Section E: NGEs

Question 1

What does NGEs do not cover?

Answer 1

They do not cover dividends paid out on participating policies, where they calculated based on the policyholder’s share of the profits.

Question 2

What necessitated the need for NGEs?

Answer 2

• High and volatile interest rate environments in the 1970s-80s
• Substantial improvement in mortality (but unsure if it would continue)
• Variable experience
• Non-insurance products offering better rates

All of these necessitated a need for flexible product design.

Question 3

What are the primary sources of actuarial guidance on NGEs?

Answer 3

• ASOP 2: NGEs for Life Insurance and Annuity Products
• Life Insurance Illustrations Model Regulation
• Universal Life Insurance Model Regulation

Question 4

What are different examples of NGEs?

Answer 4

• Crediting rates
• Premium loads and other expenses (subject to guaranteed maximums)
• COI charges (vary by class) - subject to max rates to comply with SNL and tax law
• Index parameters - ex. cap/par rates
• Nonguaranteed bonuses
• VA rider charges
• Indeterminate premiums - trad products with guaranteed/nonguaranteed premium scales

Question 5

What are considerations the pricing actuary must consider when setting NGEs?

Answer 5

• Expected mortality
• COI charges
• Policy loan and expense charges
• Basis for credited interest (will investment yields sufficient to cover credited interest and other costs) or (use of new money vs. portfolio method for setting credited rates)
• Experience studies and sensitivity testing

Question 6

When can NGEs be revised?

Answer 6

If experience doesn’t align with anticipated experience factors (AEFs) set in the original pricing

Question 7

What is the scope of ASOP 2?

Answer 7

It gives guidance on initial and subsequent determination of NGEs for individual life and annuity products with NGEs.

Question 8

What is the NGE framework under ASOP 2?

Answer 8

A combination of:
1. Company’s determination policy = insurer’s governing principles/objectives to determine NGEs
2. Methods used by the insurer to define its policy class
3. Any relevant criteria/principles used to determine NGEs

Question 9

What are two regulatory framework for life insurance illustrations involving NGEs?

Answer 9

Model 582: NAIC Life Insurance Illustrations Model Regulation
ASOP 24: provides guidance on complying with Model 582

Question 10

What is the Basic Illustration in Model 582?

Answer 10

Basic illustrations to include a summary of DBs, policy values, and premium outlays under 3 bases:
1. policy guarantees
2. insurer’s illustrated scale
3. insurer’s illustrated scale (but with reduced NGEs to show a conservative projection of policy values)

This is sent to all applicants for policies marked with an illustration

Question 11

What are common practical issues when revisiting NGE scales?

Answer 11

• Original product pricing not often available or sufficiently detailed
• ASOP 2 NGE framework - paperwork
• Experience data challenges
• No industry standard for evaluating changes in NGE anticipated experience factors (ASOP 2 is not prescriptive)
• Insurers may face litigation no matter what
• Implementation challenges

Question 12

What are additional regulations in NY?

Answer 12

New York Regulation 210 is more prescriptive and requires the following:
- Max time between NGE reviews can’t exceed 5 years
- Formal documentation of NGE determination policy
- Various reinsurance specifications
- Waiting period for filings and disclosures to policyholders

Question 13

What is the disciplined current scale?

Answer 13

The DCS is a scale based on the insurer’s recent historical experience and cannot project improvements in experience nor make experiences lesser than the minimum required set by 582.

The illustrated scale is capped at the DSC, as it is the max illustrated rates allowed.

Question 14

What is the self-support test (SST)?

Answer 14

It is a test on the CSV where it only passes if at every illustrated point on the 15th anniversary and later, the accumulated policy cash flows >= illustrated CSV.

This test is to demonstrate that the policy can support itself without additional money elsewhere.

Question 15

What is the lapse support test?

Answer 15

It is also a test like the SST that proves that the NGEs can still be supported even without surrenders. In Years 1-5, use the same lapse rate as the SST. In years 6 and beyond, assume 100% persistency (0% lapse).