Session 27 PD, Improving Your Actuarial Memorandum
Moderator:
Thomas A. Campbell, FSA, CERA, MAAA
Presenters:
Michael E. DuBois, FSA, MAAA
Linn K. Richardson, FSA, CERA, MAAA
Andrew J. Rarus, ASA, MAAA
27PD: Improving Your Actuarial Memorandum
Andy Rarus, CT Ins. Dept.
Link Richardson, AIG Life & Retirement
Mike DuBois, MassMutual Tom Campbell, ARC, Moderator
Monday, August 25, 2014 1:30 – 3:00 PM
Disclaimer
• These comments are our personal views and
should not be construed to represent the views
of our organizations, the American Academy of
Actuaries or the Society of Actuaries.
2
Session Overview
•
•
•
•
Academy Discussion Group Report
Case Study: Links in 2013 Memos
Other Areas of Improvement
Questions
3
Academy Discussion Group Report
• Overview
• Activities
• March 2014 Report
4
Academy Discussion Group - Overview
• Designed to improve communication of key
issues with respect to the appointed actuary’s
actuarial opinion and memorandum (AOM)
• Focus on communication rather than content
• Group is not charged with recommending
changes to current requirements
• Goal is to help further open the lines of
communications between appointed actuaries
and regulatory actuaries
5
Academy Discussion Group - Activities
• March 2014 Report
•
Target audience is the actuarial profession
• Progress reports to NAIC LATF in 2013 and
2014
• Sessions at the 2012 and 2013 SOA Valuation
Actuary Symposiums
http://www.actuary.org/files/AOMR_Communication_Group_Report_3-18-14.[eventyyyy].3.pdf
6
March 2014 Report
• Background & Additional Considerations (Andy)
• Consolidation and Standardization of
Actuarial Memorandums (Link)
• Executive Summary (Andy) and
• Adding Links to the
Actuarial Memorandum
for Key Issues (Mike)
7
Additional Considerations
• Electronic submission of the AOM
• For example, the domestic state receives the
memorandum and non-domiciliary states receive the
RAAIS or an executive summary
• May require support from the NAIC, access
constraints and confidentiality assurances
• Not intended to be an Academy Discussion
Group recommendation
8
Consolidation & Standardization
• Over 20 separate actuarial submissions exist
•
•
•
•
Most submissions beyond the AOM involve an
Actuarial Guideline (AG) or particular regulation
Creating an exhibit of reserves, in the AOM or
RAAIS, by AG or Regulation would allow
regulators to gauge materiality at a glance
Clearly communicated general assumptions and
methodologies could avoid duplication
An AG section could then discuss changes to the
general framework
9
Consolidation & Standardization
• Standardized format, links, bookmarks and
“searchability” enable ease of use
• Layers of electronic reports could allow for full
assumption and data detail. Main document
could show representative data
• NAIC administration could allow for encrypted
submission and limited time passwordprotected access for appropriate regulators,
with no obligation to “return” documents
10
Executive Summary
• Discusses ways in which additional information
could help regulatory actuaries better
understand and gain confidence in the analysis
performed by the appointed actuary
• Framework to better communicate key issues
that affect the actuarial opinion
•
•
Several ways to accomplish this, such as an
enhanced RAAIS or a summary section in the
actuarial memorandum
Could be combined with adding links in the AOM
11
Executive Summary
Summary
The following are some highlights of this Summary. Each is described in
greater detail in the body of this report.
1. Due to large interim deficiencies within the Whole Life block from projection
year 15 to year 40 under the base line scenario, additional reserves of
$13.83 million were held for the 12/31/2013 statutory statement.
2. On the base line (level) scenario, the company’s Book Value (BV) of ending
assets was over $50 million.
3. Stochastic testing generated some negative results but the mean result, a
75th percentile measure and a CTE 60 standard were all positive for the
company.
4. In mid-2013, XYZLIC acquired a block of 10-year convertible Term
insurance from ABC Life Insurance Company.
12
Executive Summary
• Suggestions to improve communication of
results
•
•
•
•
•
•
Describe the assets and liabilities at a high level
Discuss the methods used in the analysis
Identify clearly whether additional reserves were held and
the criteria used to determine additional amounts
Provide a numeric summary of key testing results for the
current and prior year, identifying the key drivers of change
Describe sensitivity testing use to stress most important risks
Describe important changes in the assumptions, models, risk
mitigation strategies, etc. and the effects of these changes
13
Adding Links to the Actuarial Memo
• Incorporation of links and bookmarks
•
•
•
Table of Contents that links to major subject
headings
“Items of Interest” links to send reader to major
memoranda topics
Executive Summary with links to key topics
• Creation of a common reserve template
14
Example of linked memo
• Inspiration not dictate
• Working version shows the following:
•
•
•
•
Linked table of contents
Page with items of interest and links
Links within document where other parts of the
memo are referenced
“Return to home” links
15
Linked Table of Contents
16
“Items of Interest”
17
Internal links
18
Case Study: Links in 2013 Memos
• History of the move to a linked memo (Mike)
• User Reactions (Andy)
• How to create a linked table of contents and
other links (Mike)
19
Original situation
• Three companies (parent & two subsidiaries)
• Four memoranda each for individual annuity
•
•
•
•
AOMR supporting memo
C-3 Phase 1 memo
C-3 Phase 2 memo
AG 43 memo
• Twelve memos – no links or consolidation
20
Consolidation 2009-2010
• 2009 C-3 Phase 2 memo submitted in March
• In June 2010, a combined C3 Phase 2 & AG 43
memoranda was submitted.
• Similarities and ‘laziness’ > differences
• Memo met minimum requirements for both
21
Evolution 2010-2013
• Moved from customized to quasi-standardized
• Created single set of product descriptions
•
•
Cut & Paste to each memo from AOMR memo
Only had applicable in each memo
• Created single set of liability assumptions
•
•
Customized to each memo from AOMR copy
Excluded what was not used
22
Revolution 2013-2014
• Created common product descriptions and
liability assumptions sub-documents
•
•
Linked table of contents (Cntl-home returns to top)
Internal links where applicable (between
assumptions)
• In each memos, linked with image of ToC.
• Within memos, had linked ToC and internal links
23
Future Plans 2014+
• Look for more sections to move to assumptions
memoranda
•
•
•
Scenario Selection
Model point compression
AVR/IMR
• Potential expansion beyond individual annuities
24
Submemos – T of C links
25
Add links when referencing
Asset/liability management is used to manage the exposure to interest rate risk. ALM
practices include regular and systematic matching of duration between assets and
liabilities to within tolerances that reflect our ability to bear risk. Exposures to changes in
the slope and curvature of the yield curve are also managed through ALM.
Investment types include bonds (publicly traded and privately placed), common and
preferred stocks, mortgages and equity real estate. For a summary of the starting assets by
category, see Appendix D.
A. Sources of Asset Data
The primary source of asset data was a seriatim inventory as of September 30, 2013 from
the Asset/Liability Management database maintained by the Quantitative Management
Group within Babson. This database is primarily populated with data from Babson’s
main database (referred to as the Data Warehouse) and it’s Derivative Accounting
System. The inventory included items such as book value, par value, coupon rate, timing
and amount of contractual cash flows, call and prepayment options, and prepayment
premiums.
There was a detailed reconciliation of the asset inventory to the assets listed on the
balance sheet of the Company’s September 30, 2013 Statutory Financial Statement.
Starting assets used in cash flow testing analysis as well as the process for projecting the
starting assets are discussed in detail in Appendix D.
Keith Sell, Actuary, and David Echeverria, Managing Director of Babson, were relied
upon for the accuracy and completeness of the asset inventory. Reliance statements can
be found in the Appendix of the memo that contains this attachment.
B. Valuation Basis of Assets
The general account assets covered by this memorandum were valued at their statutory
value for Page 2 of the Annual Statement. For the majority of assets in the general
accounts, the statutory carrying value is amortized cost. Derivatives are a notable
exception. They are held at market value since the company does not qualify for hedge
accounting treatment. A full description of the bases for general account assets is
contained in the “Notes to Financial Statements” section of the Annual Statement.
The separate account assets covered by this memorandum were valued at their market
value as of September 30, 2013. Actual market movement during the fourth quarter was
reflected in the projections.
A breakdown of the starting assets used in cash flow testing can be found in Appendix E.
26
Adding a linked Table of Contents
• Create outline headers for your document
http://shaunakelly.com/word/numbering/numbering20072010.html
• Create Table of Contents (References ribbon)
27
Adding bookmarks and non-TOC links
• Add a Bookmark (Insert ribbon)
• Add a Hyperlink (Insert ribbon)
28
Saving as a PDF
• Word (and Excel) allow you to save as a PDF &
links are
preserved
29
Sub-memos
• Allow multiple usage
•
•
Various memos
Non-regulatory uses
• Consistency between multiple uses
•
•
Update once and you are done
Allows better delegation
• Current use
•
•
Product Descriptions
Liability Assumptions
30
Other areas of Improvement
• Reducing the number of submissions
• Showing explicit effects of margins
• Graphical presentation of results
31
Reducing the number of submissions
• Updates to AG’s or regulations might be
necessary
•
•
•
An “administrative solution” may exist
The NAIC State Filing Checklist template could
enable this, using a note to indicate required
conditions
For example, “If an AOM is filed with the NAIC with
an exhibit of reserves by AG and a section for each
relevant AG, this separate filing need not be
submitted”
32
Showing explicit effects of margins
• Best Estimate assumptions work well with
Credibility Theory and Experience Studies, and
for certain GAAP and Fair Value purposes
• Direction of margins may need to be determined
• “One at a time” assessment of major risks helps
with validations, for both companies and
regulators
• Combined Adverse Assumptions can be used in
final assessment of adequacy
33
Graphical presentation of results
• Graphs are helpful for viewing scenarios, surplus
emergence, cash flows, yields, etc.
• NY 7 graphs can show every scenario, stochastic
graphs can show selected percentiles
• Anomalies show up readily as every time period
is presented
• Actual history can help provide context for
projections
• Scenario example on following page
34
Exhibit B-3: 10 Year Treasury Rates - Point in Time Statistics - 10,000 Scenarios
Maximum, 99.5th percentile, 95th, 85th, 70th, Median, 30th, 15th, 5th, 0.5th, Minimum
16%
10 year UST Rate
14%
12%
10%
8%
6%
4%
2%
0%
2063.06
2058.06
2053.06
2048.06
2043.06
2038.06
2033.06
2028.06
2023.06
2018.06
2013.06
2008.06
2003.06
1998.06
1993.06
1988.06
1983.06
1978.06
1973.06
1968.06
1963.06
1958.06
1953.06
Actuals from 1953
10,000 Scenarios projected from March 31, 2014
35
Conclusions
• Next Steps
• Potential NAIC Project
• Comments and Questions
36
Next Steps
• Get the word out
•
For example, webcasts (such as this one), articles,
2014 SOA Valuation Actuary Symposium session
• Further discussions, but not just within
Academy Discussion Group
•
•
Feedback from regulatory and company actuaries
Some LATF members indicated plans to discuss
this with the appointed actuaries of their domestic
companies
37
Next Steps
• Possible implementation of ideas
•
•
Recommendations from the actuarial profession,
industry and/or the NAIC?
Preference is identification and communication of
best practices, but this could be accomplished
with changes to requirements
38
Potential NAIC Project
• Streamline actuarial documentation and testing
requirements, in part, in response to PBR
• Recommendations will incorporate emerging
PBR and RBC requirements
39
Potential NAIC Project
• Three phases
•
•
•
Recommend ways to streamline reporting and
testing requirements (including electronic data
capture) based on a review of actuarial reports for
50-75 companies
Recruit companies to voluntarily incorporate these
recommendations into their 2014 reporting
Use these results to update testing and
documentation requirements
40
Do you have ideas on ways to
improve communication?