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Old 06-12-2017, 04:27 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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Old 06-12-2017, 05:27 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, 04:59 PM
E's Avatar
E E is offline
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 11:38 AM.. Reason: spelling
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