for bigger blocks). But let's say if the rate goes up by 10 bps from October to November (late in the year), I want to be able to explain why.
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#4
03-08-2018, 02:21 PM
 JMO Carol Marler Non-Actuary Join Date: Sep 2001 Location: Back home again in Indiana Studying for Nothing actuarial. Posts: 37,660

OK, I think I see. The accountants have this rule that the initial net reserve for this kind of business must not produce either a gain or loss for the year in which it is issued. You might start by looking for the source of earnings on the block, and which assumptions drive it. That will give you a starting point for "what's different" when the numbers flip around late in the year.
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Carol Marler, "Just My Opinion"

Pluto is no longer a planet and I am no longer an actuary. Please take my opinions as non-actuarial.

My latest favorite quotes, updated Nov. 20, 2018.

Spoiler:
I should keep these four permanently.
Quote:
 Originally Posted by rekrap JMO is right
Quote:
 Originally Posted by campbell I agree with JMO.
Quote:
 Originally Posted by Westley And def agree w/ JMO.
Quote:
 Originally Posted by MG This. And everything else JMO wrote.
And this all purpose permanent quote:
Quote:
 Originally Posted by Dr T Non-Fan Yup, it is always someone else's fault.
MORE:
All purpose response for careers forum:
Quote:
 Originally Posted by DoctorNo Depends upon the employer and the situation.
Quote:
 Originally Posted by El Actuario Therapists should ask the right questions, not give the right answers.
Quote:
 Originally Posted by Sredni Vashtar I feel like ERM is 90% buzzwords, and that the underlying agenda is to make sure at least one of your Corporate Officers is not dumb.
#5
03-08-2018, 09:14 PM
 E Eddie Smith SOA AAA Join Date: May 2003 College: UGA Posts: 9,227

The OP is talking about the FAS 91 break even rate that basically calibrates the PV of expected future cash flows to time zero cash flow. At time zero (issue), the company receives single premium from the policyholder and pays acquisition costs. The PV of future cash flows has to equal the single premium net of acquisition costs for DAC to be recoverable.

Fundamentally, the break even rate is simply an IRR calculation. If you recalculate it after adding more business throughout the year, you are simply changing the cash flow profile. If possible, you could try recalculating the rate in stages. For example, hold everything constant but then update premium. Then update acquisition costs. Then update future payments (benefits). Etc. Each time you change something the rate will change. The order of the changes will impact the size of the rate change at each step, but you may get some insight into the key drivers.
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#6
03-08-2018, 09:37 PM
 umich Member SOA AAA Join Date: Mar 2016 Location: Detroit, MI College: University of Michigan Alum Posts: 144

Quote:
 Originally Posted by E The OP is talking about the FAS 91 break even rate that basically calibrates the PV of expected future cash flows to time zero cash flow. At time zero (issue), the company receives single premium from the policyholder and pays acquisition costs. The PV of future cash flows has to equal the single premium net of acquisition costs for DAC to be recoverable. Fundamentally, the break even rate is simply an IRR calculation. If you recalculate it after adding more business throughout the year, you are simply changing the cash flow profile. If possible, you could try recalculating the rate in stages. For example, hold everything constant but then update premium. Then update acquisition costs. Then update future payments (benefits). Etc. Each time you change something the rate will change. The order of the changes will impact the size of the rate change at each step, but you may get some insight into the key drivers.
Thanks Eddie! Now back to studying the Mary Hardy stuff.

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#7
03-13-2018, 11:48 AM
 dunnigan Member SOA AAA Join Date: Apr 2007 Posts: 136

I like the approach described above of isolating the effects of premium, acquisition costs, and future payments.

One could also isolate the effect between new issues and prior inforce. For example, maybe the policies that were in the prior period's break even rate still have essentially the same break even rate, but one big case came in this period that pulled the rate up or down.