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Old 01-30-2018, 05:30 PM
fastcount fastcount is offline
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Default AG36 IUL, AG37 VUL, XXX/AG38 UL

I am currently working in the valuation reporting team of my company, and Iíve been working with UL products mostly, and I can make high level sense of XXX and AG38 reserves.
I have now moved on to IUL and VUL products, but Iím having a tougher time making sense of AG36 and AG37.
Iím going to write down my understanding of these products and reserves at a very high level, if my understanding is lacking, I would appreciate if you could please point it out. Thank you.

Basics:
Theyíre all products whose excess of premium payments above the COIs and other expenses is credited to the cash value.
UL: return is linked to the general account, and has a guaranteed return
VUL: return is linked to the separate account, all return risk is on the p/h, theyíre going to bear all negative investment risk
IUL: return is linked to an S&P or some other external index. It can have rolling interest crediting segment, where premium inflow in month 1 can be credited a different rate, than premium inflow in month 7, etc.

They all have a basic CRVM reserve whose purpose is to have enough reserve for a hypothetical fund (GMF) that endows at maturity. This hypothetical fund is adjusted every year in case the actual fund is greater than the GMF. The reason for this hypothetical GMF fund is because these products donít have a fixed premium like a term or a whole life product.

UL:
XXX reserve
AG38 reserve
I already started a thread about these reserves back in the day:
http://www.actuarialoutpost.com/actu...d.php?t=323137
I liked The Sleeping Dragon and Eddie Smith explanations of the rationale behind the reserves very well. I was hoping someone could explain the rationale behind AG36 and AG37 as well.

IUL:
AG36 reserve Ė identical to CRVM calculation, except that the crediting rate use is not the guaranteed minimum rate. The crediting rate is calculated using a Black-Scholes methodology. Hereís what I donít get. Whatís the point of AG36? Whatís the rationale behind it? Itís nearly identical to regular CRVM in size.
If a product has a secondary guarantee, itíll also have XXX/AG38 reserve.

VUL:
AG37 reserve Ė reserve to take into account the risk associated with the separate account. Whatís the rationale behind it?


Another question, I can see how the reserves were calculated exactly when I look at my companyís spot checking sheet of these reserves. Would an interviewer ever ask me to exactly walk them through each reserving methodology step by step? I can recognize the steps when I see them in an excel spot checking file, but I donít think Iíd be able to memorize it all, let alone say it under the pressure of an interview.
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  #2  
Old 01-30-2018, 06:16 PM
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So.

Socratic method:
What is Black-Scholes designed to do? How does that design relate to the product features of IUL?

Do you know what secondary guarantees are used for?

What risk is there in a VUL separate account? How would you recognize this risk if you didn't have AG37?

Do you think the interviewer has memorized the detail steps? Or would it be more likely that they understand the underlying rationale?

Not Socratic: Why haven't you asked your manager about the rationale for these calculations?
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Old 01-30-2018, 06:17 PM
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PS - You should move this thread to the Life forum. You can use thread tools to do this.
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And def agree w/ JMO.
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Old 01-30-2018, 07:17 PM
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Quote:
Originally Posted by JMO View Post
What is Black-Scholes designed to do? How does that design relate to the product features of IUL?
Black-Scholes is used to calculate the cost of an option.
The return on an IUL is linked to an external index.
The return on a VUL is based on separate account.
So IUL and VUL seem pretty similar to me, which begs the question, what's the purpose of AG36. It's probably because I don't fully understand the product well enough yet.

Quote:
Originally Posted by JMO View Post
Do you know what secondary guarantees are used for?
Secondary guarantee is there to keep the policy inforce longer, even if the cash value reaches 0, but if the secondary guarantee reaches 0, then the policy lapses.

Quote:
Originally Posted by JMO View Post
What risk is there in a VUL separate account? How would you recognize this risk if you didn't have AG37?
The risk in a VUL SA is that the returns may be inadequate to cover the DB.
If you didn't have AG37, you'd need some sort of measure that'd hold a reserve in case SA returns tank. I don't fully know the AG37 calculation at a high level, that probably makes it tougher to understand.

Quote:
Originally Posted by JMO View Post
Do you think the interviewer has memorized the detail steps? Or would it be more likely that they understand the underlying rationale?
Good call.

Quote:
Originally Posted by JMO View Post
Not Socratic: Why haven't you asked your manager about the rationale for these calculations?
My current manager doesn't fully understand the rationale and big picture of why these reserves exist, he just knows that they're there, and the calculation methodology.
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Old 01-31-2018, 08:55 AM
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Regarding AG36, what valuation interest rate would you use for CRVM if the guideline didn’t exist? There’s no obvious guaranteed rate in the contract because credits depend on uncertain option payoffs. So AG36 provides guidance on the implied rate to use.
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Old 01-31-2018, 11:17 AM
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Quote:
Originally Posted by fastcount View Post
Black-Scholes is used to calculate the cost of an option.
The return on an IUL is linked to an external index.
The return on a VUL is based on separate account.
So IUL and VUL seem pretty similar to me, which begs the question, what's the purpose of AG36. It's probably because I don't fully understand the product well enough yet.
The IUL product linkage uses a formula involving the greater of a guarantee or an external index. An option lets you value the "greater of" part.
VUL just goes up or down based on the separate account. There's not an option.

Quote:
Secondary guarantee is there to keep the policy inforce longer, even if the cash value reaches 0, but if the secondary guarantee reaches 0, then the policy lapses.
Well, yes. But to avoid the rules for term insurance, some companies created secondary guarantees that keep the policy in force if the policyholder pays a term-plan-like premium. It's for this gimmick that the requirement was intended. I don't think the original version of secondary guarantee generates any actual extra reserve, although I admit I have never actually tested this, nor tried to prove it.


Quote:
The risk in a VUL SA is that the returns may be inadequate to cover the DB.
If you didn't have AG37, you'd need some sort of measure that'd hold a reserve in case SA returns tank. I don't fully know the AG37 calculation at a high level, that probably makes it tougher to understand.
You and your manager (see below) need to educate yourselves on this question.


Quote:
Good call.



Quote:
y current manager doesn't fully understand the rationale and big picture of why these reserves exist, he just knows that they're there, and the calculation methodology.
This statement makes me very sad. I hope that you and your manager decide to educate yourselves. You should do so, whether your manager does or not. JMO, of course.
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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 Apr 5, 2018.

Spoiler:
I should keep these four permanently.
Quote:
Originally Posted by rekrap View Post
JMO is right
Quote:
Originally Posted by campbell View Post
I agree with JMO.
Quote:
Originally Posted by Westley View Post
And def agree w/ JMO.
Quote:
Originally Posted by MG View Post
This. And everything else JMO wrote.
And this all purpose permanent quote:
Quote:
Originally Posted by Dr T Non-Fan View Post
Yup, it is always someone else's fault.
MORE:
All purpose response for careers forum:
Quote:
Originally Posted by DoctorNo View Post
Depends upon the employer and the situation.
Quote:
Originally Posted by Sredni Vashtar View Post
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.
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  #7  
Old 01-31-2018, 11:30 AM
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PS - You will get more people answering, I think, if you move this to Life. That was where you got your answers before.
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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 Apr 5, 2018.

Spoiler:
I should keep these four permanently.
Quote:
Originally Posted by rekrap View Post
JMO is right
Quote:
Originally Posted by campbell View Post
I agree with JMO.
Quote:
Originally Posted by Westley View Post
And def agree w/ JMO.
Quote:
Originally Posted by MG View Post
This. And everything else JMO wrote.
And this all purpose permanent quote:
Quote:
Originally Posted by Dr T Non-Fan View Post
Yup, it is always someone else's fault.
MORE:
All purpose response for careers forum:
Quote:
Originally Posted by DoctorNo View Post
Depends upon the employer and the situation.
Quote:
Originally Posted by Sredni Vashtar View Post
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.
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  #8  
Old 01-31-2018, 04:13 PM
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I am trying to educate myself, but there isn't really a paper out there that explains these things succinctly.

All papers out there only go over the mechanics.

If there is such a paper out there, I would love to read it. Maybe even go over the history of how and why these methods were developed.

Last edited by fastcount; 01-31-2018 at 04:17 PM..
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Old 01-31-2018, 05:53 PM
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Many recent actuarial guidelines were adopted because it was deemed too hard to get all the states (or even most of them) to adopt uniform model regulations (which would have been more appropriate in many cases).
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Old 02-05-2018, 08:49 PM
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Many recent actuarial guidelines were adopted because it was deemed too hard to get all the states (or even most of them) to adopt uniform model regulations (which would have been more appropriate in many cases).
Actuarial Guidelines (AGs) are clarifications of underlying laws, i.e., not laws themselves. They are adopted by the NAIC, which has no authority to make law. The Valuation Manual operates somewhat differently, in that the laws of 47+ states make Valuation Manual (VM) provisions effectively the law as of the date they are made effective by vote of the NAIC, albeit only prospectively.

Effective dates that are stated in some AGs seem confusing, because they imply that the law has a different meaning as of the effective date, even though the underlying law didn't change. AGs have generally been considered to be applicable retroactive to the date of the law which they clarified. If an Actuarial Guideline is a true explanation of the law as of 1/1/18, and the law was effective 7/1/11, it implies that the Actuarial Guideline was also a correct clarification as of 7/1/11.
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