ASOP 2
(NONGUARANTEED ELEMENTS FOR LIFE INSURANCE AND ANNUITY PRODUCTS)
SECTION 3
(ANALYSIS OF ISSUES AND RECOMMENDED PRACTICES)

Section 3
Analysis of Issues and Recommended Practices

ASOP 2 | §3.1 | NGE FRAMEWORK

The actuary should understand the insurer’s NGE framework in relation to the actuarial services requested. The actuary should understand how the NGE framework has been applied in the past in relation to the actuarial services requested, if available. The actuary should take into account the elements of the NGE framework that are relevant to the actuarial services requested. Examples of elements of the NGE framework include the following:

a. the methodology for evaluating experience and developing anticipated experience factors;

b. the source or sources of data used in developing anticipated experience factors;

c. the frequency of review of anticipated experience factors and policy classes;

d. the methodologies for allocating expenses and investment income;

e. the models or methods used;

f. the marketing objectives, such as distribution channels, target markets, and competitive objectives;

g. the objectives used in setting profitability metrics;

h. the methodology for determining reserves and capital objectives; and

i. the insurer’s governance process, including the decision and approval process.

If the NGE framework is absent, or in the actuary’s professional judgment, is incomplete or needs to be updated to reflect the current environment, the actuary should recommend that the NGE framework be created, completed, or updated.

ASOP 2 | §3.2 | PROVIDING ADVICE ON THE ACTUARIAL ASPECTS OF THE DETERMINATION POLICY

The actuary may provide advice on

1) developing or modifying the determination policy, or

2) applying the determination policy.

When providing advice on the actuarial aspects of the determination policy, the actuary should provide advice consistent with the following:

a. NGE scales are determined with the expectation that they will be revised only if anticipated experience factors have changed since issue, or alternatively, since the previous revision.

b. NGE scales are determined based on reasonable expectations of future experience and are not determined with the objective of recouping past losses or distributing past gains.

3.2.1 Providing Advice on Developing or Modifying the Determination Policy

When advising an insurer on developing or modifying its determination policy, the actuary should take into account the following, if applicable:

a. the policy provisions and applicable law;

b. how anticipated experience factors reflect expectations of future experience;

c. how the variability and credibility of each anticipated experience factor may impact the determination of the NGE scales;

d. the insurer’s reserve, profitability, capital, surplus, and marketing objectives;

e. reinsurance and taxes; and

f. periodic review of NGEs in in-force policies, such as the maximum time period between successive insurer reviews of NGEs.

The actuary may take into account other items relevant to the determination policy.

The actuary should document the sources of the determination policy used in developing the advice and how (a)–(f) above and any additional relevant items were taken into account. For example, portions of the determination policy may be found in the insurer’s governance processes, corporate policies, or operating practices.

3.2.2 Providing Advice on Applying the Determination Policy

When advising on applying the determination policy for determining initial NGE scales, evaluating whether to revise existing NGE scales, or revising existing NGE scales, the actuary should take into account the following, if applicable:

a. the need to make additional assumptions about how the determination policy applies to the assignment;

b. guaranteed elements, policyholder options including the likelihood of antiselection, and other relevant provisions of the policy;

c. impacts on or from reserve, profitability, capital, surplus, and marketing objectives, or changes in such objectives;

d. impact on or from reinsurance and taxation;

e. applicable law (including, for example, for variable products, any constraints or other requirements imposed by applicable securities law); and

f. resources available.

If, in the actuary’s professional judgment, the actuary believes that the determination policy may be inconsistent with the guidance in sections 3.2 and 3.2.1, the actuary should recommend that the determination policy be revised.

ASOP 2 | §3.3 | ESTABLISHMENT OF OR CHANGES TO POLICY CLASSES

When preparing for an assignment, the actuary should review the existing policy classes for the product or similar products within the insurer’s NGE framework.

3.3.1 For Future Sales of a New or Existing Product

If the policy classes for future sales have not been defined in the NGE framework, or if they have been defined, but in the actuary’s professional judgment are incomplete, do not reflect changing circumstances (for example, new underwriting practices, or new profit or marketing objectives), or are inconsistent with the items below, the actuary should recommend the establishment of or changes to the policy classes that are

a. consistent with the guidance in ASOP No. 12, Risk Classification;

b. appropriate for each NGE (a particular policy may be assigned to one or more policy classes at issue based on anticipated experience factors and NGEs, for example, one policy class for credited interest and a different policy class for COI charges);

c. appropriately reflective of differences within anticipated experience factors (for example, smoker versus nonsmoker mortality);

d. refined appropriately to mitigate antiselection; and

e. not expected to be redefined after issue.

Policy classes may be defined by grouping policies at various levels, for example, at a product level, across multiple products, or within a product or products.

The actuary may recommend policy classes that use different grouping methodologies based on policy duration. For example, a policy class may be defined in terms of a select and ultimate mortality method, or a policy class may be defined in terms of an investment year interest crediting method that uses a new money method in the early durations and a portfolio method in the later durations.

When recommending policy classes for future sales, the actuary should take into account the policy provisions, the structure of guaranteed elements and NGEs, the date on which the recommended policy classes would take effect (for example, policies issued before or after a particular date could be in different policy classes), and the underwriting characteristics and marketing objectives for the product. The actuary may also take into account any additional relevant factors.

3.3.2 For In-Force Policies

The actuary should recommend that in-force policies remain assigned to their policy classes, unless there is new information that is material to the anticipated experience factors and supports reassigning the policies to different policy classes. For example, a change in one state’s premium tax that affects some policies within a policy class differently than it affects others could justify reassigning such policies to a different policy class.

In addition, the actuary may recommend combining or redefining policy classes if, in the actuary’s professional judgment, such combinations or redefinitions would be appropriate. For example, if the experience for a policy class is not credible, the policy class could be combined with other policy classes for the purposes of determining anticipated experience factors.

When recommending a change in the assignment of policies to policy classes, or combining or redefining policy classes, the actuary should follow the guidance in section 3.3.1.

ASOP 2 | §3.4 | DETERMINATION PROCESS FOR NGE SCALES

When determining NGE scales for future sales of a new or existing product and for in-force policies in accordance with the NGE framework, the actuary should take into account the determination policy and the following:

a. the appropriateness of the models, methods, and profitability metrics;

b. how the anticipated experience factors relate to NGE scales;

c. the consistency of NGE scales with policy provisions;

d. any limits on NGE scales due to regulatory constraints;

e. any limits on NGE scales due to guaranteed elements; and

f. the impact on or from reserve, profitability, capital, surplus, and marketing objectives.

The actuary may take into account practical constraints and any other relevant circumstances.

The actuary may use approximation methods, such as smoothing and interpolation, when determining NGE scales.

If, in the actuary’s professional judgment, the actuary believes that following the determination policy when determining NGE scales would be inconsistent with the guidance in section 3.2, the actuary should consider discussing these inconsistencies with the insurer. The actuary should document any unresolved inconsistencies and should consider providing advice consistent with section 3.2.2. 3.4.1 Determination Process for Future Sales of a New or Existing Product When determining NGE scales for future sales of a new or existing product, the actuary should take into account the following:

a. how anticipated experience factors were developed and whether they reflect the product’s features, intended markets, distribution methods, underwriting procedures, and policy classes (see section 3.3.1);

b. how NGE scales are structured to cover costs under the product design, as well as the potential impact on profitability if policyholder behavior varies from expectations;

c. that NGE scales are determined with the expectation that they will not be revised unless the anticipated experience factors change;

d. whether the NGE scales are consistent with the language of the policy;

e. projected profitability;

f. constraints on the ability to revise NGE scales to reflect future changes in anticipated experience factors (for example, guaranteed elements, contractual limitations, development and implementation cost, systems constraints); and

g. how elements of the determination policy affect the ability to revise NGE scales after issue.

The actuary may use prior analysis in the determination of the NGE scales, if appropriate. For example, changes in credited interest may be based on a previously established interest rate spread.

The actuary should document the NGE determination process and results, including how items (a)–(g) and any prior analysis were taken into account.

The actuary should consider conducting sensitivity analyses to evaluate the impact of future deviations from the anticipated experience. The actuary should consider recommending how often such anticipated experience factors be reviewed.

3.4.2 Determination Process for In-Force Policies

The determination process for inforce policies consists of reviewing prior determinations, analyzing emerging experience relative to anticipated experience factors, considering whether to recommend a revision in the NGE scales, and, if a revision is to be made, determining the revised NGE scales.

3.4.2.1 Reviewing Prior Determinations

The actuary should review prior determinations, including the original determination in effect at the time of policy issue. This may include information such as previous anticipated experience factors, profitability metrics, pattern of profits, NGE scales, and other assumptions.

If the information related to prior determinations is not available or incomplete, the actuary should reconstruct prior determinations to the extent practicable and necessary for the determination process, and document the methods and assumptions used. If reconstructing the prior determinations is not practicable due to incomplete information or other limitations, the actuary should select and document a reasonable approach to gain an understanding of the prior determination.

3.4.2.2 Analyzing Experience

When analyzing how experience is emerging relative to anticipated experience factors, the actuary should take into account the following, if applicable:

a. the time elapsed since the last analysis of experience;

b. the credibility of experience;

c. the size of the relevant group of policies or policy classes, such as number of policies, premium volume, insurance amount, or account value;

d. the materiality of any change in the experience relative to the existing anticipated experience factors;

e. whether existing anticipated experience factors, including any projected trends, are supported by actual experience; and

f. whether profitability was particularly sensitive to changes in any anticipated experience factors, as disclosed in previous actuarial reports.

The actuary should recommend that the anticipated experience factors be updated, if warranted by the results of the analysis.

The actuary should document how (a)–(f) above and any additional relevant items were taken into account.

3.4.2.3 Considering Whether to Recommend a Revision to NGE Scales

When considering whether to recommend a revision to NGE scales, the actuary should take into account the following, if applicable:

a. time elapsed since NGE scales were last reviewed;

b. the anticipated experience factors that are used for revising NGE scales under the terms of the policy and applicable law;

c. deviations in emerging experience from what was assumed in the prior determination of NGE scales;

d. how any recommended revision could affect reserves, capital, reinsurance, and taxation;

e. the appropriateness of the profitability metrics and objectives. For example, an internal rate of return metric may have been used at policy issue, but a different metric may be appropriate when applied to in-force policies;

f. the change in the prospective profitability due to the change in anticipated experience factors and any additional factors for which a change may be reflected in the determination of NGEs under section 3.2(b), the terms of the policy, and applicable law;

g. the complexity of the analysis needed. For example, when changing credited interest rates, the actuary may limit the analysis to changes in investment income, while other changes, such as COIs, may require more complex analysis and modeling, which could reflect multiple anticipated experience factors and require consideration of other NGEs;

h. whether other analyses, such as sensitivity analysis, are needed;

i. costs, practical implementation difficulties, and materiality of making revisions to the NGE scale; and

j. potential impacts on the policyholder (for example, policyholder behavior or policyholder equity) or the insurer of revising or not revising NGE scales to reflect changes in anticipated experience factors.

The actuary should document the results of the analysis, including how (a)-(j) above and any additional relevant items were taken into account, whether the actuary recommends a revision or not.

3.4.2.4 Determining the Revised NGE Scales

When determining revised NGE scales, the actuary should take into account the provisions of section 3.4.1(a)-(g) and should

a. identify the anticipated experience factors to be used when revising NGE scales, taking into account the terms of the policy and applicable law;

b. base the revision of the NGE scales on changes in the anticipated experience factors identified in (a) above; and

c. determine new NGE scales using a method that is consistent with sections 3.2(a) and 3.2(b). For example, it might be appropriate to use a method to determine the revised NGE scales such that the prospective profitability from the time of revision, taking into account the prospective pattern of profits by duration, is not materially greater than that using the original NGE scales and original anticipated experience factors, holding all other assumptions constant between the projections.

The actuary may use approximation and smoothing methods that are reasonable in relation to the costs and benefits provided.

The actuary should perform an appropriate level of analysis based on the anticipated experience factors and the type of revision being considered. The actuary may use relevant prior analysis in making the determination. For example, as discussed in section 3.4.2.3(g), changing COIs may require more complex analysis and modeling than routine changes in credited interest rates, which may rely on prior interest rate spread analysis. The actuary should ensure that the method and results of any analysis used to support the determination of the revised NGE scales, including how the provisions of section 3.4.1(a)-(g) and any additional relevant items as noted above were taken into account, are documented or addressed in prior documentation.

3.4.2.5 Additional Considerations

When recommending or determining a revision to NGE scales, the actuary may consider using additional anticipated experience factors that were not part of the previous determination of NGE scales, such as a new tax-related expense.

If circumstances arise under which the insurer allocates past losses or gains by making adjustments to the NGE scales, for example, due to regulatory requirements, the actuary should document the circumstances and should consider recommending a methodology to separately account for such adjustments when considering future determinations of the NGE scales.

ASOP 2 | §3.5 | NGES USED IN ILLUSTRATIONS NOT SUBJECT TO ASOP NO. 24

The actuary should recommend NGE scales to be used in illustrations not subject to ASOP No. 24 that have been determined consistently with section 3.4. The actuary should also follow applicable regulations, guidelines, and standards for illustrations, such as those that are based upon the following:

a. Annuity Disclosure Model Regulation (Model 245); and

b. Variable Life Insurance Model Regulation (Model 270) and NAIC Actuarial Guideline 15.

The actuary should consider conducting tests of illustrated NGE scales to ascertain whether those illustrated NGE scales could be supported by anticipated experience factors and other reasonable assumptions.

ASOP 2 | §3.6 | PROVIDING OPINIONS AND DISCLOSURES TO MEET REGULATORY REQUIREMENTS

When providing opinions and disclosures to meet regulatory requirements relating to NGEs (for example, a response to an NAIC annual statement interrogatory) or actuarial services in support of such opinions and disclosures, the actuary should be knowledgeable about the requirements and information necessary to support the opinion or disclosure. Such information may include some or all of the following for the relevant products:

a. the insurer’s NGE framework;

b. the requirements of applicable law;

c. the determination process, including how experience and financial results are emerging; and

d. previous regulatory filings.

ASOP 2 | §3.7 | RELIANCE ON OTHERS FOR DATA, PROJECTIONS, AND SUPPORTING ANALYSIS

The actuary may rely on data, projections, and supporting analysis supplied by others. When practicable, the actuary should review the data, projections, and supporting analysis for reasonableness and consistency. For further guidance, the actuary should refer to ASOP No. 23, ASOP No. 41, Actuarial Communications, and ASOP No. 56, Modeling. The actuary should disclose the extent of any such reliance.

ASOP 2 | §3.8 | RELIANCE ON ASSUMPTIONS OR METHODS SELECTED BY ANOTHER PARTY

When relying on assumptions or methods selected by another party, the actuary should refer to ASOP No. 41 for guidance. The actuary should disclose the extent of any such reliance.

ASOP 2 | §3.9 | RELIANCE ON ANOTHER ACTUARY

The actuary may rely on another actuary who has performed actuarial services related to the determination of NGEs. However, the relying actuary should be reasonably satisfied that the other actuary is qualified to perform the actuarial service, the actuarial service was performed in accordance with applicable ASOPs, and the actuarial service performed is appropriate for the objective of the assignment. The actuary should disclose the extent of any such reliance.

ASOP 2 | §3.10 | DOCUMENTATION

In addition to the documentation requirements throughout the rest of section 3, the actuary should consider preparing and retaining documentation to support compliance with the remaining requirements of section 3 and the disclosure requirements of section 4. When preparing documentation, the actuary should prepare it in a form such that another actuary qualified in the same practice area could assess the reasonableness of the actuary’s work. The degree of documentation should be based on the professional judgment of the actuary and may vary with the complexity and purpose of the actuarial services. In addition, the actuary should refer to ASOP No. 41 for guidance related to the retention of file material other than that which is to be disclosed under section 4.