Mortality tables get out of sync over time as underlying experience changes. What was different with this CSO effort was the tremendous amount of change since the last tables were developed in 2001.
Those tables were based on industry experience from 1990-1995. Since then a remarkable shift in underwriting occurred as the industry moved to preferred and multiple preferred risk classes. Also since that time, there has been a shift in mix of business in the industry, moving away from permanent products to term plans. Over the past 20 years, we have also seen a sizeable increase in the average face amounts and more business issued at older ages. Lastly, early estimates of mortality improvement at older ages were too low. The resulting impact of all these changes are reflected in a change in the slope of the table.
But more importantly, we are experiencing fundamental changes in industry regulation: principles-based reserving (PBR), Actuarial Guidelines 38 and 48, to name a few. The 2017 CSO is different because companies have all these moving parts to deal with. There has been industry and regulator recognition for some time that new CSO tables were needed to better reflect the improved mortality from what was in the 2001 CSO. As far back as 2008, the group looked at the need for new CSO tables, but because principles-based reserving was coming, the industry and regulators decided to wait until PBR to update the CSO tables.
How has the data used to develop tables changed?
There was significant increase in the number of contributing companies and claims and policy exposures underlying the 2017 CSO over what was in the 2001 CSO. The 2017 CSO contained data from 51 contributing companies versus 21 in the 2001 CSO.
In addition to the overall increase in exposures, there was significant increase in the exposures for smoker/non-smoker distinct issues, business issued under a preferred risk program and female risks than what was underlying the 2001 table.
|||1980 CSO||2001 CSO||2017 CSO|
|# Companies' experience included||19||21||51|
|# Companies covered||10||17||36|
|Amount of data in underlying study |
|Exposure by amount||$0.77 trillion||$5.7 trillion||$30.7 trillion|
|Exposure by count||Not provided in report||175 million||266 million|
|Actual # claims||Not provided in report||1.25 million||2.5 million|
As data submissions move from a voluntary basis to mandatory with the adoption of the Valuation Manual, we expect future data submissions will be even more complete and allow for further mortality analytics for future CSO tables.
Once you have the data, how do all the involved parties work together to develop new tables?
Throughout development of any new tables there is discussion and debate. Most of the discussion centers on the level of prudence or how much margin to be built in as well as the structure of the margin. Regulators at the NAIC set the level and give direction to the industry committee. Then debate begins: what percent is too high, what is too low and a lot of discussion around the slope of the mortality table and resulting impact on reserves and non-forfeiture values across various product types and age groups.
What will be most affected by the new tables?
The impact of the new tables is company- and product-dependent. Not all companies will act on the new tables Day 1. The effect for each company depends on the path it chooses to take – when to implement the 2017 CSO, how many products to apply the new tables to, etc. The new tables can significantly lower the statutory reserves, but if a captive solution is already in place, the company may may not want to unwind that arrangement.
The 2017 CSO has a bigger reserve impact for certain ages, gender and risk classes, but the impact on each company depends on the company’s product set, business mix, older vs. younger issue ages and so on. Because the change is policy form-specific, companies may implement the new tables on some products and not others.
The biggest impact is on term reserves, but even the magnitude of the change depends on business mix. If a company has a lot of super-preferred whole life business with 45-year-old males, the company may not realize a big change in reserve requirements under the 2017 CSO. If a company’s term business has a large residual standard class and a lot of issues at younger ages, implementing the 2017 2017 CSO may lower reserves considerably.
Who in the company will be most impacted by implementation of the 2017 CSO?
Implementation of the 2017 CSO can create tremendous resource strain for a company, especially in light of other regulatory changes. The product development team, tax team, treasury, valuation, IT, financial reporting, compliance, contracting and others will be involved. For example, all products must be refiled with implementation of the 2017 CSO tables and may require new illustrations.
Companies need to look at implementation holistically as so many areas are affected. It’s not a low-cost effort to reprice and refile all products. Also, new product designs could come about due to PBR, so companies must evaluate how much to invest in refiling products due to the 2017 CSO when new product designs now may be on the horizon. The market disruption caused by the combination of the 2017 CSO and PBR could be significant. Companies will need to evaluate their capacity to navigate the disruption and competitive landscape throughout the implementation period against any reserve and capital considerations.
We expect to see an increase in reinsurance activity as well. A lot of new product pricing and re-pricing stalled with the introduction of AG48 and in anticipation of new mortality tables and pending changes to reserve requirements.
What is the most important consideration for companies preparing for 2017 CSO implementation?
Unlike the implementation of prior CSO tables, the timing of the 2017 CSO is tied to massive fundamental changes within the industry. Companies just finished with AG48. Quite a few companies – both large and small – just now are starting to focus on both the 2017 CSO tables and PBR and the various decision points around adoption/implementation of each. While some companies are testing the CSO tables, others simply do not have the resources right now to work on CSO or may just now be asking, "What is this?"
It is very difficult to disassociate the new tables with other regulatory changes underway. The benefit is that with more updated reserving tables -- all things being equal -- reserves will go down, capital requirements or the cost to finance redundancy in reserves will be lower.
While companies may delay implementing both the 2017 CSO and PBR for up to three years, new GAAP rules may also go into effect in or shortly after 2020, so there will continue to be a lot of competition for resources. Companies do not want to be implementing GAAP, PBR and the 2017 CSO all at the same time. The biggest risk is underestimating the resources needed to implement all the changes, in underestimating the disruption likely to take place as these fundamental changes occur.