Life Insurance Valuation
Interest Rate
Scott Gibson, FSA, MAAA
Lewis & Ellis Inc.
Actuaries and Consultants
(972) 850-0850
Lewis & Ellis Inc.
Important Facts About the
Standard Valuation and
Standard Nonforfeiture Laws
¾ Prescribe formulas for setting reserves and cash values
¾ Formulas include maximum interest rates indexed to Moody’s Corporate Bond Yield
Valuation Interest Rates
¾ Current valuation rate for long life contracts is 4.50%
¾ Last changed in 1995
¾ Formula for valuation interest rate uses the lesser of 36-month or 12-month average ending June 30 prior to the year of policy issue
Lewis & Ellis Inc.
Moody’s Corporate Bond Yields
Month Year Yield Month Year Yield Month Year Yield
7 2002 7.27% 7 2003 6.25% 7 2004 6.24% 8 2002 7.06% 8 2003 6.58% 8 2004 6.08% 9 2002 6.87% 9 2003 6.37% 9 2004 5.91% 10 2002 7.08% 10 2003 6.32% 10 2004 5.87% 11 2002 7.01% 11 2003 6.27% 11 2004 5.89% 12 2002 6.90% 12 2003 6.20% 12 2004 5.84% 1 2003 6.84% 1 2004 6.08% 1 2005 5.72% 2 2003 6.62% 2 2004 6.00% 2 2005 5.55% 3 2003 6.53% 3 2004 5.84% 3 2005 5.77% 4 2003 6.44% 4 2004 6.22% 4 2005 5.65% 5 2003 6.02% 5 2004 6.51% 5 2005 8.02%* 6 2003 5.85% 6 2004 6.42% 6 2005 8.02%*
Projected 36-Month A verage = 6.39% Projected 12-Month A verage = 6.21% Projected 2006 Long Life Valuation Interes t Rate = 4.00%
* M aximum A verage M oody's Corporate Bond Yield that would res ult in a reduction in the long life valuation interes t rate
Valuation Interest Rate Change
¾ A change will occur if the 12-month average Moody’s Corporate Bond Yield is less than 6.21%
¾ To avoid a change, Moody’s Corporate Bond Yield would need to average at least 8.02% for May and June, 2005
¾ Moody’s Corporate Bond Yields have not been this high since June 2000
¾ Therefore, we expect the long life valuation interest rate to drop to 4.00% for 2006!
Lewis & Ellis Inc.
Example Impact of Valuation Interest Rate
Change
Traditional Whole Life – Age 45 – Male Nonsmoker
4.50% Reserve & 5.75% CV 4.00% Reserve & 5.00% CV
ROE % Prem Breakeven ROE % Prem Breakeven
15.20% 6.05% 7.52 Yrs 11.34% 3.93% 12.07 Yrs
A 4.00% increase in the premiums are needed to reestablish profit margins
Deficiency Reserves
¾ Could occur on any plan where guaranteed gross premiums are set equal to the valuation net premiums using the 4.50% rate
¾ This results in deficiency reserves which can be sizeable
¾ Most likely to affect term plans, term riders and traditional life plans
¾ Deficiency reserves deplete up surplus and decrease profitability
¾ Universal life contracts with 4.50% guarantees could result in additional reserves
Lewis & Ellis Inc.
Nonforfeiture Values
¾ One year deferral on the maximum nonforfeiture interest rate changes
¾ Maximum 5.00% rate would not be required until 2007
¾ Nonforteiture values may now be required for previously exempt term products
Disability Income and Long-Term Care
¾ Changes in the long life valuation interest rate also affect disability income and long-term care reserves
¾ As under life contracts, the lower interest rate will increase reserves for these contracts, deferring the recognition of profits
¾ New reserve factors will be needed for business issued in 2006 and later
Lewis & Ellis Inc.
2001 CSO Mortality Table
¾ If products are repriced and refiled for a valuation rate change, should the new 2001 CSO Mortality Table be considered?
¾ Consider incorporating the 2001 CSO Mortality Table when repricing and refiling products
¾ Most states have now adopted the 2001 CSO Mortality Table. Remaining states should be onboard soon.
2001 CSO Mortality Table
States Adopted (WY Permitted) States Considering Adoption
Lewis & Ellis Inc.
Company Options
¾ Recompute reserve factors based on the new valuation rate. Do not adjust gross premiums or nonforfeiture values. Do not
incorporate 2001 CSO.
¾ Recompute reserve factors and gross premiums based on the new valuation rate. Do not adjust nonforfeiture values. Do not incorporate 2001 CSO.
¾ Recompute reserve factors, gross premiums and nonforfeiture values based on the new valuation rate. Do not incorporate 2001 CSO.
¾ Recompute reserve factors, gross premiums and nonforfeiture values based on the new valuation rate. Incorporate 2001 CSO.
Issues To Consider
¾ Product Margins and Competitiveness
¾ Surplus Strain and Statutory Earnings
¾ Administrative Systems
¾ Filing and Compliance Requirements
Lewis & Ellis Inc.