Background
In the mid-1970s, activity increased with respect to individual life and annuity products with nonguaranteed elements (NGEs) as opposed to dividends under traditional participating policies.Because of the increased activity on these products, they came to represent significant market share and financial significance, and it was deemed necessary to develop an actuarial standard of practice in this area. Thus, the Interim Actuarial Standards Board adopted the original version of this ASOP as ASOP No. 1 in October 1986. (Prior to 2013, ASOP No. 2 was known as ASOP No. 1.) The Actuarial Standards Board adopted a reformatted version of ASOP No. 1 in 1990.
In 1986, the policies in question were still evolving, and there was little standardization in areas such as benefit design, pricing structure, marketing practices, and investment philosophies. It was therefore impossible for the standard to offer guidance on these issues. Rather, the standard reflected that the actuary’s essential obligations were
(2) to prepare an actuarial communication for the client presenting this advice.
In May 2011, ASOP No. 1 was updated for deviation language, and in March 2013, it was renumbered ASOP No. 2.
In recent years, further developments affecting products with NGEs have taken place, such as the following:
• continued product evolution, including index features, persistency bonuses, living benefit riders, secondary guarantees, and new ancillary benefits;
• advances in actuarial techniques for modeling, stochastic testing, and sensitivity analysis;
• changes in life insurance company taxation, reserve valuation, and capital objectives;
• enhancement of insurer governance procedures with respect to the determination of NGEs;
• increased public awareness of changes to NGEs for in-force policies; and
• increased regulation of NGEs, such as the promulgation of New York Regulation 210 in March 2018.
Current Practices
The actuary may provide professional services in three principal areas with respect to NGEs. The actuary is normally involved in the determination of NGE scales in accordance with insurer determination policy. The actuary may also be involved in advising the insurer on setting the determination policy or the establishment of or changes to policy classes. When determining NGEs, the actuary considers corporate governance practices, policy administration, regulation, marketing objectives, and consumer expectations, among other factors.The actuary may be called upon to determine NGE scales for future sales of a new or existing product and for in-force policies. Although the steps needed to complete these two broad categories of assignments have many common elements, there are significant differences with respect to the principles, methodologies, and criteria that are commonly followed.
