Voya 2014 Annual Report Download - page 205

Insurance and Other Reserves
Reserves for traditional life insurance contracts (term insurance, participating and non-participating whole
life insurance and traditional group life insurance) and accident and health insurance represent the present value
of future benefits to be paid to or on behalf of contract owners and related expenses, less the present value of
future net premiums. Assumptions as to interest rates, mortality, expenses and persistency are based on our
estimates of anticipated experience at the period the policy is sold or acquired, including a provision for adverse
deviation. Interest rates used to calculate the present value of these reserves ranged from 2.5% to 7.7%.
Reserves for payout contracts with life contingencies are equal to the present value of expected future
payments. Assumptions as to interest rates, mortality and expenses are based on our estimates of experience at
the period the policy is sold or acquired, including a provision for adverse deviation. Such assumptions generally
vary by annuity plan type, year of issue and policy duration. Interest rates used to calculate the present value of
future benefits ranged from 1.0% to 8.3%.
Although assumptions are “locked-in” upon the issuance of traditional life insurance contracts, certain
accident and health insurance contracts and payout contracts with life contingencies, significant changes in
experience or assumptions may require us to provide for expected future losses on a product by establishing
premium deficiency reserves. Premium deficiency reserves are determined based on best estimate assumptions
that exist at the time the premium deficiency reserve is established and do not include a provision for adverse
deviation.
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 that are measured at estimated fair value separately from the host contract. These embedded
derivatives include annuity GMAB, GMWB, GMWBL, FIA 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. After
inception, 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.).
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