Voya 2013 Annual Report Download - page 186

Product Guarantees
The assumptions used to establish the liabilities for our product guarantees require considerable judgment
and are established as management’s best estimate of future outcomes. We periodically review these assumptions
and, if necessary, update them based on additional information that becomes available. Changes in, or deviations
from, the assumptions used can significantly affect our reserve levels and related results of operations.
GMDB and GMIB: Reserves for annuity GMDB and GMIB are determined by estimating the value of
expected benefits in excess of the projected account balance and recognizing the excess ratably over the
accumulation period based on total expected assessments. Expected experience is based on a range of scenarios.
Assumptions used, such as the long-term equity market return, lapse rate and mortality, are consistent with
assumptions used in estimating gross revenues for the purpose of amortizing DAC. In addition, the reserve for
the GMIB incorporates assumptions for the likelihood and timing of the potential annuitizations that may be
elected by the contract owner. In general, we assume that GMIB annuitization rates will be higher for policies
with more valuable (more “in the money”) guarantees.
GMAB, GMWB, GMWBL, FIA, Stabilizer and MCG: We also issue certain products that contain embedded
derivatives and are measured at estimated fair value separately from the host contract. These embedded
derivatives include annuity GMAB, GMWB, GMWBL, FIAs and Stabilizer. The managed custody guarantee
product (“MCG”) is a stand-alone derivative and is measured in its entirety at estimated fair value. Changes in
estimated fair value of these derivatives are reported in Other net realized capital gains (losses) in the
Consolidated Statements of Operations.
At inception of the GMAB, GMWB and GMWBL contracts, we project a fee to be attributed to the
embedded derivative portion of the guarantee equal to the present value of projected future guaranteed benefits.
The estimated fair value of the GMAB, GMWB and GMWBL contracts is determined based on the present value
of projected future guaranteed benefits, minus the present value of projected attributed fees. A risk neutral
valuation methodology is used under which the cash flows from the guarantees are projected under multiple
capital market scenarios using observable risk free rates. The projection of future guaranteed benefits and future
attributed fees require the use of assumptions for capital markets (e.g., implied volatilities, correlation among
indices, risk-free swap curve, etc.) and policyholder behavior (e.g., lapse, benefit utilization, mortality, etc.).
The estimated fair value of the FIA contracts is based on the present value of the excess of interest payments
to the contract owners over the growth in the minimum guaranteed contract value. The excess interest payments
are determined as the excess of projected index driven benefits over the projected guaranteed benefits. The
projection horizon is over the anticipated life of the related contracts which takes into account best estimate
actuarial assumptions, such as partial withdrawals, full surrenders, deaths, annuitizations and maturities.
The estimated fair value of the Stabilizer and MCG contracts is determined based on the present value of
projected future claims minus the present value of future guaranteed premiums. At inception of the contract, we
project a guaranteed premium to be equal to the present value of the projected future claims. The income
associated with the contracts is projected using actuarial and capital market assumptions, including benefits and
related contract charges, over the anticipated life of the related contracts. The cash flow estimates are projected
under multiple capital market scenarios using observable risk-free rates and other best estimate assumptions.
The GMAB, GMWB, GMWBL, FIA and Stabilizer embedded derivative liabilities and the stand-alone
derivative for MCG include a risk margin to capture uncertainties related to policyholder behavior assumptions.
The margin represents additional compensation a market participant would require to assume these risks.
The discount rate used to determine the fair value of our GMAB, GMWB, GMWBL, FIA and Stabilizer
embedded derivative liabilities and the stand-alone derivative for MCG includes an adjustment to reflect the risk
that these obligations will not be fulfilled (“nonperformance risk”). Through the second quarter of 2012, our
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