Valuation Standards for Life Insurance Policy Reserves

April 29, 2016 INSURANCE CIRCULAR LETTER NO. 026-16 Superseding: CL No. 2014-42-A TO : All Life Insurance Companies and Mutual Benefit Associations Doing Business in the Philippines SUBJECT : Valuation Standards for Life Insurance Policy Reserves Pursuant to Sections 216 and 423 of the New Insurance Code (RA 10607) and in light of the changes in the Risk Based Capital (RBC) Framework under the Regulatory Alignment Program, attached is the revised valuation standards for life insurance policy reserves, which shall be used in the full implementation of the Financial Reporting Framework, Reserving and RBC-2 Framework. It is understood that for the December 31, 2015 parallel run, both the net premium valuation and the attached revised valuation standards shall apply. For strict compliance. (SGD.) EMMANUEL F. DOOC Insurance Commissioner Valuation Standards for Life Insurance Policy Reserves I. Introduction 1. Life insurance companies shall value their policy reserves for life business at the end of each calendar year as required by the Insurance Commission (IC), in accordance with this set of Valuation Standards. 2. The methods and valuation assumptions shall: a. be appropriate to the type of business and its risk profile; b. include appropriate margins for adverse deviations in respect of the risks that arise under the insurance policy; c. be in accordance with the internationally accepted actuarial standards; and d. consider the generally accepted actuarial principles concerning financial reporting framework promulgated by the Actuarial Society of the Philippines (ASP). acEHCD 3. Unless the context otherwise requires, the following terms shall be taken to mean: a. "variable contract" is as defined in Section 238 (b) of the New Insurance Code (RA 10607). b. "traditional policy" is a policy other than variable contract, which includes life, health or accident, annuity contracts and supplementary benefits or riders. c. "company" is a life insurance company supervised by the IC. II. Valuation Methodology 1. An actuary duly accredited by the IC shall be responsible in determining the level of policy reserves based on his professional valuation of the company's life insurance liabilities using a basis no less stringent than that prescribed in the following paragraphs. 2. Subject to paragraphs 3 to 4 below, the reserves for traditional life insurance policies shall be valued, where appropriate, using gross premium valuation. This is calculated as the sum of the present value of future benefits and expenses, less the present value of future gross premiums arising from the policy discounted at the appropriate risk-free discount rate. For this purpose, the expected future cash flows shall be determined using best estimate assumptions with due regard to significant recent experience and appropriate margin for adverse deviation from the expected experience. 3. For any traditional life insurance policy where the calculation based on paragraph 2 results in a negative reserve, the company shall appropriate from the unassigned surplus an amount equal to the aggregate of the negative reserves calculated on a per policy basis. 4. For any traditional life insurance policy with a term of one year or less, the reserve shall be calculated using the unearned premium method. 5. A company shall value the reserves for variable life insurance contracts as the sum of the: a. market value of the underlying assets backing the separate accounts relating to the policy, excluding any seed capital; and b. unearned cost of insurance or unearned risk charge. 6. A more conservative basis of valuation may be adopted by the Actuary resulting in higher policy reserves compared to the standards set out above, if, in his professional judgment, it is appropriate to do so. 7. Where the reserve of a life insurance policy cannot be appropriately valued using this set of valuation standards, the valuation shall be done using the basis approved by the IC. III. Data and Systems 1. The company's Chief Executive Officer (CEO), or responsible officer with a rank of at least Vice President or its equivalent, shall ensure that the company's database is properly maintained so that the data on business in force is accurate and complete. The CEO or the responsible officer shall furnish the data to the actuary and grant him/her reasonable access to its database. 2. Reasonable tests shall be applied on the data to check both its integrity and completeness before starting the valuation process. EcTCAD IV. Valuation Assumptions 1. Discount Rates a. The risk-free discount rate shall be used for all cash flows to determine the liability of a traditional life insurance policy. b. The yield curve used as basis for the risk-free discount rate shall be obtained from the following sources: i. for Philippine Peso policies: PDST-R2 rates ii. for US Dollar policies: International Yield Curve (IYC) from Bloomberg c. The risk-free discount rate shall be the equivalent zero-coupon spot yield of the above yield curve with matching duration for durations less than or equal to 20 years. Duration is the term to maturity of each future cash flow. d. If the duration of the cashflow is more than 20 years, then the discount rate shall be based on a moving-average of the 20-year government bond yield rate, over a period to be prescribed by IC. e. Where yields at certain durations are not available, these yields shall be appropriately interpolated from available information. f. The IC shall provide the yield curve and risk-free discount rate, and may change the sources of the yield curve when appropriate. 2. Non-guaranteed Benefits The level of non-guaranteed benefits under traditional life insurance policies to be valued, including policy dividends, shall be determined with due regard to the company's duty to treat its policyholders fairly and meet policyholders' reasonable expectations. The Actuary shall disclose the basis for the dividend scale. 3. Expenses a. The expense assumptions shall be based on the company's experience derived from its latest expense study. Otherwise, basis and justification of the assumptions used shall be provided. b. Suitable non-negative expense inflation rate shall be used. All projected expected expenses shall be recognized in the valuation process. 4. Mortality and Morbidity The mortality and morbidity assumptions shall be based on rates of mortality and morbidity that are appropriate to the nature of the risks covered based on the company's actual experience. If actual experience is not available or if the company's actual experience is inappropriate to be used, the basis and justification for the assumptions used shall be provided. 5. Lapse and/or Persistency The lapse and/or persistency rates reflective of the company's actual experience shall be taken as the best estimate lapse and/or persistency assumption, with due regard to changing company practices and market conditions. If lapse and/or persistency experience is not yet available, the basis and justification for the assumption used shall be provided. V. Margin for Adverse Deviation (MfAD) 1. Fixed margins for adverse deviations (MfAD) shall be used subject to a minimum of: a. Interest: +/-10% of discount rate. There shall be no MfAD if the yield rate is net of tax. b. Expense: 10% of best estimate expenses c. Other assumptions including but not limited to mortality, morbidity, lapse and conversion: +/-10% of best estimate assumptions 2. For mortality and lapse assumptions, the sign (positive or negative) of MfAD should be tested per group of products at the time of valuation. MfAD shall have the same sign for all durations per group of products. The product grouping shall be whole life, endowment and term. 3. For interest assumption, the sign (positive or negative) of MfAD shall be tested on the aggregate basis. 4. The MfAD on expenses shall be on expense components that are exposed to uncertainty. The commissions payable to agents/distributors and taxes may not be subject to MfAD. 5. The provision for adverse deviation or the additional reserves due to the MfAD for each component ( i.e. , expense, mortality/morbidity, lapse, interest) shall be non-negative. 6. Any change in the level of MfAD used shall be justified. VI. Actuarial Valuation Report 1. The Report on Actuarial Valuation of Life Insurance Policy Reserves shall follow the format and contain the minimum information set out in Annex A . The Actuary shall provide an analysis of the valuation results. 2. The Certifications to be provided by the Actuary and the Chief Executive Officer or responsible officer shall be duly notarized. VII. Application This set of Valuation Standards shall apply to all policies issued by life insurance companies and mutual benefit associations. ANNEX A Report on Actuarial Valuation of Life Insurance Policy Reserves Name of Company: _________________________ For the period ended dd/mm/yyyy Section A: Data on In Force Policies Describe the following: a. Steps taken to verify consistency, completeness and accuracy of data b. Adjustments made to the data and rationale for such adjustments Section B: Valuation Methodology 1. Describe the valuation method used 2. If methods used are different from those prescribed in this set of valuation standards, provide a detailed description of each method, including, but not limited to: HSAcaE a. Scope of application including policies/products covered b. How the method works including formula c. Disclosure of any approximation or simplification made d. Justification for the use of said method e. Document evidencing approval by the IC 3. Provide details of any change in the valuation methods used since the last valuation date and quantify impact of the change. Section C: Valuation Assumptions 1. State and provide justification for the key assumptions. 2. Disclose and justify any material change in assumption from the previous valuation and quantify the impact of each change. Section D: Margin for Adverse Deviations (MfADs) 1. State the MfAD used per assumption or parameter, and provide rationale if different from the minimum prescribed in this set of valuation standards 2. Provide justification for any change in MfAD used from last valuation date and quantify the impact of each change. Section E: Others 1. Document the extent of compliance with the requirements of this set of valuation standards and the reasons for non-compliance, if any. 2. Define terms and expressions used in the Report on Actuarial Valuation which may be ambiguous or subject to wide interpretation. Section F: Valuation Results The summary of the valuation results shall follow the format shown in Annex B. A written analysis of the valuation results shall be provided for in the report. Section G: Certification by the Actuary The Actuary shall provide a duly-notarized certification as set out below: "I hereby certify that I have conducted tests necessary to verify the reasonableness and integrity of the data, confirm that the information contained in this Report are accurate to the best of my knowledge and that I have calculated the policy reserves in accordance with the Valuation Standards prescribed by the Insurance Commission and the standards of practice of the Actuarial Society of the Philippines. _____________________________________ Signature over Printed Name of Actuary Date: ________________" Section H: Certification by the CEO or Responsible Officer The CEO/Responsible Officer shall provide the following duly-notarized certification: "I hereby certify that the database is properly maintained and I have satisfied myself that the data provided to the certifying Actuary are accurate and complete. _________________________________ Signature over Printed Name of Chief Executive Officer/Responsible Officer Date: ______________________" ANNEX B Actuarial Valuation Results Life Insurance Policy Reserves in Philippine Peso For the period ended dd/mmm/yyyy Summary of Valuation Results A. Impact of Change in Valuation Basis As of End of Prior Period As of End of Current Period Amount of Increase/(Decrease) (A) (B) (B) - (A) Traditional Variable Total Traditional Variable Total Traditional Variable Total Policy Reserves Before basis change (to be accomplished during the Transition Period) -1 Net Premium Valuation Reserves - - - - - with Cash Value Floor (NPV Reserves with CV Floor) -2 Net Premium Valuation Reserves - - - - - without Cash Value Floor (NPV Reserves without CV Floor) -3 Effect of the Cash Value Floor on - - - - - - - - - the Net Premium Valuation Reserves (1) - (2) After basis change -4 Gross Premium Valuation Reserves - - - - - with Margin for Adverse Deviation and with Cash Value Floor (GPV Reserves with MfAD with CV Floor) -5 Gross Premium Valuation Reserves with - - - - - Margin for Adverse Deviation but without Cash Value Floor (GPV Reserves with MfAD without CV Floor) -6 Effect of the Cash Value Floor on the - - - - - - - - - Gross Premium Valuation Reserves (4) - (5) -7 IMPACT OF BASIS CHANGE (4) - (1) - - - - - - - - - -8 IMPACT OF CV Floor on Reserves - - - - - - - - - from NPV to GPV (6) - (3) B. Impact of Change in Assumptions under Gross Premium Valuation (GPV) As of End of Current Period After Any Changes After Any Changes Prior to Any in Assumptions in Assumptions As of End of Prior Change in Amount of Except Discount Amount of Including Discount Amount of Period Assumptions Increase Rate Increase Rate Increase (A) (B) (B) - (A) (C) (C) - (B) (D) (D) - (C) Policy Reserves -1 Total Policy Reserves after - - - - - - - basis change (2) + (3) -2 GPV Reserves with MfAD with - - - CV Floor -3 Unearned Premium Reserves - - - -4 GPV Reserves with MfAD - - - without CV Floor -5 Impact of CV Floor (2) - (4) - - - - - - - -6 GPV Reserves without MfAD - - - without CV Floor -7 Impact of MfAD (4) - (6) - - - - - - - -8 Negative GPV Reserves - - - -9 GPV Reserves for - - - Non-Guaranteed Benefits and Policyholder Dividends Notes: 1 This summary shall be accompanied by the Actuarial Valuation Report and Actuarial Certification following the format set out in Circular Letter No. 2014-42-A (Annex A). 2 If there are no changes in assumptions except Discount Rate, reserves under column (C) should equal column (B). 3 If there are no changes in Discount Rate, reserves under column (D) should equal column (C).