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  #1  
Old 06-12-2017, 05:27 PM
fastcount fastcount is offline
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Default XXX and AXXX reserving

Hello,

What is the purpose of checking for the creation of new segments?
I know how the calculation works, I would just like to know the thinking/rationale behind it.

Also, what's the rationale behind having XXX and AXXX, isn't XXX enough?

Cheers,
FactCount
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  #2  
Old 06-12-2017, 06:27 PM
Sleeping Dragon Sleeping Dragon is offline
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Under pre-XXX, companies could reduce reserves by creating gross premium increases from one policy year to the next. The reserve = PV benefits less PV of net premium. Since the net premium is a constant percent of the gross premium, you can reduce the reserves in the early years by making the gross premiums in the later year very high without segmentation. By making the gross premiums very high in later years, policyholders are more likely to lapse the policy when the premium charges increase.
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Old 06-15-2017, 05:59 PM
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Eddie Smith
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XXX is a highly conservative fix for an inherent problem in traditional stat reserves: there is no explicit lapse assumption in US stat. Therefore companies can use very high premium scales to wipe out reserves without accounting for the reality of shock lapses when premiums go sky high. XXX basically breaks a term policy into a series of term policies corresponding to different premium slopes. The classic example is level term, then ART. The level term is segment 1, and subsequent segments are based on the annual premium. This ensures that the ART premiums do not affect (lower) the reserve for segment 1.

AXXX is difficult to describe succinctly. In my opinion, it is the most complicated actuarial regulation that exists. The current version (8E) is the result of a long cat and mouse game between insurers and regulators and the ever increasing sophistication of ULSG. But fundamentally, it is trying to correct the same problem, which is the fact that the normal UL model reg method can be too easily gamed by ULSG product designs that result in unreasonably low solvency results from a regulator's perspective. So it prescribes a complicated methodology that results in a higher reserve. ULSG designs are difficult to comprehend without seeing them in action. They have a lot more moving parts than term and often make use of multiple account values (shadow accounts). Even within the different accounts, the charges and credits can shift around under different market conditions and other factors.

In theory, VM-20 (PBR) will obviate the need for these regulations and hopefully the complexity in ULSG design, which has been largely driven by AXXX regulation.
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Last edited by E; 06-16-2017 at 12:38 PM.. Reason: spelling
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Old 07-11-2017, 02:25 PM
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AXXX (AG38) has become regulation via a non-government body (NAIC).
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Old 02-23-2018, 11:02 AM
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Default XXX to AG38 transition

Question about transitioning from XXX to AG38.

I read in a presentation that the problems with XXX are solved with AG38. Here is the main problem with XXX:
Not everyone minimally funds NLG (GP in XXX are calculated to minimally fund the shadow account), ie: XXX does not increase reserves when premiums are pre-paid

I don't understand why pre-paid premiums should increase the reserve.
AG38 has a new component that calculates a Payment that would fully fund the shadow account to end of the NLG period. Why is this needed?

Here's an AG38 formula, perhaps this'll help explain why AG38 is needed over XXX.
AG38 reserve = Min(NSP, FR*(NSP-XXX-defXXX) + XXX + defXXX) SC
FR = shadow_AV/(Payment that fully funds NLG)
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Old 02-23-2018, 05:17 PM
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Eddie Smith
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The more premiums the policyholder actually pays, more "funded" the policy is. All flexible premium UL products are fundamentally term insurance + a savings component, and the policyholder essentially controls the size of the savings component with the premiums they pay. This causes UL to fall along a gradient between pure term insurance and something more like WL. Traditional UL CRVM recognizes this by ratcheting a WL-like stat reserve up and down based on how funded the policy actually is. The more WL-like the UL policy is (higher savings component), the higher the reserve should be to help fund surrenders and maturity values.

Even though ULSG tends to lie closer to the "term" end of the gradient, it's possible policyholders will pay more premium than needed to minimally fund it, so AG 38 is designed to increase the reserve to reflect that. It just goes about it in a more complicated way because ULSG is way more complicated than the kind of vanilla UL that falls under the UL model reg (basic UL CRVM).
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Last edited by E; 02-23-2018 at 05:21 PM..
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Old 02-23-2018, 09:19 PM
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Thanks, Eddie. Very clear explanation.
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