Session 20, Professionalism and PBR: Adapting to a New Environment. Moderator: Jerry F. Enoch, FSA, MAAA

Transcription

1 Session 20, Professionalism and PBR: Adapting to a New Environment Moderator: Jerry F. Enoch, FSA, MAAA Presenter: Mark William Birdsall, FSA, MAAA, FCA Arnold A. Dicke, FSA, MAAA, CERA Lorne W. Schinbein, FSA, MAAA

2 Professionalism and Principle Based Reserves: Adapting to a New Environment JERRY ENOCH Moderator MARK BIRDSALL ARNOLD DICKE LORNE SCHINBEIN Presenters Valuation Actuary Symposium August 29, 2016

3 Presentation Disclaimer Presentations are intended for educational purposes only and do not replace independent professional judgment. Statements of fact and opinions expressed are those of the participants individually and, unless expressly stated to the contrary, are not the opinion or position of the Society of Actuaries, its cosponsors or its committees. The Society of Actuaries does not endorse or approve, and assumes no responsibility for, the content, accuracy or completeness of the information presented. Attendees should note that the sessions are audio-recorded and may be published in various media, including print, audio and video formats without further notice. 2

4 Introductions Moderator Jerry Enoch, FSA, MAAA Alfa Life Insurance Corporation Presenters Lorne Schinbein, FSA, MAAA Actuarial Resources Corporation Arnold Dicke, FSA, MAAA, CERA New World Actuaries Mark Birdsall, FSA, MAAA, FCA Lewis & Ellis, Inc. 3

5 Objective PBR brings greater professionalism demands than we have faced before. We want to identify some ways that professional responsibility should affect PBR work, so actuaries can develop processes to make our PBR work meet our professional requirements. Some questions In what ways will we be challenged? What will regulators be looking for? What recommended practices can help? 4

6 Overview Lorne Schinbein Am I really qualified? Professionalism issues and resources Arnold Dicke Governance Whom do we serve? Mark Birdsall Documentation Experience studies and assumptions Creativity and professionalism The power of regulators Q&A 5

7 2016 Valuation Actuary Symposium Professionalism and Principle Based Reserves: Adapting to a New Environment August 29, 2016 Lorne Schinbein VP & Consulting Actuary Actuarial Resources Corporation of Georgia

8 Presentation Disclaimer Presentations are intended for educational purposes only and do not replace independent professional judgment. Statements of fact and opinions expressed are those of the participants individually and, unless expressly stated to the contrary, are not the opinion or position of the Society of Actuaries, its cosponsors or its committees. The Society of Actuaries does not endorse or approve, and assumes no responsibility for, the content, accuracy or completeness of the information presented. Attendees should note that the sessions are audio-recorded and may be published in various media, including print, audio and video formats without further notice. 7

9 Introduction Principle Based Reserves are effective for new business January 1, The new environment is a mere four months away! 8

10 Introduction Prepared Professionally? What s New? Valuation Manual (VM) Professional Qualification Standards (USQS) Actuarial Standards of Practice (ASOP) and Practice Notes 9

11 Valuation Manual 10

12 Valuation Manual Valuation Manual (VM) provides the requirements supporting PBR Effective VM is dated April 6, 2016 NEW... VM has and continues to evolve by means of Amendments approved by Life Actuarial Task Force (LATF) d_by_a_cmte.pdf 11

13 Valuation Manual Definitions VM-01 Products VM-20, VM-21, VM-22, VM-25, and VM-26 Corporate Governance Guidance For PBR VM-G Actuarial Opinion & Report Requirements VM-30: Requirements regarding the AOMR VM-31: PBR Report requirements 12

14 Professional Qualification Standards 13

15 Professional Qualification Standards Code of Professional Conduct Precept 2 Actuary must satisfy applicable qualification standards US Qualification Standards (USQS) Basic Education Requirement Experience Requirement Continuing Education Requirement So what s new?... 14

16 Professional Qualification Standards NEW... March 27, American Academy of Actuaries direction on Qualifications and PBR. (abridged) Actuaries must remain current in relevant, emerging advancements in actuarial practice and science that are relevant to the Actuarial Services they provide. In the case of PBR, a sample of source material for those advancements is listed on the Academy website. 15

17 Actuarial Standards of Practice and Practice Notes 16

18 Actuarial Standards of Practice Relevant to Principle Based Reserves Current Standards Nos. 1, 7, 11, 21, 22*, 23, 25* & 41 NEW... Pending Exposure Draft ASOP No. XX* - Principle Based Reserves for Life Products (dated June 2015)... * Practice Notes available for these three standards. 17

19 Actuarial Standards of Practice ASOP No. XX Principle Based Reserves for Life Products Obviously the most directly related to actuary s VM- 20 work Section 3: Analysis of Issues and Recommended Practices Coverage of Assumptions and Determining Margins (Section 3.4.2) Practice Note available (February 2014 updates being worked on) 18

20 Actuarial Standards of Practice NEW... Recent Exposure Drafts ASOP No. 21 Revision Responding to or Assisting Auditors or Examiners in Connection with Financial Audits, Financial Reviews, and Financial Examinations (December 31, 2015) ASOP No. 23 Revision - Data Quality (February 29, 2016) NEW... Current Exposure Draft Modeling (comment deadline October 31, 2016)

21 Current Exposure Draft Modeling NEW... Third Exposure Draft just released (July 22, 2016) Guidance for selecting, developing, and evaluating models Section 3: Analysis of Issues and Recommended Practices Meeting Intended Purpose, Presentation of Results NEW... Model Governance Practice Note in development 20

22 Actuarial Standards of Practice ASOP No. 7 Analysis of Life, Health or Property/Casualty Insurer Cash Flows Section 3: Analysis of Issues and Recommended Practices Guidance for many VM-20 related items and VM-31 PBR Report related items Guidance on Asset Characteristics, Investment Strategy, Sensitivity Testing... Actuary is reminded to consider and establish criteria consistent with the purpose of the cash flow analysis Analysis need not be further refined if it would not result in a materially different opinion (Section 3.7) 21

23 Actuarial Standards of Practice ASOP No. 7 Analysis of Life, Health or Property/Casualty Insurer Cash Flows (cont.) Section 4: Communications and Disclosures Documentation should be more complete for more significant assignments such as regulatory requirements... such as PBR! PBR requirements are many and very specific Refer to this section if departing from the guidance of this standard 22

24 Actuarial Standards of Practice ASOP No. 11 Financial Statement Treatment of Reinsurance Transactions Involving Life or Health Insurance As title suggests, focus is financial statement treatment Section 3: Analysis of Issues and Recommended Practices Guidance on Reinsurance Cash Flows (Section 3.2) Guidance on Treatment of Reins. Ceded (Section 3.3) These being significant components of PBR (VM-20 Section 8) Professional judgment 23

25 Professional Judgment - example Can I use my reinsurer s mortality assumption? Some Professional Judgment Points to Consider: 1. Appropriate only if underwriting and expected mortality are similar 2. Reinsurer s model segments will likely be grouping similar treaties from several ceding cos. 3. How representative is reinsurer mortality when a blend of experience with different average size, age...? 4. The structure of reinsurance agreement denotes differences (first dollar, excess of retention) 5. Would need to make modifications to reflect the circumstances of company 6. Greater uncertainty { data is: (i) less relevant, (ii) of lower quality, or (iii) less reliable }, the larger the required margin 7. How does reinsurer determine credibility? 24

26 Actuarial Standards of Practice ASOP No. 22 Statements of Opinion Based on Asset Adequacy Analysis by Actuaries for Life or Health Insurers New relevance with respect to VM-30 and VM-31 Section 3: Analysis of Issues and Recommended Practices Some Professional Judgment Points to Consider Reasonableness of Results Adequacy of Reserves and Other Liabilities Analysis of Scenario Results Aggregation During Testing and Aggregation of Results Trends, Management Action and Subsequent Events Credibility... 25

27 Actuarial Standards of Practice ASOP No. 25 Credibility Procedures Bar is raised Credibility is a much greater consideration under PBR Section 2: Definitions Full Credibility, Relevant Experience, Professional Judgment Appendix: Current Practices Classical Credibility Procedures such as the Limited Fluctuation Method Bayesian, in particular Buhlmann, Credibility Procedures (VM-20 Sec 9.C.4.) Credibility Practices Theory Report SOA Website: research-credibility-theory-pract.aspx Documentation... 26

28 Actuarial Standards of Practice ASOP No. 41 Actuarial Communication Section 3: Analysis of Issues and Recommended Practices Ensure content is appropriate to circumstances and clearly communicated Be mindful of needs and concerns of the intended users PBR requirements have great breadth Section 4: Responsibilities When Relying on Other Sources 27

29 Practice Notes Life Principle Based Reserves under VM-20 (February 2014 Exposure Draft updated version being developed) 20_Practice_Note_Exposure_Draft_ pdf Asset Adequacy Analysis (August 2014 Exposure Draft) e_august2014.pdf Credibility (July 2008) bility_theory_july2008.pdf Scenario and Cell Model Reduction (September 2010) 20PN%20Final% pdf/Scenario%20and%20Cell%20Model%20Reducti on%20pn%20final% pdf NEW... PBR Model Governance (coming soon) 28

30 Concluding Remarks ASOPs - Re-familiarize Yourself With Them Numbers 1, 7, 11, 21, 22, 25 & 41 Professional Judgment Beyond the Technical Aspects of PBR Professional Qualifications Non-Technical VMs such as VM-G Reliance on Others Continue to Remain Current Pending PBR ASOP Exposures for Related ASOPs New Practice Notes VM Amendments 29

31 Thank you. 30

32 The Role of the Actuary under the Valuation Manual Arnold Dicke, FSA, CERA, MAAA President, AADicke LLC Valuation Actuary Symposium August 29,

33 The Role of the Actuary VM-G 2016 Valuation Actuary Symposium August,

34 Provisions of VM-G VM-G is the chapter of the Valuation Manual that discusses Governance VM-G discusses the responsibilities of: The Board Senior Management Appointed Actuary Qualified Actuaries VM-G provides guidance, but does not expand legal responsibilities, except as regards qualified actuaries 2016 Valuation Actuary Symposium August

35 What is a qualified actuary VM-01 definitions: The term qualified actuary means an individual who is qualified to sign the applicable statement of actuarial opinion in accordance with the American Academy of Actuaries qualification standards for actuaries signing such statements and who meets the requirements specified in the Valuation Manual. The term appointed actuary means a qualified actuary who is appointed or retained in accordance with the Valuation Manual to prepare the actuarial opinion required in Section 3A of the Standard Valuation Law (VM-05) Valuation Actuary Symposium August

36 Appointed Actuary/Qualified Actuary Appointed Actuary Appointed by Board Opines on adequacy of assets supporting aggregate company reserves Responsibilities set forth in VM-30 Qualified Actuary Assigned certain responsibilities for a group of policies by the company (including oversight) Does not opine on adequacy of reserves for that group of policies Responsibilities set forth in VM-G 2016 Valuation Actuary Symposium August

37 Background: the Standard Valuation Law The commissioner shall annually value, or cause to be valued, the reserve liabilities (hereinafter called reserves) for all outstanding life insurance contracts, annuity and pure endowment contracts, accident and health contracts, and deposit-type contracts of every company issued on or after the operative date of the valuation manual. Typically, the commissioner causes the company to value the liabilities. The company selects the assumptions, methods and models used in a principle-based valuation Valuation Actuary Symposium August

38 Provisions of VM-G In carrying out the responsibility for each group of policies and contracts subject to a principle-based valuation, the company shall assign to one or more qualified actuaries certain responsibilities listed later in VM-G 2016 Valuation Actuary Symposium August

39 Responsibilities of Qualified Actuaries under VM-G 1 1. The responsibility for overseeing the calculation of principle-based reserves for that group of policies or contracts; 2016 Valuation Actuary Symposium August

40 Responsibilities of Qualified Actuaries under VM-G 2 2. The responsibility for verifying that the assumptions, methods, and models that are used in determining principle-based reserves, and the company s documented internal standards used in the principle-based reserve valuation processes, the company s documented internal controls and documentation used for such reserves, appropriately reflect the requirements of the Valuation Manual for that group of policies or contracts Valuation Actuary Symposium August

41 Responsibilities of Qualified Actuaries under VM-G 2 In particular, the qualified actuaries are required to certify that the assumptions used in the principlebased reserve valuation, other than assumptions that are prescribed in the Valuation Manual or by law or regulation, or that pertain to risk factors that are modeled stochastically, are prudent estimates, as defined in VM-01, with appropriate margins. The qualified actuaries are not required to verify the appropriateness of any prescribed assumptions, methods or models but are required to verify that they are being used as required by the Valuation Manual; 2016 Valuation Actuary Symposium August

42 Responsibilities of Qualified Actuaries under VM-G 3 3. The responsibility for providing a summary report to the board and to senior management on the valuation processes used to determine and test principle-based reserves, the principle-based reserve valuation results, the general level of conservatism incorporated into the company s principle-based reserves, the materiality of principle-based reserves in relationship to the overall liabilities of the company, and significant and unusual issues and/or findings; 2016 Valuation Actuary Symposium August

43 Responsibilities of Qualified Actuaries under VM-G 4 4. The responsibility for preparing the PBR Actuarial Report with respect to that group of policies or contracts, as described in VM-31 (note: for each group of policies, can have separate sub-report signed by qualified actuary to whom responsibility for that group of policies was assigned); and 2016 Valuation Actuary Symposium August

44 Responsibilities of Qualified Actuaries under VM-G 5 5. The responsibility for disclosing to the company s external auditors and regulators any significant unresolved issues regarding the company s principle-based reserves held with respect to that group of policies or contracts Valuation Actuary Symposium August

45 Responsibilities of Qualified Actuaries under VM-G Limits A qualified actuary assigned responsibilities with respect to a group of policies or contracts may be required to make any certification required by the Valuation Manual, but is not required, except as regards any responsibilities he or she may have as the appointed actuary under VM-30, to opine upon or certify the adequacy of the aggregate reserve for that group of policies or contracts, the company s surplus or the company s future financial condition Valuation Actuary Symposium August

46 Responsibilities of Appointed Actuary under VM-G The responsibilities of the appointed actuary are described in VM-30 Careful: VM-30 contains some changes from pre- Valuation Manual requirements 2016 Valuation Actuary Symposium August

47 The AOMR Changes VM-30 Scope and Qualifications Applies to Opinions with a year-ending date on or after operative date of PBR Actuarial Qualifications to issue AOMR NOT changing: education, experience, CE Actuary must be familiar with new law & regs, including VM, to issue opinion Significant Changes in VM-30 New Inconclusive Opinion Significant changes when relying on others Significant changes in form of documentation RAAIS due date now 4/1/YY+1; only given to domicile, others upon request Content Mangini Actuarial and Risk Advisory LLC 4

48 The Role of the Actuary Whose Interest Does the Qualified Actuary Represent? 2016 Valuation Actuary Symposium August

49 LATF Request for comment In addition to comments on the edits to VM-G and VM-20 proposed by the ACLI and the Academy, LATF requested comments on whether the qualified actuaries assisting or advising the company regarding its responsibility to establish principle-based reserves under VM-20 or VM-21 represent the interest of the company or the interest of the commissioner Valuation Actuary Symposium August

50 Background Question was posed by a LATF member during the discussion of VM-G. Under SVL, the commissioner values the liabilities, or causes them to be valued The company is required to value the liabilities for the commissioner and assigns responsibilities to a qualified actuary, but The commissioner can hire an independent actuary to do the valuation if not satisfied with the company s work 2016 Valuation Actuary Symposium August

51 Background Under VM-G, the qualified actuary is essentially overseeing the work that has been assigned to the company. So whose interest does the qualified actuary represent? 2016 Valuation Actuary Symposium August

52 Whose Interest Does the Qualified Actuary Represent? Responses were received from the ACLI, two actuaries, and from the Academy s Life Practice Council All the responses referenced the Code of Conduct and relevant ASOPs 2016 Valuation Actuary Symposium August

53 ACLI Response Points to legal status of employees Also points to actuarial Code of Conduct Principal is the employer or client Code of Conduct outlines responsibilities of the Actuary to his or her Principal Precept 5: Must identify Principal in communications Precept 7: Must disclose conflicts of interest Precept 10: Must cooperate with others (including the Commissioner) in the Principal s interest 2016 Valuation Actuary Symposium August

54 Academy Response Says interest has not been defined, so response doesn t speak directly to request Points to Code of Conduct and ASOPs Code of Professional Conduct: Precept 1: must fulfill profession s responsibility to the public and must uphold profession s reputation Must not provide services that violate or evade the law Precept 3: must satisfy applicable ASOPs Precept 7: Actuarial Communication must be clear and appropriate to circumstances and its intended audience (in this case, interests of company and commissioner could be served differently) 2016 Valuation Actuary Symposium August

55 Academy Response Points to several ASOPs in particular: ASOP 41 (Communications) Defines Intended User : Any person whom the actuary identifies as able to rely on the actuarial findings (clearly includes the Commissioner) If assumptions or methods are chosen by someone other than the actuary, 3 choices: If actuary finds them reasonable, no disclosure is required If they significantly conflict with what actuary finds reasonable, disclose that fact and who set them If the actuary is unable or not qualified to judge reasonableness, disclose that fact 2016 Valuation Actuary Symposium August

56 Whose Interest Does the Qualified Actuary Represent? Responses were reviewed by LATF; no action was taken 2016 Valuation Actuary Symposium August,

57 The Role of the Actuary Assumptions Company sets the assumptions Company could assign this task to an actuary, but not required by VM-20 or Standard Valuation Law Actuary in this role is still subject to ASOPs Qualified actuary is responsible for verifying that assumptions appropriately reflect Valuation Manual requirements Under ASOP 41, actuary must disclose if assumptions significantly conflict with what the actuary finds reasonable PBR ASOP, as well as ASOP 41, will apply to all actuaries assisting company, not only qualified actuaries assigned VM-G responsibilities and the appointed actuary 2016 Valuation Actuary Symposium August

58 2016 Valuation Actuary Symposium Professionalism & PBR Mark Birdsall FSA, MAAA Lewis & Ellis, Inc.

59 Observations from the Past Regulatory Asset Adequacy Issues Summary Minimalist approach Example: words Executive summary approach Actuarial Memorandum Listing of assumptions, not sources of assumptions If no experience studies, consultant actuary states something like this is what we have seen other companies do 58

60 Observations from the Past Actuarial Memorandum Setting assumptions inconsistent with recent industry studies with no justification Applied composite industry studies inappropriately to a more granular situation Broad sensitivity testing on the whole block of business, without regard to the sensitivity to risks associated with different products 59

61 Setting Assumptions and Margins for Material Assumptions for PBR In a Principle-Based Reserve (PBR) environment, the bar has been raised for assumption-setting VM-31 documentation requirements are more thorough than the requirements for asset adequacy analysis Document sources of assumptions as well as the anticipated experience assumptions themselves 60

62 Setting Assumptions and Margins for Material Assumptions for PBR Document whether assumptions are based on experience or actuarial judgment or other factors List key risk reporting and experience reporting the company is tracking for updating assumptions Provide explanations ( rationale ) about the use of actuarial judgment, such as making adjustments to company or industry experience 61

63 Setting Assumptions and Margins for Material Assumptions for PBR Set an objective standard for determining which assumptions are material Example: Use sensitivity testing results with a criterion based on percent of surplus, percent of reserve, or a specific monetary value 62

64 Setting Assumptions and Margins for Material Assumptions for PBR Align experience studies closely with assumptions being supported Unravel composite industry experience to ensure relevance to the assumptions being set Calibrate policyholder behavior assumptions to company and/or industry experience Identify key drivers of experience Consider interactions of interdependent assumptions in dynamic functions 63

65 Setting Assumptions and Margins for Material Assumptions for PBR Use an objective methodology to develop margins Calculate actual to expected ratios Consider credibility of company experience Use granular sensitivity testing in the analysis Document analysis in the PBR Actuarial Report 64

66 Setting Assumptions and Margins for Material Assumptions for PBR Report the size of individual margins on material risks, together with aggregate impact of margins Company can elect to report implicit margin of no future mortality improvement Company can elect to report implicit margin on other prescribed assumptions, such as default costs and net spreads on reinvestment assets 65

67 Setting Assumptions and Margins for Material Assumptions for PBR Documenting margins will provide feedback to reviewers and regulators to consider the level of conservatism in statutory reserves The Valuation Manual is likely to be updated annually Will margins be right-sized over time and across product types with different risk profiles? 66

68 Needed: Better Assumption-Setting Processes Expanded Historical Experience Studies for Both Industry and Companies Targeted Studies of Expected Experience-Actual to Expected Ratios-NAIC Streamlining Project Unraveling Composite Experience to Apply Experience Appropriately New Tools for Risk Analysis 67

69 Example: Unraveling Composite Experience Published industry experience studies sometimes combine experience in ways that is not immediately usable for assumption-setting Unraveling composite experience is required to properly apply the industry. See the experience for three contract statuses based on LIMRA data: VA Contracts with GLWB Rates of Full Surrender by Benefit Utilization Status 68

70 New Tools are Coming! SOA Research Project on PBR Simplified Methods Multi-Risk Scenario Generator Open source Deliverable before project completion Need company experience, actual to expected ratios, credibility of experience, and distribution type Data aggregators will help recommend distribution types With these inputs, will be able to generate scenarios for each material risk at specified probability levels 69

71 New Tools are Coming! SOA Research Project on PBR Simplified Methods Definition of an Objectivity Measure for Best Estimate Assumptions Using Bayesian methods, derive the distribution of the assumptions, accounting for both the industry and the company-specific experience. Methods will provide a structured way to incorporate expert opinion (if desired). They also provide reviewers (including regulators) with a quick and objective way to evaluate the rationality of the chosen assumptions. Deliverable before project completion 70

72 Creativity in Professionalism Needed: Better model validation to minimize additional costs of PBR oversight Current processes include static validation and dynamic validation Supplement current approaches with additional analysis How could new tools be applied to model validation? 71

73 Needed: Better Model Validation Current processes include static validation and dynamic validation Supplement current approaches with additional analysis What could you do with new tools, such as: An objectivity measure for anticipated experience assumptions A theoretically sound guardrail A multi-risk scenario generator to analyze the distribution around the central estimate assumptions 72

74 Needed: Better Model Validation With scenarios generated at specified probability levels, could you accurately estimate the fully stochastic distribution of the present value of future cash flows? Test with predictive modeling tools If so, you could compare the NPR, DR, and SR against an estimated CTE 70 reserve and determine the percentile of the distribution for each of these PBR values Establish a threshold for acceptance of the results (example: SR at the 80 th percentile of the fully stochastic distribution or higher) 73

75 The Power of Commissioners VM-05 (SVL) Section 11: If the Commissioner is not satisfied with a company s work in valuation, he/she may hire a third party to perform a valuation at the company s expense VM-05 (SVL) Section 11: The Commissioner has the authority to specify methods and assumptions for reserve calculations and to adjust reserves and may take other disciplinary action VM-30 (AOMR) Section 1: If Commissioner rejects an actuarial memorandum, the actuary may not serve as an appointed actuary for five years At NAIC meetings, the Academy hosts a breakfast meeting for regulators to discuss Standards of Practice and ABCD issues 74

76 VM-05 Standard Valuation Law For contracts subject to a principle-based valuation: Assumptions shall be prescribed for those assumptions over which the company has little or no control Procedures must be established for corporate governance and oversight of the actuarial function If there is a gap in the requirements or requirements are inconsistent with the SVL, the commissioner may implement regulations to fill the gap or correct the inconsistency In a principle-based valuation, the assumptions and methods should be consistent with the company s risk assessment process Each year the company must certify to the effectiveness of the internal controls to the commissioner and the Board of Directors 75

77 Questions Data aggregators are currently expanding historical industry studies. Are you obligated professionally to expand your company experience studies to support your PBR assumptions? Do you have enough leverage through PBR requirements to persuade management to invest in more experience analysis? 76

78 Questions A new NAIC Valuation Analysis Working Group (VAWG) will help develop consistency of interpretation and application of PBR. Are you willing to engage your domestic regulators in discussions about PBR and use them as a channel to get your questions answered? 77

79 Questions and Answers 78