communication, the names of those responsible for material
assumptions or methods, any conflicts of interest, material differences from previous actuarial findings, and more.
Finally, we consider that ASOP No. 46, Risk Evaluation in
Enterprise Risk Management, and ASOP No. 47, Risk Treatment
in Enterprise Risk Management, are also relevant and applicable to the work of the Qualified Actuary—the former because
grouping of policies for VM- 20 mortality and credibility will
typically reflect the company’s actual risk underwriting practices and claims results, and the latter because VM- 20 only
permits reflecting documented company ERM practices that
are actually implemented. This is of particular importance to
NGEs, hedging, and other management actions that respond to
the economic environment or policyholder behavior.
Four to Watch
If this list weren’t long enough already, we haven’t yet considered exposed ASOPs. There are four relevant exposure drafts
that we believe warrant attention.
The first is the draft ASOP on principle-based reserving.
This proposed ASOP has been through the Actuarial Standards
Board’s exposure process, but has been held so that the final
changes to the Valuation Manual that will be applicable to 2017
valuations can be reflected. The pending draft, available on the
ASB website, is relevant (not binding) advisory guidance, keeping in mind that changes to the Valuation Manual, such as the
VM-G changes described above, may require corresponding
changes to the ASOP. It will provide guidance on the aspects
of the Valuation Manual that require professional judgment, as
well as on disclosure and documentation requirements.
The second is a proposed revision to ASOP No. 38, Using
Models Outside the Actuary’s Area of Expertise. ASOP No. 38 currently applies to property/casualty actuaries who use economic
or other models outside their area of expertise. An exposure
draft revising ASOP No. 38 would, among other things, expand
its scope to include all practice areas. The proposed revisions,
in our view, provide insight into possible considerations surrounding economic and other models. We believe that in a PBR
context, models of assets—such as mortgage-backed securities,
options, etc.—as well as liability-side models of tail risk, hedging,
scenario-based stress testing, mortality securitizations, policyholder behavior, and NGEs, could fall within this category. ASOP
No. 38 requires that the actuary understand the basic functional
workings of the model and its limitations and the implications
thereof. To us this means that the actuary cannot simply assert
that he or she is using a “black box,” but instead needs to have
some understanding of how the model works and the ramifications of how well it works.
The third exposure draft of a proposed ASOP on modeling,
which had an Oct. 31, 2016, comment deadline and would take
effect nine months after formal adoption by the ASB, if and when
that occurs, also merits watching. This proposed ASOP has extensive requirements regarding inputs and assumptions, model
structure, model risk, reliance on others, and documentation.
The fourth draft ASOP is a current exposure draft, Setting
Assumptions, with a comment deadline of April 30, 2017. One in-
teresting provision requires that the actuary, when determining
the reasonableness of assumptions, ensure that the assumptions
are not set with the purpose of counteracting prescribed as-
sumptions set by law.
Given the responsibilities of the Qualified Actuary to oversee
the calculation of principle-based reserves and to verify the appropriateness of internal controls over the valuation processes,
as well as the heavy reliance of PBR on internal company models,
we envision that the ASOP on modeling will become very important in shaping the content of these processes and the methods
by which they will be controlled. In particular, this possible new
ASOP on modeling, if adopted as currently exposed, would require, using “should” language, the use of actual experience to
the extent that it is available, relevant, and sufficiently reliable.
This proposed requirement is aligned with the wording of Sections 7 and 9 of VM- 20. This ASOP exposure draft also includes
the requirement that the actuary consider whether the range of
assumptions and parameters used and the number of model runs
analyzed reflect a range of conditions consistent with the intended purpose. The exposure draft, further, using “should” language,
directs consideration of grouping of model inputs, model granularity, whether deterministic or stochastic inputs or both are
needed, and whether embedded optionality and choices are reflected. In a PBR context, this last requirement would appear to
us to apply to assumptions about policyholder behavior, coun-terparty risk, and management actions in the form of NGE policy
and documented ERM processes, and could involve evaluation
of natural hedges and correlations, given that every assumption
used in determining a modeled reserve (except prescribed and
stochastic assumptions) must have its own margin.
We hope that this article has given you a sense of what we
consider to be the broad responsibilities of the new role of the
Qualified Actuary or an actuary assisting with a principle-based
valuation, and provides you with a useful overview of our take
on the various resources and ASOPs that can help guide you if
you find yourself in either of these roles.
ARNOLD DICKE, MAAA, FSA, FCA, CERA, is president of
AADicke LLC, a member of the Actuarial Standards Board’s Task
Force on Principle-Based Reserves and the Academy’s Life Reserve
Work Group, and is a former vice-president of the Academy.
LEONARD MANGINI, MAAA, FSA, FRM, FALU, is president
of Mangini Actuarial and Risk Advisory LLC, a member of the
Academy’s Committee on Professional Responsibility and the
Life Reserve Work Group, and is a former chair of the Society of
Actuaries’ Financial Reporting Section Council.
Along with TIM CARDINAL, MAAA, FSA, CERA, and STEVE
STOCKMAN, MAAA, ASA, who are both principals at Actuarial
Compass LLC, they are members of The PBR Consortium, which
provides consulting and corporate training services surrounding
Please note: None of the authors are authorized to speak on behalf of the
Actuarial Standards Board (ASB) on these topics, and as noted above, this
article represents their personal views.