I wonder how common it is for a life insurance company to try to keep its liabilities at a higher (older) valuation interest rate so that it has a higher RBC ratio overall?
For example, when a deferred annuity matures and it used to be under the 83 IAM 6.5% standard on Exhibit 5 of the annual statement, but the policyholder wants to renew the policy under new terms, does it stay under that valuation standard? Or does it switch over to the currently applicable standard for newly issued policies? Can someone please point me to the regulation on that?
Valuation rate requirements are based on issue date. On reissue/revision, it’s fuzzy. The company could decide, but might be overruled by the domiciliary state insurance department.
Interesting! How is the state regulator informed on what policies are valued under what standard? The annual statement seems very sparse on this kind of information. Or is there a revision process and some private conversations between company and regulator?
Changes in reserve basis show up as separate statement items (but there are too many situations to cover them with annual statement instructions); Academy practice notes might give guidance. Private conversations with the regulator are usually preferable to waiting for awkward questions on the financial exam. Having the domiciliary state on board usually means the other states will accept the decision.
I have a hard time imagining a situation where a state regulator might disallow a higher reserve basis. They’re usually happy to see reserves larger than minimum required.
That being said - I’m not sure if I follow the idea that a higher reserve creates a higher RBC ratio. The larger the reserves, the less Surplus (a smaller numerator). In addition, larger reserves => larger C3 component in the RBC calculation ( a larger denominator). ==> lower RBC %
@Hip_tiger I checked many Exhibit 5as and they are usually empty, so there are few valuation standard changes reported. Thanks for the tip, the notes are very good. But it could find anything about reserve valuation of a “maturing” or “rolled-over” policy.
@Ranger I used the wrong term: I meant the valuation interest rate, so the 6.5% in the example is a discount rate. I changed the original post! A higher rate means more discounting and less reserve value. I agree with your assessment, except I do not see how C3 - Interest Rate Risk increases with reserves. Maybe you meant C2 or C4? Or I am out-of-date, then I would appreciate a good reference.
Your original post makes a lot more sense now. I think I now fully understand your question.
I think in your follow-up question, you’re really asking about the actual C3 risk and whether it reduces if the annuity reserves are larger. In reality, this might be very true. In the real world, larger reserves reduce the actual C3 exposure.
I believe the source our confusion is; I was responding to the RBC calculation in which the C3-component is just a percent of the annuity reserves (i.e. 2.63%). In the RBC calculation, larger reserves create a larger C3-component.