Session 38, Practical Assumption Governance
Moderator:
Leonard Mangini FSA, MAAA
Presenters:
Robert B Crompton FSA, MAAA
Matthew J Wininger FSA, MAAA
Session 38
Practical Assumption Governance
Regulatory Perspective
MATTHEW WININGER, FSA, MAAA
AVP, MassMutual Financial Group Inc.
2015 Valuation Actuary Symposium - August 31 2015
Disclaimer
I am a member of the ASB Life Committee; however,
any statements, representations, and expressions of
opinions or views that I make are attributable only to
me and should not be construed as representing the
views of the ASB or my employer.
Assumption Governance
Stakeholders
Internal Stakeholders
Colleagues who use, approve, or rely upon
actuarial models and governance, generally:
• Corporate Actuarial
• Enterprise Risk Management
• Actuarial functions such as pricing, risk
management, and valuation
• CFO for valuation, capital planning, and
financial forecasting
• Board of Directors Risk and Audit
Committees
External Stakeholders
•
•
•
•
•
•
Regulators
External auditors
Counterparties
Reinsurers
Credit rating agencies
Equity analysts
… and those who rely upon
your work or representation
about actuarial results.
Internal and external auditors review assumption governance.
Regulatory Drivers in the US and
Canada
NAIC Adoption of ORSA
Solvency II
OSFI
Principles-Based Reserves
ASOP 46 and others
PCAOB
ORSA and Solvency II use the ‘three lines of
defense’ concept in their design.
An ORSA principle requires each Company use the
assumptions stated in their self-assessment when
managing specific risks.
Solvency II also uses the three lines of defense
concept. Compliance with Solvency II requires
reducing silos between business functions.
OSFI requires actuarial model review and
governance, including assumption governance.
OSFI expects assumptions receive period evaluation
and refresh under certain conditions.
Regulatory Drivers in the US and
Canada
NAIC Adoption of ORSA
Solvency II
OSFI
Principles-Based Reserves
ASOP 46 and others
PCAOB
PBR increases regulators’ expectations about the
timeliness of assumption evaluation and the
thoroughness of their review. VM-31 requires
documenting the rationale for assumptions and
modeling methods.
Assumption governance is an integral part of a PBR
readiness assessment.
ASOP 46 requires more specific disclosures about
assumptions: see section 4.1.5.
PCAOB practice alert 11 influenced external audit
firms to increase audit of management review
controls. Assumption review and approval is
generally a key control for life insurers.
Actuarial Standards of Practice
relating to Assumption Governance
The redesigned ASB website is helpful to determine which ASOPs apply and which
proposed or exposed ASOPs may indicate future requirements.
ASOP 1 – Intro standard
ASOP 2 – Nonguaranteed elements
ASOP 7 – Analysis of cash flows
ASOP 10 – US GAAP methods and assumptions
ASOP 12 – Risk classification
ASOP 17 – Expert testimony
ASOP 21 – Assisting auditors and examiners
ASOP 22 – Asset adequacy opinions
Actuarial Standards of Practice
relating to Assumption Governance
ASOP 23 – Data quality
ASOP 24 – Illustration model regulation
ASOP 25 – Credibility
ASOP 38 – Use of models outside your area of expertise (P&C)
ASOP 41 – Communication
ASOP 46 – Risk evaluation in ERM
ASOP 47 – Risk treatment in ERM
ASOPs exposed for discussion and/or discussion drafts include Modeling, Life &
Annuity Pricing, Capital Adequacy, and Principles-Based Reserves.
Internally-Driven Requirements
Effective Practices
New Demands
New Opportunities
US actuaries generally have effective assumption governance practices for projects
which historically required them: cash flow testing, valuation, and illustration
regulatory compliance.
Assumption governance is critical for DAC unlocking and loss recognition. Tail-driven
modeling such as capital management, economic capital, risk limit testing, and
reinsurance can greatly benefit from assumption governance.
Meeting external requires can create benefits for internal stakeholders, for example:
• Assumption clarity and consistency helps manage complexity
• Pricing and product management is facilitated by effective assumption governance.
Internally-Driven Requirements
Effective Practices
New Demands
New Opportunities
Assumption governance can be useful for competitive analysis and leveraging ‘big
data’ to create business insights.
Assumptions may reflect implicit choices about actuarial methodology. Inconsistent
actuarial methodology complicates assumption governance.
Assumption governance supports, and is supported by, modeling governance and clear
responsibility assignments.
Strong assumption governance may result in better modeling of Company forecasts
about future economic conditions, expense allocation, tax incidence, etc.
Questions for Discussion
1.
Consolidation: If a single person at your organization manages
assumption governance rather than a committee, what benefits do
you experience and do they outweigh the key person dependencies?
Questions for Discussion
1.
Consolidation: If a single person at your organization manages
assumption governance rather than a committee, what benefits do
you experience and do they outweigh the key person dependencies?
2.
Coordination: What practices do you use to assess whether
assumptions are ‘fit for purpose’ when there is more than one
purpose?
Questions for Discussion
1.
Consolidation: If a single person at your organization manages
assumption governance rather than a committee, what benefits do
you experience and do they outweigh the key person dependencies?
2.
Coordination: What practices do you use to assess whether
assumptions are ‘fit for purpose’ when there is more than one
purpose?
3.
Convincing: What benefits beyond the requirements to external
stakeholders convince a skeptical audience of assumption
governance’s value?
Questions for Discussion
1.
Consolidation: If a single person at your organization manages
assumption governance rather than a committee, what benefits do
you experience and do they outweigh the key person dependencies?
2.
Coordination: What practices do you use to assess whether
assumptions are ‘fit for purpose’ when there is more than one
purpose?
3.
Convincing: What benefits beyond the requirements to external
stakeholders convince a skeptical audience of assumption
governance’s value?
4.
Complements: If assumption governance is working well at your
organization, what practices are necessary or helpful complements?
Actuarial Resources
Research: SOA research report Actuarial Modeling
Controls (12/2012)
Academy of Actuaries Discussion Papers:
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•
•
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Materiality (2006)
Selection and Application of Models (2006)
Principles/Practices in Developing Practice Areas (2004)
Relationship to Users of Work Product (2003)
Precept 13 – Material Code Violations (2013)
Practical Assumption
Governance
Session 38
Practical Assumption Governance
Management Perspective
LEONARD MANGINI, FSA, FRM, FALU, MAAA
President, Mangini Actuarial and Risk Advisory LLC
2015 Valuation Actuary Symposium - August 31, 2015
Liability Disclaimer, Copyright, Use of Slides
Although I’ve attempted to capture the letter and spirit of the Code of Conduct, ASOPs, and
Qualification standards faithfully- you have a personal professional duty to familiarize yourself with the
original source material and apply professional judgment as to its specific application to your own work
and those working under your direction as you perform covered Actuarial Services.
None of the content in this presentation is intended to be legal or professional advice or an Actuarial
Opinion by the Society of Actuaries, Leonard Mangini, or Mangini Actuarial and Risk Advisory LLC.
The nature of your work, and other professional designations you hold, may require you to be bound
by additional professional requirements from other professional organizations as well.
Much of the original source material on Professionalism is copyrighted material of the American
Academy of Actuaries. This presentation paraphrases these for educational purposes to capture the
intent of the standards, and every attempt has been made to identify and cite original sources.
These slides may NOT be copied, redistributed, or otherwise furnished to any party without the prior
written consent of Mangini Actuarial and Risk Advisory LLC, other than as may be required to comply
with an audit of the attendee’s annual CPE compliance
2015 Val Act- Session 38
.
Mangini Actuarial and Risk Advisory LLC
August 31, 2015
Overview
• Corporate View of Assumption Governance
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One Version of “The Truth”?
Is “The Truth” Current?
How does your company Learn/Adapt?
Reporting and Controlling Inputs and Results
Establishing a Risk Culture
• Evolving Standards and Guidance
• Moving Towards Reproducibility
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Five Questions
Regarding
Governance
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Q1: Do you have “One version of the truth”?
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Q1: Do you have “One version of the truth”?
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•
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How do you define terms, risk measures/metrics?
Are methods standardized across business units?
How are roles and responsibilities assigned?
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Q1: Do you have “One version of the truth”?
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How do you define terms, risk measures/metrics?
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Are methods standardized across business units?
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Risk Dictionaries define terms and concepts, risk measures, metrics
If not, is this on purpose? Are you trying to harmonize?
How are roles and responsibilities assigned?
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Does senior management ask same questions to different units?
Does this produce different answers?
Do you frequently have to explain why answers don’t match?
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Q2: Is “The Truth” Current?
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Q2: Is “The Truth” Current?
• How often are assumptions refreshed?
• What/Who drives assumption resetting?
• How stale are underlying experience studies?
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Q2: Is “The Truth” Current?
• How often are assumptions refreshed?
• What/Who drives assumption resetting?
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Valuation/Reporting?- quarterly for IFRS, annually for CFT?
Planning and Forecasting?- annual Budget/Plan, intra-year forecasts?
Pricing?- Illustration Actuary, Non-Guaranteed Element Setting
Risk Management/Corporate?- mandatory calendar-based schedule?
Risk-based triggers?- credibility, experience drift?
Ad-hoc?- Global Financial Crisis, Macroeconomic Shocks, DAC-unlocking?
• How stale are underlying experience studies?
• Are this year’s model assumptions unchanged because actuals haven’t changed?
• What are the true “experience periods” that underlie your assumptions?
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Q3: How does your company “Learn/Adapt”?
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Q3: How does your company Learn/Adapt?
• How are best practices generated within the organization?
• How do they spread?
• How do evolving methods and best practices enter into the
organization from the outside?
• How do IT/Technology constraints impact implementation?
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Q3: How does your company Learn/Adapt?
• How are best practices generated within the organization?
• Are business units allowed to experiment?
• How does Corporate/Management evaluate quality?
• How do they spread?
• Does Corporate/Management actively facilitate communication between
business units and the spread of best practices?
• If a business unit excels in internal audit is copying encouraged?
• How do evolving methods and best practices enter into the
organization from the outside?
• Do business units or Corporate or both do environmental scanning?
• Are business units allowed to experiment by copying things that they see work?
• How do IT/Technology constraints impact implementation?
• Do you wish you could change assumptions but practically can’t?
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Q4: How are assumptions monitored and
impacts of changes reported and stored?
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Q4: How are assumptions monitored and
impacts of changes reported and stored?
• Do you have standardized templates and reports for the
experience review and assumption setting process?
• Do you have standardized methods for measuring and
aggregating the impacts of assumption changes?
• What kind of data repositories store assumptions, their
“freshness” and results/metrics of impacts of assumptions?
• How is this process controlled?
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Q4: How are assumptions monitored and
impacts of changes reported and stored?
• Do you have standardized templates and reports for the experience
review and assumption setting process?
• Does Corporate facilitate compliance by providing business units with clear guidance and tools to
standardize reporting: spreadsheets, documents, databases to fill in?
• Do you have standardized methods for measuring and aggregating the
impacts of assumption changes?
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Order of inforce roll-forward, update macro economy, PH behavior, revise assumptions, calculate $ impacts
How/Who ensures apples to apples are being calculated in aggregated results?
• What kind of data repositories store assumptions, their “freshness” and
results/metrics of impacts of assumptions?
• Central repository where anyone finds current assumption, last study date, next study date
“experience window”, refinements desired but not done, $ impact of X% change in input?
• How is this process controlled?
• Are assumption repositories “locked”, SOX compliant, and safe from cyber-attack?
• Business unit managers actively sign off assumptions reviewed for staleness/ appropriateness?
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Q5: How is risk culture fostered at your firm?
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Q5: How is risk culture fostered at your firm?
• Clearing the Path: Does Senior Management make processes and
controls clear and relatively painless to comply with?
• Top-Down: Are there clear mandates “top of the house”?
• Bottom-Up: Do front-line staff in business units have a stake in suggesting
and then implementing improvements?
• Accountability: Are performance ratings/compensation tied to “topdown” compliance and “bottom-up” own-use?
• Open Door: Do you shoot the messenger?
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Summary of
Existing ASOP
Principles
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Compliant Data Analysis/Modeling Considerations
• Qualified for Project? CE Compliant for SAOs? Teammates? Staff?
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Compliant Data Analysis/Modeling Considerations
• Qualified for Project? CE Compliant for SAOs? Teammates? Staff?
• Do you have quality data?
• Relevant, Historic/Current, Comprehensive, Scenario-Coherent, Credible?
• Budget time/people? Relying on others to compliantly check/validate?
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Compliant Data Analysis/Modeling Considerations
• Qualified for Project? CE Compliant for SAOs? Teammates? Staff?
• Do you have quality data?
• Relevant, Historic/Current, Comprehensive, Scenario-Coherent, Credible?
• Budget time/people? Relying on others to compliantly check/validate?
• Are you building a model or using one?
• Do you have a plan to test/validate basic model? Sensitivity Test?
• Enough homogeneous data to “hold back” for testing?
• Relying on others to compliantly check/validate?
• Are non-actuaries building/servicing model? Experts? State-of-Art?
• Is the model locked down, version control, secure?
2015 Val Act- Session 38
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Compliant Data Analysis/Modeling Considerations
• Qualified for Project? CE Compliant for SAOs? Teammates? Staff?
• Do you have quality data?
• Relevant, Historic/Current, Comprehensive, Scenario-Coherent, Credible?
• Budget time/people? Relying on others to compliantly check/validate?
• Are you building a model or using one?
• Do you have a plan to test/validate basic model? Sensitivity Test?
• Enough homogeneous data to “hold back” for testing?
• Relying on others to compliantly check/validate?
• Are non-actuaries building/servicing model? Experts? State-of-Art?
• Is the model locked down, version control, secure?
• How do you plan to adjust inputs/parameters for bias? Margins?
2015 Val Act- Session 38
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Compliant Data Analysis/Modeling Considerations
• Qualified for Project? CE Compliant for SAOs? Teammates? Staff?
• Do you have quality data?
• Relevant, Historic/Current, Comprehensive, Scenario-Coherent, Credible?
• Budget time/people? Relying on others to compliantly check/validate?
• Are you building a model or using one?
• Do you have a plan to test/validate basic model? Sensitivity Test?
• Enough homogeneous data to “hold back” for testing?
• Relying on others to compliantly check/validate?
• Are non-actuaries building/servicing model? Experts? State-of-Art?
• Is the model locked down, version control, secure?
• How do you plan to adjust inputs/parameters for bias? Margins?
• How are you documenting data, models, adjustments, biases, issues?
2015 Val Act- Session 38
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August 31, 2015
Compliant Data Analysis/Modeling Considerations
• Qualified for Project? CE Compliant for SAOs? Teammates? Staff?
• Do you have quality data?
• Relevant, Historic/Current, Comprehensive, Scenario-Coherent, Credible?
• Budget time/people? Relying on others to compliantly check/validate?
• Are you building a model or using one?
• Do you have a plan to test/validate basic model? Sensitivity Test?
• Enough homogeneous data to “hold back” for testing?
• Relying on others to compliantly check/validate?
• Are non-actuaries building/servicing model? Experts? State-of-Art?
• Is the model locked down, version control, secure?
• How do you plan to adjust inputs/parameters for bias? Margins?
• How are you documenting data, models, adjustments, biases, issues?
• Are you communicating in a way tailored to Principal/Intended Users?
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Q6: How are you preparing for new ASOPs?
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Pending Modeling
Actuarial Standard of Practice
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Pending Modeling ASOP- Status
• ASOP38- motivated by P&C Cat models and non-actuarial experts
• 2010 ASB asked Life Committee to begin work on ASOP for All Models
• December 2012 ASB created two Task forces- one for General Models in
all practice areas and another to update ASOP 38 for Catastrophe Models
• General Model ASOP 2nd Exposure Nov 2014, Comment Deadline Over
• Not Yet Adopted
• Will be effective for work performed 9 months after adopted by ASB
• Revised ASOP 38 Cat Modeling (all practice areas) released concurrently
Source: American Academy of Actuaries Website
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Modeling ASOP- Scope
• ASOP applies to selecting, designing, building, modifying, developing,
using, reviewing, evaluating models when performing Actuarial Services
• “Using a model” includes using the results of a model
• Applies to all forms of models in all practice areas
• Section 3.1 deals with models where results are not heavily relied upon
or do not have material financial effects- acknowledging that in those
circumstances not all guidance is necessary or practical
• As usual has a Section 4 for departures to comply with law or for any
other reasons to be explained and disclosed by the actuary
Source: American Academy of Actuaries Website
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Modeling ASOP- Reliance On Others
• Model built by colleague/vendor- may limit ability to understand model
• Actuary should make reasonable effort given the project objective to have a
basic understanding of the model, including:
• Intended application, general operation
• Major sensitivities and dependencies within model
• Key strengths and limitations
• If part of modeling team, should either personally confirm or may reasonably
rely on others who have confirmed applicable guidance followed
Source: American Academy of Actuaries Website
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Modeling ASOP- Model Structure
• Actuary should evaluate whether structure of model is appropriate for
intended purpose. Considerations should include, where appropriate:
• Which provisions and risks specific to a business segment, contract, or plan are
material and appropriate to reflect in the model
• Whether grouping model inputs will produce reasonable results
• Whether use of model requires a particular level of granularity
• Whether deterministic, stochastic results, or both are needed, AND
• Whether projection of future results might be materially influenced by choices and
options available to the entity being modeled in whole, part, members, counterparts
Source: American Academy of Actuaries Website
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Pending Modeling ASOP- Model Risk
• Should use reasonable/appropriate model risk mitigation- validation, governance, controls
• Nature and degree of validation should be consistent with complexity, intended purpose
• Should use governance and controls to maintain integrity, avoid unintended changes
• Validate each model run/set of runs relied on by intended user
• Reconcile model input to actual data- documenting material differences
• Check formulas, logic, tables- depending on context, controls, changes
• Test against historical actual results, where applicable
• Depending on project objective, should
• Perform analytic tests on model results for reasonableness
• Reconcile against prior runs if change assumptions, data, formulas- keep reconciliation
• Run tests of variations on key assumptions and parameters to ensure run consistently
• Compare results to alternative models
• If appropriate, obtain reasonableness peer review of input, construction, model results
Source: American Academy of Actuaries Website
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Pending Modeling ASOP- Documentation
• For model results used in Actuarial Communications actuary should
document nature of data used, material Assumptions and Parameters
• Follow ASOP 41 Sections 3.4.1 and 3.4.2 even if NO report created
Source: American Academy of Actuaries Website
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Pending PBR
Actuarial Standard of Practice
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Pending ASOP on PBR- Status and Scope
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2nd Exposure June 2014, comment deadline is over, Not Yet Adopted
Effective for work performed starting 4 months after adopted by ASB
Under VM-20, company, NOT actuary responsible to regulators for compliance
BUT one or more qualified actuaries is responsible to senior management of
company for overseeing calculation of PBR and signing PBR Actuarial Report
• Actuarial Services performed by actuary on behalf of life insurer or fraternal
• Only reserves where company experience used to extent in assumptions or cash flow models
• Developing or opining on principles based reserves for life insurance subject to VM-20 where such
reserves are represented by actuary as being in compliance with Dec 2012 SVL/Valuation Manual
• ASOP frequently refers actuary back to specific text of VM-20 to avoid duplication
Source: American Academy of Actuaries Website
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Pending ASOP on PBR- Validation/Assumptions
• Section 3.4 of ASOP has detailed static and dynamic Model Validation requirements including
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•
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granularity, historical back-testing, scenarios
consideration over controls, model changes, assumption changes, refreshing stale data
scenario-dependent assumptions and dynamic policyholder behavior and management actions
• Points actuary to ASOP 23 and ASOP 25 for assumptions, VM-20 Section 9 for grading to industry tables
• Requires consider reasonableness of assuming range PH behavior constrained to historical outcomes
• Requires considering policy values/optionality from policyholder view
• Requires margins to anticipated experience for estimation error and moderately adverse deviations
Source: American Academy of Actuaries Website
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Q7: Do you use Reproducible Data Analysis?
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The Future is Now:
Reproducible Data Analysis
Literate Programming
Big Data in Valuation
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Reproducibility/Communication of Results
• Common practice- inefficient validation and compliance
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Considerable time/effort to manually document
Data, Analysis, Reports typically separate documents/processes
Relink documents for changes? Version control?
Non-standard data formats and proprietary storage
Different tools, platforms, sources:
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Policy Admin Files , Reinsurance Transactions
Actuarial Projection Software, EXCEL, SAS, SQL/DBs, PowerPoint/Word etc.
• Complicates Supervisor/Peer Review, Internal/External Audit,
Responding to Regulators, ORSA/ERM- manual reconstruction
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Reproducibility Tools
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Actuarial Analyses too complicated to “replicate” as in physics experiment
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ASOPs in a nutshell- require “reproducibility” not exact replication
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Free Tools such as R, Python, Octave can permit high power data analysis and
machine learning while fostering “reproducibility”
•
YouTube Video, Prof. Roger Peng, Johns Hopkins on Reproducibility of Analytic Work:
https://www.youtube.com/watch?v=DfBSiOupI1I
•
Another excellent (25-minute) video from Prof. Roger Peng on using knitr for
literate statistical programming in R-Studio/R environment can facilitate:
http://www.r-bloggers.com/literate-statistical-programming-with-knitr-creating-reproducible-analysis-in-r/
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Q8: Do you use Big Data Data in Valuation Assumptions?
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Q8: Do you use Big Data Data in Valuation Assumptions?
• Have you considered using Reproducible Data Techniques for Governance?
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Questions?
[email protected]
mobile: 516-418-2549
Session 38
Practical Assumption Governance
Review of Current State
BOB CROMPTON
Director, KPMG
2015 Valuation Actuary Symposium - August 31, 2015
Disclaimer
Any statements, representations, and expressions of opinions or
views that I make are attributable only to me and should not be
construed as representing the views of my employer.
None of the content in this presentation is intended to be legal or
professional advice or an Actuarial Opinion by the Society of
Actuaries, Robert Crompton, or KPMG LLP.
Assumption Governance – Why?
Increasing
Centralization
Insurance companies are moving to increased centralized control
in order to have a coordinated and rationalized approach to
increasing scrutiny from all stakeholders
Increasing
Scale
Increasing scale results in greater challenges in coordinating and
optimizing all the moving parts
Increasing
Complexity
Increasing complexity results in the need for a wider set of
inputs for determining all critical assumptions
Regulatory
Requirements
Certain levels of governance are becoming increasingly expected
by regulators
Where Is Current Practice?
Enterprise Level
Business Unit Level
Product-Type Level
Product Level
Plan Code Level
Some Leading Practices
Leading practices tend toward more centralization & formalization
Assumption
Committee
Assumption Life
Cycle
Formalized
Summary &
Presentation
Assumptions reviewed by a committee of senior executives.
Typical makeup might be CFO/CRO/Chief Actuary
Assumptions are reviewed according to a pre-determined
schedule. The schedule may be based on a stipulated time
frame, specific experience thresholds or some combination
There is a standardized information packet that is provided for
Committee review.
Some Leading Practices (Continued…)
Articulated
Rationale for
Choices
Effective
Documentation
Coordination
With Model
Governance
The rationale for best estimates as well as for PADs
Documentation that allows comparison between products, lines
of business, provides the rationale for assumption selection,
discusses best estimates and appropriate PADs
Assumption governance is not independent from model
governance
Special Situations
Loss
Recognition
Loss recognition situations often require reconsideration of all
significant assumptions and their likely glide-path into the future.
The resulting assumptions will diverge from the previous best
estimate of the future
Mergers /
Acquisitions
Acquisition of a block of business or company requires
consideration of experience developed outside the company and
the effects of bringing it inside the company
Reinsurance
Many reinsurance arrangements call for careful consideration of
assumptions and experience
Questions for Discussion
1. What developments or events at your company led to
your current state of assumption governance?
________________________________________________________________________________________________________
2. Are there any pressures in your company to move the
level of governance up to the next tier in the hierarchy?
______________________________________________________________________________________________________
3. How have you managed the trade-off between flexibility
at the operational level and the need for coordination at
the Enterprise level? What practices compliment
assumption governance?
__________________________________________________________________________________________
4. What are some practices that you have found to be
particularly effective in communicating assumptions to
the governance body?
Questions for Discussion (Continued…)
5. How do you ensure a unitary message on
assumptions in communications with external
stakeholders?
________________________________________________________________________________________________________