Session 49, Assumption Governance and Management – Advantages of a Formal Assumption
Process Framework
Moderator:
Jeffrey R Lortie FSA, MAAA
Presenters:
Maria Itteilag
Danielle Rose Kuhn ASA, MAAA
Assumption Governance
and Management
Advantages of a Formal
Assumption Process Framework
Maria Itteilag
Danielle Kuhn, ASA, MAAA
Society of Actuaries – 2015 Valuation Actuary Symposium
September 1, 2015
Challenges Impacting Insurers
What is driving the opportunity for a change in an insurer’s approach for
managing and setting actuarial assumptions?
Macro Challenges
‫‏‬
• Changing regulatory
requirements
• Increased auditor requests
• Multiple stakeholders
• Low interest rate
environment
2
Micro Challenges
‫‏‬
• Too much time spent
reconciling assumptions
and addressing questions
on differences
• Ability to reproduce results
over time
• Explaining why changing
assumptions now
Copyright © 2015 Deloitte Development LLC. All rights reserved.
Opportunity to Optimize Process
What needs to be aligned to best optimize the assumption setting
process?
3
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Interested Parties in Assumptions
Who are the key stakeholders interested in assumptions and why?
4
Interested Parties
Concern
Assumptions
CFO / Finance
•
•
GAAP financial accuracy
Earnings stability
•
•
GAAP best estimate
Financial plan (e.g. sales)
Appointed Actuary
•
•
Solvency
Statutory compliance
•
•
Cash Flow Testing
Prudent best estimate (e.g.
AG 43)
Pricing Executive
•
Profitability
•
New business
Chief Actuary
•
Overall compliance and
accuracy
•
All actuarial
CRO / Risk
•
•
Statutory capital compliance
Risk mitigation and tail risk
•
•
Economic capital
Embedded value
CAO / Controller
•
•
Compliance
External auditor
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A Framework for Setting Assumptions
What activities make up a good assumption setting process?
Identify
Assumptions
Sensitivity &
Risk
Assessment
Assumption
Setting
Governance
Experience
Monitoring
Experience
Studies
Industry
Monitoring
5
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Committee Structure for Assumption Setting
What is a possible committee structure?
Executive Committee
Executive
Committee
Sponsorship
Committee(s)
Operational
Working
Group(s)
Supporting
Roles
6
CFO
CAO/Controller
CRO
CIO
Sponsorship
Committee
Appointed Actuaries
LOB - Chief Actuary
LOB - Valuation Lead
LOB - Pricing Lead
LOB - Forecasting Lead
LOB - ALM Lead
Assumption Strategic
Guidance
Assumption
Oversight
Operational
Working
Group
Chief Actuary
Chief
Actuary
Valuation
Lead
Valuation
Pricing
Lead Lead
Assumption
Owners
Pricing
Forecasting
LeadLead
Documentation
Owners
/ Steward
Forecasting
Lead
ALM
Lead
ALM Lead
LOB
Representation
Assumption
Delivery
Supporting Roles
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Polling Question
Do you have chartered committee(s) with representation from
actuarial and non-actuarial functions across the organization
to review, challenge and approve assumptions?
1. No committee(s) in place
2. Yes, committee(s) in place with actuarial representation but
with limited representation from non-actuarial functions
3. Yes, committee(s) in place with representation from
actuarial and non-actuarial functions (e.g. risk, finance, etc.)
7
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Defining Roles and Responsibilities
What are the key roles and responsibilities of the committees?
Executive Committee
• Provides direction for defining approach to setting companywide assumptions
• Grants final approval all assumptions proposed
Sponsorship Committee
• Ensures consistency and alignment of assumptions
• Reviews, challenges, and approves assumptions proposed
by Operational Working Groups
• Communicates and releases official approved assumptions
8
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Defining Roles and Responsibilities
What are the key roles and responsibilities of the committees?
Operational Working Group
• Discuss and agree on differences across model purposes and
propose any assumption changes
• Propose Best Estimate Assumptions to the Sponsorship
committee(s)
Supporting Roles
• Conduct experience studies
• Recommend assumptions to the Operational Working Group(s)
based on experience studies
• Quantify and implement assumption changes
9
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Deeper Dive into the Assumption Setting
What are the major activities for the following assumption
setting process step:
Identify
Assumptio
ns
Sensitivity
& Risk
Assessmen
t
Assumptio
n Setting
Governance
Experience
Monitoring
Experience
Studies
Industry
Monitoring
Identify Assumptions
 Develop assumption inventory by product the universe of
assumptions
 Identify and document variations between the Business
Function specific assumptions
10
Copyright © 2015 Deloitte Development LLC. All rights reserved.
Deeper Dive into the Assumption Setting
What are the major activities for the following assumption
setting process step:
Identify
Assumptio
ns
Sensitivity
& Risk
Assessmen
t
Assumptio
n Setting
Governance
Experience
Monitoring
Experience
Studies
Industry
Monitoring
Sensitivity Testing
 Identify sensitivities to be performed
 Perform sensitivity testing to understand and prioritize
best estimate assumptions
– Identify sensitivity tests performed outside of the
actuarial assumption setting process
– For new sensitivity tests, identify testing parameters
and update models to determine the financial impact
11
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Polling Question
Do you consider a range around your single best estimate
assumption?
1. Sensitivities are performed and documented for all material
assumptions to produce a range around the single best
estimate
2. Sensitivities are only performed and documented on an as
needed basis
3. Sensitivities are only performed on an as needed basis but
results are rarely documented
12
Copyright © 2015 Deloitte Development LLC. All rights reserved.
Deeper Dive into the Assumption Setting
What are the major activities for the following assumption
setting process step:
Identify
Assumptio
ns
Sensitivity
& Risk
Assessmen
t
Assumptio
n Setting
Governance
Experience
Monitoring
Experience
Studies
Industry
Monitoring
Assumption Significance
 Classify the riskiness of the best estimate assumptions
and Business Function specific assumptions by line of
business and product
 Define assumption risks as low, normal or significant,
documenting justification for rankings
13
Copyright © 2015 Deloitte Development LLC. All rights reserved.
Deeper Dive into the Assumption Setting
What are the major activities for the following assumption
setting process step:
Identify
Assumptio
ns
Sensitivity
& Risk
Assessmen
t
Assumptio
n Setting
Governance
Experience
Monitoring
Experience
Studies
Industry
Monitoring
Experience Studies
 Determine formal experience studies to perform each
year
 Execute experience studies in line with company policy
 Perform data validation and reconciling the underlying
data
 Communicate experience studies results to stakeholders
 Create documentation supporting experience studies
developed
14
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Polling Question
Does your organization consistently follow an experience
study policy that outlines the company’s experience study
methodology and schedule?
1. Actuarial functions / LOB’s create studies independently as
needed without following a policy
2. Actuarial functions / LOB’s create studies independently as
needed under the guidance of a formalized policy
3. A centralized group is responsible for all experience studies, but
a policy with formalized standards and schedules is limited or
does not exist
4. A centralized group is responsible for all experience studies with
the schedule and standards documented in a formalized policy
15
Copyright © 2015 Deloitte Development LLC. All rights reserved.
Deeper Dive into the Assumption Setting
What are the major activities for the following assumption
setting process step:
Identify
Assumptio
ns
Sensitivity
& Risk
Assessmen
t
Assumptio
n Setting
Governance
Experience
Monitoring
Experience
Studies
Industry
Monitoring
Industry Monitoring
 Monitor published industry studies and notifying key
stakeholders when new studies become available
 Identify industry data to leverage in assumption setting
process
 Monitor regulatory actions and tax law changes that might
warrant a review of current assumptions
16
Copyright © 2015 Deloitte Development LLC. All rights reserved.
Deeper Dive into the Assumption Setting
What are the major activities for the following assumption
setting process step:
Identify
Assumptio
ns
Sensitivity
& Risk
Assessmen
t
Assumptio
n Setting
Governance
Experience
Monitoring
Experience
Studies
Industry
Monitoring
Experience Monitoring
 Monitor trends in policyholder behavior and material
movements in rates such as interest rate/credit
spread/asset defaults each quarter
 Identify material product design and pricing design
changes
 Track policy or process changes and identifying any
qualitative items
17
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Polling Question
Do you document your comfort with assumptions ever quarter,
regardless if they are updated or not?
1. Material assumptions are reviewed (e.g. trend analysis,
A/E’s, etc.) and documented every quarter
2. Material assumptions are reviewed (e.g. trend analysis,
A/E’s, etc.) every quarter but documentation supporting
comfort with assumption is only captured once a year
3. Assumptions are only reviewed and documented once a
year during the annual assumption setting process
18
Copyright © 2015 Deloitte Development LLC. All rights reserved.
Deeper Dive into the Assumption Setting
What are the major activities for the following assumption
setting process step:
Identify
Assumptio
ns
Sensitivity
& Risk
Assessmen
t
Assumptio
n Setting
Governance
Experience
Monitoring
Experience
Studies
Industry
Monitoring
Assumption Development
 Develop assumptions and validating them with experience study
results and other relevant industry experience
 Recommend and present proposed assumptions to committee(s) for
review, challenge and approval
 Document and store rationale supporting decision to update or keep
current assumptions
 Communicate company-wide assumption updates to key functions
 Implement the approved assumptions in modeling environment and
perform final testing in the QA environment
 Release new production models with all reviewed and approved
assumption updates
19
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Committee Interaction for Assumption Development
What is the committee interaction during assumption development?
 Executive committee has
final authority on
assumptions
Develop Assumptions
Timeline (e.g. July – August)
Review,
iterate and
approval
Governance
Sponsorship
Committee(s)
Operational
Working
Group(s)
Supporting
Roles
20
 Sponsorship
committee(s) are
responsible for reviewing,
challenging and approving
assumptions in addition to
communicating companywide assumptions to
Business Functions
Approve final
assumption
Executive
Committee
Propose
assumption
change
Develop and
recommend
assumption
Gain
committee
approval
Publish
assumption
release memo
 Operational working
group(s) are responsible
for proposing assumption
changes to the
Sponsorship committee(s)
Review and
iterate
Quantify
financial
impact
(testing
environment)
Implement
final
assumption
in QA
environment
Release new
production
models
 Supporting roles are
responsible for developing
assumptions, implementing
in models and quantifying
results
Copyright © 2015 Deloitte Development LLC. All rights reserved.
Recap of Assumption Management Trends
 Regulatory and Audit Requirements – Assumption management should take
into consideration changing regulation and auditor requirements
 Assumption Governance – Assumptions should be consistently defined and
governed using a consistent framework across the organization
 Assumption Development – Assumptions should be reviewed, approved and
challenged by committees with representation from all Business Functions; the
concert of assumptions should be reviewed instead of assumptions in isolation
 Experience Studies – Experience studies should be actively managed across
Business Functions using a consistent source of data
 Documentation - Developed assumptions and corresponding rationale should
be stored in assumption repository center allowing for easy replication and
understanding in future
21
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‫‏‬
Copyright © 2013 Deloitte Development LLC. All rights reserved.
Member of Deloitte Touche Tohmatsu Limited
Assumption Governance and Management
DRAFT - Proposed Reserve Adjustments
Q3 2014
Jeffrey R. Lortie, FSA, MAAA
Society of Actuaries – 2015 Valuation Actuary Symposium
September 1, 2015
Confidential: Privileged Attorney-Client Communication
23
The Resolution Life Story (to date)
Resolution Life is a private specialist U.S. life insurance company
— Our mission is to build a substantial, diversified and lasting life insurance company.
— Our focus is providing excellent policyholder service and delivering sustainable
financial results to our investors within a well-controlled risk framework.
Resolution Life took ownership of Lincoln Benefit Life (“LBL”) on April 1, 2014 for
approximately $600m
— 350 thousand policyholders and $13 billion of assets
Breadth of product types
— Traditional Life, Universal Life, Deferred Annuities, Long-term Care
Ongoing business relationships
— Reinsurance in place with Allstate for a portion of life insurance block
— Retrocession in place (Allstate to Prudential) for VAs
In latter stages of transitioning retained business onto our administrative platforms,
valuation systems, etc.
Confidential: Privileged Attorney-Client Communication
24
Resolution Life’s Actuarial Management Structure
Board of Directors
Management Risk Committee
Actuarial Balances Committee (ABC)
Non-Guaranteed Elements
Committee
Voting Members: President, CFO,
CIO, Appointed Actuary
Voting Members: Chief Legal
Officer, CEO, ABC
Non-Voting Members / Supporting Staff
Corporate, Capital Management, ALM, Valuation, Modeling, Product Management, ERM
The establishment of a governance framework to manage critical actuarial analysis and
decision-making, set forth by high-level policies, and supported by repeatable procedures, was
immediately identified as a critical need of the organization.
Confidential: Privileged Attorney-Client Communication
25
Actuarial Balances Committee
Duties and Responsibilities
— Review at least annually: Comprehensive review of actuarial assumptions,
review of detailed experience studies, unlocking of actuarial assumptions for
modelling or other purposes
– Plan, CFT, Dividend Projections, Valuation, GAAP/PGAAP
— Review at least once per quarter: Life rate setting, Annuity rate setting,
Experience updates
— Review periodically as needed: Model changes, Controls, Reserve
actions/changes, Updates on special projects
Process
— Meetings conducted monthly, with set agenda
— Prior meeting minute approval / update on previously-identified action items
— Discussion of current topics
— Active approval from voting members explicitly sought
Informed Parties
— Audit Committee of the Board (Quarterly)
— Nebraska Department of Insurance (As needed)
Confidential: Privileged Attorney-Client Communication
26
Resolution Life’s Assumption Setting Framework
Primary Order of Activities
2. Experience
Monitoring
1. Identify
Assumptions
/ Sensitivity
& Risk
Assessment
4. Experience
Studies
5. Best
Estimate
Assumption
Setting
(ABC)
(ABC)
3. Industry
Monitoring
Additional Influences
— Asset Adequacy Results, ORSA
— Stress Testing and Capital Management
— Macro-economic conditions
— Regulatory Changes
Though a primary order of activities exists under the governance structure, other factors and
analysis may impact the process.
Confidential: Privileged Attorney-Client Communication
27
Activity 1:
Identify Assumptions / Sensitivity & Risk Assessment
An exhaustive set of assumptions is established for each product as
part of the acquisition process (i.e., appraisal), and defines the initial
benchmark for experience
— Mortality, Longevity, Lapse / policyholder behavior, Morbidity, Claims
1
2
4
5
3
Appraisal contains sensitivities that can highlight key risks
— Can help identify key assumptions that have large risk exposures
— Helps ERM actuaries define meaningful stress tests
— Provides insight to Appointed Actuary for Cash Flow Testing
Risk assessment is continually informed by ongoing analysis
— Asset Adequacy Analysis, Stress Testing, ORSA
— Results help re-focus company on risk exposures
Determine frequency of experience studies (determined formally by ABC)
— Some quarterly, some annual, some triennial, etc.
– Life mortality, annuity lapses: annual
– Mortality for annuitizations: scheduled for 2017
— Regulatory changes and business mix shifts may adjust frequency
Confidential: Privileged Attorney-Client Communication
28
Activity 2:
Experience Monitoring
Experience monitoring is the development of a series of indicators to
monitor actual experience to expected between formal experience
studies, primarily to serve as an early-warning system for deviations and
possible assumption updates
1
2
4
5
3
Formal process performed monthly using controlled data
— Valuation supplies Account Value Rollforward
— Corporate Actuarial provides Claims Experience
More focus is put on deviations in results during the experience monitoring process and
may lead to assumption updates prior to full experience study
Assumption
EIA Lapses
MVA Lapses
Post-acquisition
experience
As of 8/31/2014, YTD 2014 lapses were running higher than expected for EIA and MVA
Rationale
Adverse experience was expected to
continue and a factor was applied to
appraisal assumptions to project higher
future lapse rates for EIA
It was determined that the resulting
adverse experience was from contracts
coming to the end of their initial 5-year
guarantee period
Decision
Increase lapse rates
No change to lapse rates
Confidential: Privileged Attorney-Client Communication
29
Activity 3:
Industry Monitoring
Evaluate published industry studies for consideration in experience
study analysis
— Enhances analysis of company experience
– Post-acquisition experience is only now beginning to emerge
and cannot yet be used on a standalone basis to produce a
meaningful experience study
– Challenges could be encountered to obtain appropriate
historical data from seller
– Industry experience can be used as a guide in reviewing and
setting assumptions
– Annuitization mortality, post-level term experience
1
2
4
5
3
Also conduct independent informal surveys
— Dynamic lapse formula
Monitor regulatory action, which could impact how studies are
conducted, and which studies are conducted (VM-20, VM-22)
Confidential: Privileged Attorney-Client Communication
30
Activity 4:
Experience Studies
Evaluation of detailed data, interim experience monitoring, and
industry-wide considerations to create a proposed best estimate
assumption that will serve as a baseline for many actuarial activities
1
2
4
5
3
Performed on a set schedule established by ABC (required by Insurance
Risk Guideline) unless experience emerges significantly differently and
dictates a change to the schedule
Data scrubbing / validation can be time-consuming
— Data acquired as part of transaction
— Need to understand the data before using it for anything
Proposal provided to ABC after completion of study and related analysis:
— Written communication
– Definition of data used and current assumption
– Summary of experience
– Incorporation of other factors (industry data)
– Proposed changes (if any)
– Financial impacts (if any)
Confidential: Privileged Attorney-Client Communication
31
Activity 5:
Assumption Setting
Written communication is submitted to ABC for review and challenge
1
All discussions regarding actuarial assumption review are documented
through ABC meeting minutes.
— Challenges documented through meeting minutes, as well as follow-up
— Decision to update or not update assumptions are documented and then
communicated to all functional areas
2
4
5
3
Approval given for best estimate assumptions and adjusted as needed for other
purposes
— Appointed Actuary may adjust for Asset Adequacy Analysis
Change management
— Documentation of approval in ABC minutes and approval of those minutes
— Assumptions based upon revised best estimates are tested and implemented
for official use in actuarial models
— Subject to additional function-specific change management
– X Factors (Internal Controls over Financial Reporting)
– Premium Persistency (Model Risk Management Guideline)
Confidential: Privileged Attorney-Client Communication
32
Thank you!
Confidential: Privileged Attorney-Client Communication
33