クリティカルポイント・エピソード39：プリンシプルベースの責任準備金へのVM-20の利用：営業現場からの報告

VM-20の要件は、もはや仮定の話ではなく現実です。そして、生命保険業界のプリンシプルベースの責任準備金の積立に大きな影響があります。今回のクリティカルポイント・エピソードでは、専門家がどのように対応しているのかを伺います。Legal & General America社のMichael McCarty氏には元受保険会社の立場から、RGA社のLaiping Wong-Stewart氏には再保険会社の視点からお話しいただきます。また、ミリマンのアクチュアリーUri SobelとPaul Fedchakが加わり、前提条件の設定、ガバナンス・プロセス、および新たな規則に伴い発生したその他変更に関わる課題や成功体験について話を進めます。

アナウンサー：本ポッドキャストは、啓発のみを目的として一般的情報をお伝えするものです。特定の個人のいかなる状況を導いたり決定したりする意図はなく、具体的行動を起こす際には、有資格の専門家に相談してください。本ポッドキャストで示す見解は、スピーカー個人のものであり、ミリマンのものではありません。

Uri Sobel：皆様ごきげんよう。ミリマンがお届けするクリティカルポイントをご視聴いただき、ありがとうございます。ミリマンのUri Sobelがホストを務める今回のクリティカルポイント・エピソードでは、将来の仮定の状況からプリンシプルベースの責任準備金（principle-based reserving、PBR）の実際の要件となったVM-20に関する生命保険会社および再保険会社での経験についてお話します。

PBRについてミリマンがポッドキャストで取り上げるのは、2回目です。第1回目は、規制上のレビュープロセスに焦点を当て、プリンシプルベースの責任準備金積み立てのコンセプト全体について非常に簡単な紹介をしました。今回は、VM-20実施に関する経験について、課題と成功体験の両方について、複数の専門家からお話を伺えるので楽しみにしています。

本日のゲストは、Legal & General America社のMichael McCarty氏と、RGA社のLaiping Wong-Stewart氏、そしてミリマンのPaul Fedchak氏です。MichaelさんはL&Gの責任準備金評価担当VPで、元受保険会社の視点からお話しいただきます。LaipingさんはRGAのVP兼アクチュアリーで、再保険会社の視点からお話しいただきます。そしてPaulと私は、それぞれインディアナポリスとニューヨークを拠点として活動するミリマンのプリンシパル兼コンサルティングアクチュアリーです。本日は、コンサルタントとしての経験から話しを進め、コメントさせていただきます。本日は、質疑応答形式で、ゲストからVM-20の前提条件設定、ガバナンス、その他の課題やVM-20に関するアプローチについて直接的な経験をうかがう形式で進めていきたいと思います。まずはMichaelさんとLaipingさんに、それぞれLegal & GeneralとRGAでの役割について簡単に伺います。Michaelさんからよろしくお願いします。

The VM-20 requirement is no longer hypothetical—it’s here, and it’s had a big impact on principle-based reserving for the life insurance industry. In this episode of Critical Point, we hear how experts are coping. Michael McCarty from Legal & General America shares the direct carrier’s side, while Laiping Wong-Stewart from RGA brings the reinsurer’s perspective. They are joined by Milliman actuaries Uri Sobel and Paul Fedchak in a conversation about the challenges and successes surrounding assumption setting, governance processes, and other changes created with the new regulation.

Announcer: This podcast is intended solely for educational purposes and presents information of a general nature. It is not intended to guide or determine any specific individual situation, and persons should consult qualified professionals before taking specific action. The views expressed in this podcast are those of the speakers and not those of Milliman.

Uri Sobel: Hello and welcome to Critical Point, brought to you by Milliman. I'm Uri Sobel and I'll be your host today. In this episode of Critical Point, we're going to be talking about life insurers’ and reinsurers’ experience with VM-20 as it has moved from a hypothetical future state to a real-life requirement for principle-based reserving (PBR).

This is the second podcast Milliman has released on PBR. Our first focused on the regulatory review process and includes a great brief introduction to the whole concept of principle-based reserving. Today I'm excited that we're going to hear from a few experts who will share their experiences with VM-20 implementation, both challenges and success stories.

Joining us today are Michael McCarty from Legal & General America, Laiping Wong-Stewart from RGA, as well as my colleague Paul Fedchak from Milliman. Michael is the VP of valuation for L&G and brings the direct carrier perspective to the conversation. Laiping is VP and actuary for RGA and brings the reinsurer's perspective to the discussion. Paul and I are principals and consulting actuaries with Milliman, Paul in the Indianapolis office and I am in New York. Paul and I will be facilitating the discussion and adding comments from our own experiences as consultants. Our discussion today will be Q&A style, with questions designed to hear our guests' firsthand experiences with VM-20 assumption setting, governance, and other challenges and approaches to VM-20. I'm going to start just by asking Michael and Laiping to briefly tell us about your roles at Legal & General and at RGA. So Michael, why don't we start with you?

Michael McCarty: Thanks, Uri. Happy to be here today. Like you said, I am the VP of valuation at Legal & General America and all the legal entities that go with that. I'm also our PBR actuary, signing for those legal entities. My responsibilities cover all valuation bases at Legal & General America, across all of our business units. I’ve been involved with PBR for a number of years, active in a number of industry groups, and excited to be here today, so thanks for the invitation.

Uri Sobel: Laiping, please.

Laiping Wong-Stewart: Yes. I'm Laiping Wong-Stewart. Like Uri said, I work for RGA and I'm the qualified PBR actuary for RGA Traditional Life Business, VM-20, and my responsibility is usually related to assumption setting and valuation reserve calculation. And we have a large block of business that includes different direct companies, so I'm trying to see if we can bring some of the challenges and advantage of being reinsurers for the VM-20 discussion here.

Defining the mortality assumption

Uri Sobel: Fabulous. OK. I think we're going to dive straight into the substance, and whenever you read VM-20, the first thing you're going to come to when it comes to assumption setting is going to be your mortality assumption. So let's just open it up. Tell us some of the challenges in defining your mortality assumption. The best estimate assumption, your margins, et cetera. Anybody?

Michael McCarty: Sure. Happy to kick it off here, Uri. So when it comes to mortality and our best estimate assumption, PBR doesn't really change that. So we have everything rooted in our company risk assessments and the mortality assumption-setting process that has been in place predating PBR, postdating PBR. That's largely unchanged. We are not going to let the accounting standards influence our view of mortality. What PBR does do is add additional considerations to that; it adds a bit more complexity that we have to think through. So really, it's turned assumption setting from a company exercise into an additional consideration that now we have to make a document appropriately for a slightly different purpose. So that does bring about a bit of challenges with it as well as additional considerations that need to be made. I'd say for our company best estimate assumption, it's typically a Q3 exercise. This has turned our PBR assumption setting into a Q4 exercise. Once we evaluate the best estimate assumptions, we then need to take on additional considerations for PBR, so that does include additional discussions, additional governance, additional documentations, and unique circumstances with that.

Laiping Wong-Stewart: Yeah. So I guess as reinsurers, we do have a lot of client data we can use to form our credibility and mortality assumptions, but the biggest challenge with us is that we do have sometimes too much data. We're trying to isolate what is relevant and what is irrelevant for even not just VM-20 but best estimate assumption setting for other initiatives within the company. So one of the tools that was suggested or recommended to be used is the relative risk tool, which is required in the company to fill out basically the form for our preferred underwriting. So as reinsurers, we have so many different kinds of varieties of underwriting. It was very challenging to try to manage the forms. So what we ended up doing, at least with some discussion with the regulator, is we are not going to fill out those forms but instead trying to use the credible experience that we have on the book and trying to select the appropriate VBT, the 15 VBT Relative Risk Table. So from that angle, that on its own is challenging because there are so many different underwriting classes that can be specified under different clients. So we have to sort of map it out, what exactly we call super preferred underwriting, preferred underwriting, et cetera. From there, from that point, once we select the relative risk table that is appropriate for our business, that's when we start setting out different mortality assumptions on top of it, if we have to bring in different adjustments. And another challenge with our company is that, like I said, that we have so many different data with different clients, that the VBT table sometimes may not be the table that we want without further adjustment. So we have to kind of go into trying to think about what exactly we would like the table to be, if the slope is appropriate, and how it's going to reflect our new business as opposed to the legacy business. So that's a lot of different things that we can kind of work through, and that process took us quite a while to set up as well.

The nuances of accelerated underwriting

Paul Fedchak: I would add to that, Uri, if I have a moment, I think that from our consulting experience we've heard from direct carriers that similarly have issues with the RR tool, and it's not necessarily the tool itself but that their underwriting standards, especially in the modern age of accelerated underwriting, are changing in a way that their rules don't fit squarely into what that RR tool accepts and therefore can open it up to some interpretation in terms of how to best utilize that RR tool. And I think that also really lends itself to open the conversation on accelerated underwriting and how that plays into PBR assumptions in particular.

Michael McCarty: Absolutely agree, Paul. That is one of the focus areas for ourselves, and I do think a lot of the industry, like you said, is we're getting much more innovative, much more dynamic with how we underwrite both from a distribution perspective as well as just keeping the customer in mind, making things as efficient and easy as possible. And it does result in a lot of additional considerations. We can no longer rely on our traditional approach to, say, mortality assumptions, look at internal data to your credibility analysis. Now we've got to take into consideration these nuances associated with accelerated underwriting and different risk selection and what that brings about, so from a PBR perspective, it does have pretty clear language in the guidance. It says you must take into consideration these things, and you must do it in certain ways, so isolate the change in the underwriting, consider what additional adjustments are needed for mortality for that consideration, and then document it appropriately. Those are all things that I'd say companies typically do, ourselves included, really well. It's how we price the business. It's how we do our risk selection. But doing it in a way to kind of have it be a reasonable story for people who may not be as familiar with it does create a lot of challenges, create a lot of difficulties, probably create quite a bit of additional work. So what I've seen is it's just forcing in a lot of additional coordination between my team with the valuation side of the world, our pricing actuaries, our in-force management actuaries, and really comes at it from they can tell us, "Here is what this is supposed to be," and we can tell them, "Here's how we need to think about it," or, "Here's how we need to consider it for these purposes." And it gets to an end result that is hopefully reasonable. I'd say with where we're at now, those conversations have been really helpful. Documenting that story has really challenged us as a company to think through it more holistically and really bringing in the valuation perspective. Going forward, I do think we're going to have to—I don’t think “scale back” is the right word, but think about how to look at it for the entire block of business. It's easy enough to do with, here's one product, here's one accelerated underwriting. Let's have these really robust discussions. But now how do we think about that for two, five, 10 years of business, and it's going to change things when we go forward and it's going to have to be considered maybe in a little bit different light and a little bit more holistically than that specific application that's there right now.

Laiping Wong-Stewart: So yes, the accelerated underwriting definitely adds another complexity for the reinsurers because of the data being reported. For example, we could have direct company. They would be kind enough to identify the accelerated policy to us. Even with that, they have to be able to tell us what it is, like, between qualified and what is eligible and what comes through slippage. So that's a lot of things to consider for the reinsurance side. But some companies, they might not even have the capacity to identify the reinsurance data. That adds another challenging piece for us to try to figure out exactly how much percent of the fully underwritten business has the accelerated underwriting business reported within. So that's a lot of things going on just from the data itself, let alone for assumption setting, because I guess as an industry we don't have the credible experience just yet because it's relatively new, so everybody is trying to guess what exactly and how accelerated underwriting is going to pan out, so we have to add the uncertainty margin on top, and that turns into more of an art than a science sometimes.

Michael McCarty: I definitely agree. So it's taking not just, Here's our company's view of it, but how that may line up to other companies, the rest of the industry, and regulators' expectations around these types of things. And it's a lot to consider, a lot to think through, and a lot to document when you're getting to the "right answer" of what's an appropriate margin on top of an already complex approach for set mortality assumptions.

Paul Fedchak: And I think Laiping really touched on the key issue, which is credibility, and especially in an accelerated underwriting world that is a little bit of trial and error to figure out what is the right balance between straight-through and risk. It can be challenging each time you make a material change to the rules to think that you begin again from zero credibility, and it does seem like, from the companies that we’ve worked with, that companies are getting comfortable that you don’t go all the way back to square one on credibility. But at the same time, can you demonstrate that your past underwriting regimes translate in a way that you are starting from the same place in mortality, and perhaps just an additional margin is necessary to comfortably cover the uncertainty.

How reinsurers and direct carriers partner on mortality assumptions

Uri Sobel: Since we have both a direct writer and a reinsurer here, do you, Michael, ever talk to the reinsurers to help with that mortality assumption setting, given their large quantity of data? And Laiping, on the flip side, to what extent are you in touch with your direct writers to help you to make sense of all of that?

Michael McCarty: Yeah, definitely. And that's where it does kind of come full circle. Laiping was talking before about the challenges they have in getting data, and there are situations like this where we as the direct side definitely need to support them to help with that because—and we're going to be relying on them—because they're going to be a source of more credible information to support our assumption setting. So it's really an area where we have looked to, historically, especially early on in the accelerated underwriting, again predating PBR and all the things that that brings about, but looking to them as a coordinated partner in how should we be looking at this and what wealth of information do you have that we may not have accessible to ourselves given additional stakeholders, additional parties that they may have access to.

Laiping Wong-Stewart: Right. So I believe we do have a dedicated pricing team that they reach out to the client trying to understand about the underwriting requirements, and we do have admin folks that are trying to reach out to in regards to the data as well. So we're trying to hit it from different angles for sure.

The approach to setting lapse margins

Uri Sobel: That makes sense. OK. Moving on from mortality, the next assumption that I think of would be lapse assumptions. Setting the best estimate lapse assumption seems relatively straightforward, though I would be interested in everyone's perspective there. And in particular, though, I would be interested in hearing how you handle the less perfectly prescribed issue of setting your lapse margins.

Michael McCarty: Sure, I can kind of get us started here. I'd agree in theory that best estimate lapse assumptions are relatively straightforward in the sense that we have a lot of data. Where mortality can be a little thinner, lapse and company behavior, you often have a bit more data to base your assumption in, and so that does make it into a little bit more traditional exercise, still complex in itself, just anytime we’re talking about its credibility in statistical analysis it's going to be challenging. And I'd say some of the difficulties that can bring about with that amount of data is just often too much data. How detailed do you get? How low a level do you set that assumption for that? And I'd say over the years we have a pretty standard process. We do get fairly granular with our best estimate assumption setting. We do limit ourselves to making sure we do have a credible amount of information to set that. But it is something we can analyze and assess to make updates as we need to fairly frequently for the majority of the business that we look at as reasonably similar for that purpose. When you bring margins on top of that, it's kind of the same question: How low of a level of granularity do you set that margin? VM-20 does require you to kind of go one level below than where we may want to or where we have maybe historically looked to set that assumption in that it’s looking at is there going to be a change in the shape of the curve or change in the prudence, conservatism of the assumption, and so we’ve got to test that margin, not just how big it is but which way does it swing and, again, how detailed do you get with that, how low do you get with that? For our company right now, I'd say we're getting pretty granular. We have a pretty good expectation set up. When we developed PBR, we put a lot of time into this, put a lot of effort into it and made sure that we were complying very closely with both the words and likely the intent of what PBR was looking for us to do. And we set up that expectation and we have been maintaining it now for a couple of years. I do think there's going to be a point where we're going to have to take a step back and try to set that at maybe a higher level, just because it is getting to be a lot of data and we're just two years in. As we bring in more products, as we bring in more business, setting that up, analyzing it, getting it just right so it's making the direction of the margin go just right, is going to be even more and more cumbersome as we look to get that. So I do think there's areas there where we'll look to get smarter about it, look to get more efficient about it while also maintaining what the regulation requires us to do.

Laiping Wong-Stewart: Yeah, I agree with what Michael just said. Yes, lapse assumption is relatively easier than setting the mortality assumption, but in the past couple of years, because of the pandemic and the state regulations, I think all of you are probably aware that certain states allow expanded grace periods for insurance companies. That makes the lapse experience very different from what we have seen historically, so the bigger challenge nowadays is trying to figure out what is real and what is not real from a short-term versus a long-term perspective. Yes, COVID seems like it's going to last for quite some time, so do you want to reflect that lower lapse experience into what you are projecting out in the next few years? Or do you want to kind of completely ignore it? That's a big question out there in the industry.

The universal life perspective on margins

Paul Fedchak: And I would add to both Michael and Laiping's comments, I think Michael, you were focused largely on term and how the direction of the lapse margin may change at a certain point in time. Just to supplement that with some comments on UL products in particular, ones with secondary guarantees that are largely impacted by VM-20, I think the industry has gained a better understanding of the complexities of ULSG assumptions, especially late in the projection where we may not yet have experience. And while there is some prescription in VM-20 about how to approach ULSG lapses, in particular with respect to the Canadian Term to 100 Table, there is some complicated policyholder behavior that could happen out in model projections, in particular as part of best estimate assumptions. So I think trying to understand how that complicated policyholder behavior out in the tail should interact with the lapse margin is quite an issue for companies to tackle.

Michael McCarty: Appreciate that perspective, Paul. Definitely, I probably should have prefaced some of the background. We are very term-focused in my comments. The UL perspective is interesting just moving into policyholder behavior. It adds additional elements to it, which definitely turns into additional challenges with assumption setting and margin setting, and so definitely appreciate the perspective there.

Where the policyholder premium paying assumption fits in

Uri Sobel: I know you guys kind of touched on it, but it sounds like perhaps you don’t have a need to dig too deeply into your policyholder premium paying assumption. Is that true or is that something that you do dig into a bit?

Michael McCarty: For us, like I mentioned briefly, our core business is term life, the level term period, guaranteed premiums. There’s not optionality and there’s not policyholder behavior that need to be considered with those, so for that aspect of it we are not digging into much because there’s nothing to dig into there. But Laiping opened it up and started talking about the post-level period, and I know for us as a company that it continues to be, again, predating PBR and just from a company risk perspective, that’s a very large aspect of behavior that we consider. I don’t know if we necessarily look at it from a premium perspective and management action, but definitely the policyholder piece of it is something that we look at closely and monitor closely, even doing things well beyond what may influence PBR, largely because PBR is just the requirement of not allowing those post-level profits as Laiping had mentioned.

Laiping Wong-Stewart: Yeah. So for me, well, at least with RGA, most of our permanent products, which is, like, ULSG, et cetera, they’re falling under the non-guarantee YRT reinsurance agreement. So under VM-20, we’re still evaluating that as half CX. But if we do have a guarantee YRT policy that comes through, we do need to look at what we call the net amount at risk pattern. Which is, in terms we're presenting, part of the policyholder behavior because it's all driven by the fund value on a UL policy, as an example. So we sort of study it in that way without a lot of direct company information because we don't actually get the policyholder information per se, we get what is reported to us as the net amount at risk. So from there, we have to kind of do a different study to try to estimate the behavior in the future. So we have the information but not full information that we're trying to get on to the policyholder premium paying pattern.

Michael McCarty: On the direct side, it'd be the similar story on the YRT, so obviously the opposite direction from the reinsurers and the reserving credit there, but it has been interesting to see how that topic in particular evolved to non-guaranteed elements. I think a lot of the discussion around that from the industry, regulators...just everybody, was, with something like that (premium payments) a lot of management action around it, it led to a very wide range of results, a lot of it probably driven by, these are just complex agreements with varying parties involved, and individual circumstances can lead to different answers appropriately. But, with the prescription that got put in on those non-guaranteed YRT agreements, it definitely, I would say, reduced the amount of effort that was needed around those, again strictly from a PBR perspective, divorcing it from kind of company views and company risk assessments, but limited to one-half CX did significantly simplify that, and reducing the considerations that need to be made around it with the additional prescription that PBR brought about.

Paul Fedchak: I think when I see complexity around premium, it is, as I alluded to a bit earlier, about how policyholders behave later on in late policy durations and in particular with the UL products like Laiping had touched on. And I think one of the challenges that companies have is that, while the premium assumption can be material, generally speaking—not always, but generally related to the mortality—and the lapse assumption is not quite as material or as sensitive, the reserve is not as sensitive to the premium assumption. And then combined with that, what we see is that when you do have the data, you can dive into it and pick out some individual policies and pick up on trends on what those policies are doing, but then when you have a large block, trying to translate that behavior to what all of the policies are doing in total is quite challenging. And trying to figure out what should be done at a high level and what should be done at the individual policy level on that premium assumption, it can be quite challenging. So given the materiality issue, lapse and mortality tend to get more focus.

Michael McCarty: And not to mention all the things that Laiping brought up earlier; in just the environment we’re in with COVID, socioeconomic, inflation pressures, geopolitical considerations. You can understand your historical data all you want, but then how do you leap to OK, how's that going to translate to going forward. And that's a lot of the conversation now is, we have this wealth of data. We can dig into these singular policyholder transactions for how they behaved before. But is this the same world and what considerations need to be made there? And again, separate from PBR discussions and those specific nuances that that brings, but yeah, it's definitely been an entirely different evaluation for how we're thinking about things and being challenged to go well beyond what the scope of an actuary may be experienced or educated to accommodate. It's no more just purely statistical analysis but it now needs a much broader group to opine on these things.

Uri Sobel: Yeah. I don't think anybody foresaw, when they set the mandatory date of VM-20 to be for, you know, to be used for the first time mandatorily in 2020, I don't think anybody knew what that really was going to mean and how different the world would start to look basically in 2020 and forward.

Where VM-20 assumptions fit into companywide assumption-setting processes

Uri Sobel: Y'all have touched on this a little bit, but maybe dive a little deeper into how all of these assumptions that you're setting for PBR purposes, how does all that fit into your assumption-setting process at your companies generally?

Laiping Wong-Stewart: Internally, we do have different initiatives. Right now, another big initiative out there in the industry is LDTI. So we are required to set our best estimate assumption just like what we are doing with our PBR. It may be slightly different because the LDTI does impact the legacy block, and PBR supposedly is for new business. But there are certain assumptions that we were able to coordinate and share between the two different initiatives, and on top of that we do have, like, a plan that we have to develop assumptions for, which is very similar back to the best estimate assumption setting just like any other initiative that we have within our own company. So there are certain assumptions, yes, of course we could be able to manage across. But there are certain assumptions that it's more specific. Like for PBR, we have to come up with assumptions such as margin that may not be the same margin as LDTI or other best-estimate work that we're working on. So that would bring in, like, extra analysis on top of that. And of course from the governance perspective, we also have different governance requirements, but they are usually very similar, so the way we document assumption is pretty much consistent, but still you have certain things that are pretty unique, so we have to kind of take care of that in a different documentation process.

Michael McCarty: And I agree. And we're very similar in that we have our best estimate assumption, which much like everybody is a big focus for the company. I'd say it’s ongoing but a very focused annual process where we're going to document assumptions or views, any changes that go on. I kind of alluded to it earlier but our company focus is, Let's get that done in the Q3 timeframe in advance of year-end to make sure we have sufficient time prior to any year-end considerations. But what PBR has done is it’s translated it into its own bespoke assumption set for any of those nuances that need to be evaluated, and we typically try to do that now in Q4 because we really need to have the information that came out of our best estimate assumption-setting process. Any changes that came about from that, any new products that have been evaluated or implemented through the year, what are those best estimate assumptions. And we want to make sure, again, we're rooting that in that best estimate process that exists across the entire company. But then we create an additional document that says, "OK, here I have some nuances with PBR.” It’s lapse margins we talked about earlier. You know, we just changed our lapse assumptions, now we need to re-baseline those. Some of the accelerated underwriting considerations, we may need to assess that slightly differently now, with some specific, some loose guidance within the VM-20 requirements, so we may need to evaluate that a little differently. And we'll have a standalone paper that says, "OK, here are those things that came across your PBR throughout the year that require changes or just routine annual documents that will go through the same approval processes that our best estimate assumption does." So we really tried to, as much as possible, maintain the governance around it, even if it turned it into a new process under it, we're still evaluating those, reviewing them and approving them in a similar fashion as we would as best estimate assumptions.

Uri Sobel: Yeah, did you find any instances where the PBR sort of went in the opposite direction, which is to say, having the PBR assumption-setting requirements and the governance, did that actually affect how you were doing things for the other elements, the other uses of your assumptions and your models at the company; versus sort of what you were, I think what I was hearing from you, Michael, for example, was there's a Q3 process where we do all of our usual function-setting work and then PBR is sort of a tack-on to say, OK, in addition to that, we're going to do all this PBR work. I guess what I'm asking is, is there any element of either coordination ahead of time or where, because you knew or because of the work you were doing in PBR, it actually affected the assumptions at the rest of the company, or the other best estimate type work?

Michael McCarty: So I would maybe try to approach it two ways. So I'd say first, largely, no, is probably the overarching response. With that said, there are certain conversations that do happen early on well before it that I wouldn't necessarily say directly inform it, but they are going to be discussed well in advance of the best estimate assumptions being set. For example, we come up with a new product in a new market or a new distribution channel, and there's going to be probably more conversations with our pricing area on how to think about certain things and how they may want to price certain things because there is now that circular loop where they need to understand how we're going to evaluate that so they can build that into pricing. And there may be secondary effects where those types of conversations lead to impacts on assumptions or the economics of a product. But I would say to date we have kind of treated it more as a standalone requirement than, I don't want to say not fully integrated it in, but it's not going to largely influence a lot of the risk assessment we have with it.

Laiping Wong-Stewart: Yeah. I guess our goal ultimately is to be able to have consistent assumptions across different initiatives. But like I kind of alluded to earlier, we are dealing—we could be dealing with a legacy assumption, inforce policy assumption versus new business assumption, which was the PBR assumption. There's going to be some variance between the two just because of new underwriting versus old underwriting. They may not be under the same underwriting method, and for us as reinsurers, we could have a different kind of, like, a different distribution channel, different target market. They could change over time. Just like the new accelerated underwriting, it just came about a few years ago, it's really new. It's a lot more important for the new business because it's a big proportion of it from the PBR world; it might not be as big in the inforce world, but it's still an important assumption. But we kind of have to juggle and try to weight it in and see which way we should set the assumption to be appropriate for both sides and, at the same time, consistent as well.

The advantages and disadvantages of prescribed assumptions

Uri Sobel: As we know, there are lots of elements of VM-20 that prescribe our assumptions. There are both advantages and disadvantages to that. I am interested in hearing your perspective on how you approach or what is the impact on your processes, on your results, of having both some prescribed assumptions and some modeled, based-on-experience assumptions.

Michael McCarty: Yeah, and I do think we've touched on a number of them kind of littered throughout here because that is, when we get to the PBR nuances, that's really the crux of it is the intent of PBR: Here's your company. Here's your evaluation. Here's your view of risk. Model that out and that should be pretty consistent with what you see across the company in a lot of areas. But now when you start layering in prescription, it changes those views, changes those results, changes how you may view things. We touched on the PLT aspect of it. I'd say that's one of the biggest areas for our company is just understanding that and understanding how it may influence the PBR results. And with the prescription there, it definitely reduces I'd say the volatility and the impacts that we'd be seeing from a pure principle-based approach and best estimate setting. So it definitely is a consideration in how we look at things. It definitely is a financial assessment that we bring about with it that we have to look at slightly differently for those types of things. The other ones we talked about with the prescription are around the reinsurance YRT agreements, the lapse margins. And like you said, I think certain ones added a lot of complexity, like the directional aspect of the lapse margin and making sure you're evaluated there. It definitely forced companies to get down to a much lower level than maybe they thought necessary previously. But then it does simplify things, like we talked about, with the reinsurance YRT. I think if we just left it as, here is the company's discretion on how they set some of those levers or how they interacted with PBR and leave them to handle that, I think that's the simplest approach because you're doing that already. But the prescription that got added on simplified it. There is a range of things that could have made it even more complex with some of the options that were being considered, and if they prescribed it a different way it likely would have been a different story. But with where it ended, it definitely simplified things. It made it a lot easier. It made it a lot more stable. It made it a lot more understandable. And it definitely reduced the amount of documentation that may have been necessary under different approaches, so it definitely is seeing it both ways, as things that have added complexity to it and required additional consideration, but other areas that simplified it significantly, that made things a lot more consistent across the industry and a lot more understandable in how you present results.

Laiping Wong-Stewart: Yeah. I would say as a reinsurer, it's nice to have the prescribed mortality margin because it does depend on the credibility. Like when we calculate a Buhlmann credibility, for example, the reinsurer usually has the highest credibility. Which is very nice because we ended up holding the lowest margin for mortality. But I do believe that it's one element about it. And we kind of have to prove it to show that aggregate mortality is not lower than the cell-level mortality when we set the assumption. So there is an additional process we have to go through to prove that out.

Final thoughts on governance process and the landscape ahead

Uri Sobel: Before we go, just a general question: Is there anything about the assumption setting or governance process in relation to PBR and VM-20 that we have not touched on that you think our listeners should hear or understand?

Michael McCarty: Yeah, like you mentioned, we definitely focused a lot on assumptions, governance around that. The other areas for governance are just around the process controls and those types of areas, which has definitely been a very challenging thing to kind of assess as we go, identify opportunities for and those types of things. Because a couple years ago we were still developing PBR. I guess more than a couple years ago at this point. We built on this bespoke process. That's how our company approached it; new models, new processes, and in some ways that simplified a lot of the development. We are building something to address this. Now that we are in BAU from a governance and process perspective, that's added a whole new process to it. It's added a whole new chart to our process flows in governance and control structures that has created a lot of resource strain. It's definitely improved as we go. As we get better and better at it, it will go down, but I see that is definitely one of the big opportunities going forward from a process of governance perspective, is how do we better integrate that in. Over 30 years that'll resolve naturally as we get everything on PBR, and I'm sure there won't be significant changes at any point that will throw a wrench in that. But it does—something that probably gets the most attention for a lot of just things right now is how do we do this better, how do you it more efficiently. And going back to a lot of your questions, Uri, how do we integrate it into just core processes. And I'd say we're in the early stages. Two PBR reports under our belt, a lot more to come in the future, and we've definitely had a lot of areas of identification. But still a large undertaking going forward is, how do we improve this and how do we integrate it in and how do we have it not be so standalone but get it so we're not duplicating processes, controls, people, and a lot of those things. I'd say it's, for our company, it’s not something we’ve figured out yet, it’s something that we definitely look at as a long-term goal to continue evaluating in light of all the other changes going on. Laiping mentioned LDTI. We’re an international company and subject to IFRS 17. That’s changing a lot of things, and just being continual updates on other considerations, and have not even approached the VM-22 aspects and the changes that will bring. So I think that's a big part of it is, not necessarily having to wait for the dust to settle, but seeing how some of these things worked out, and there's a lot of opportunities there from a process governance perspective that we're looking to take advantage of and we're hoping is a big opportunity for us going forward.

Laiping Wong-Stewart: Yeah, like what Michael said, we are in the implementation space right now. And I know under the VM-20 it does say we're supposed to review the assumption every three years. However, with the pandemic, everything is changing fast and furious and we might not be able to wait for the three years to review all these different assumptions. That's another challenge that we're facing right now. And also, there could be, like, new products that are being introduced in the market, and as reinsurers, we have to be very proactive and try to figure out how to evaluate it and if we need to do modification to our assumption, or do we need to do modification to our actual calculation? There's a lot of things that could go on during the year that we have to take into account to get ready for the year-end reporting.

Paul Fedchak: I would expect that even once companies get beyond the point where they're comfortable with figuring out what needs to be done for year-end or quarter-end reporting, the next big frontier is going to be: As PBR reserves become more material on the overall balance sheet, how do companies invest time and resources, and understanding what that means moving forward. How do they expect assumptions to evolve over time? How do they expect to do their capital planning as PBR becomes a higher portion of their overall balance sheet? And really, what do those mean in terms of who drives that process? Is it the valuation team that is doing the year-end processes? Or is it happening elsewhere within the company?

Uri Sobel: So we have a lot to look forward to. That's great. Well, this does bring us up to the end of our time. I want to thank both of you, Laiping and Michael, for joining us. This was really great. To learn more about VM-20 and principle-based reserves, you can always visit Milliman.com. You've been listening to Critical Point, presented by Milliman. If you enjoyed this episode, rate us five stars on Apple Podcasts or share this episode with your colleagues, and we'll see you next time. Thank you so much.