Model to perform the actuarial valuation of disability and life insurance A case of the Mexican Social Security Institute

Transcription

1 Good Practices in Social Security Good practice in operation since: 2015 Model to perform the actuarial valuation of disability and life insurance A case of the Mexican Social Security Institute Mexican Social Security Institute Mexico Published

2 1 Summary On the grounds of the amendment of the Mexican Social Security Law of 1995, we discerned the need to implement a new actuarial model to valuate the financial situation of the Disability and Life Insurance (seguro de invalidez y vida (SIV)), according to the radical change in the pension scheme. Therefrom, we adjusted the existing actuarial models; however, eventually, the need and challenge of reconsidering the model arose in order to have a model that covered the changes taking place during the terms of the pension scheme. The model was designed in 2005 and it was modified in 2009 and 2014; these modifications took place to facilitate the operation and update of the model, and in order to optimize the completion period. The model covers two big categories: The demographic projection of the covered patients, people with disability pensions, and workers deceased due to a non-work-related disease. The financial projection of the volume of wages, the annual expense flow per temporary pensions, the balance on individual accounts, and the constitutive and insured amounts. CRITERIA 1 What was the issue/problem/challenge addressed by your good practice? The challenge for the Mexican Social Security Institute, by means of the Finance Division, was to have their own actuarial model that appropriately showed the financial situation of the SIV in the short, mid and long term. Another challenge was for the IMSS to have the ability to assess the financial impact on the SIV, based on the changes that the National Commission of Insurance and Bonds (Comisión Nacional de Seguros y Fianzas (CNSF)) could apply in the pension system. Furthermore, in order to simulate the changes proposed by the CNSF and the IMSS regarding the allocation of pensions, we had to modify the model to manage dynamically certain demographic and financial variables and hypothesis, in order to be able to estimate the constitutive and insured amounts. In addition, we had to optimize the completion period, as getting the results required 1 or 2 days of work, which hindered the execution of more than one case at the same time.

3 2 CRITERIA 2 What were the main objectives and the expected outcomes? To have a model that fulfilled the generally and internationally accepted actuarial standards. To have a model that involved the variables required to measure appropriately and in a timely manner the modifications to the pension system. To have a model that allowed for a technical diagnosis on the current and future financial situation of the Disability and Life Insurance, as well as in the face of potential amendments to the insurance. To secure the model's suitability in the safety note, in order to assess the benefits and its internal structure. To assess different cases in a timely manner in the face of possible changes to the pension scheme. CRITERIA 3 What is the innovative approach/strategy followed to achieve the objectives? In order reach the objectives, the following strategic lines have been proposed: Organization We created a multi-disciplinary team with staff expert on actuarial, demographic, financial and systematic areas. Cooperation In order to achieve the ideal interrelation within the multi-disciplinary team, we considered a standardization phase for the basic concepts related to the pension scheme, the actuarial and financial techniques, and the skills related to basic functions of the systems. As soon as the basic concepts were standardized, we outlined the general structure of the system developed in 2005, which considered the following as part of its general structure: The expense estimate per pension for the covered patients affiliated as of 1 July 1997, with rights to the benefits under the LSS in force, and to the covered patients affiliated up until 30 June 1997, with rights to choose from the benefits established between the LSS of 1973 and the LSS of 1997, ultimately opting for a benefit under the LSS of 1997.

4 3 The expense estimate differentiated the expenses related to conclusive (insured amounts) and temporal (annual expense flow) disability pensions, in order to model the policy of the Institute regarding the disabled' possibility of rehabilitation. The expense estimate for insured amounts classified by sex. This change allowed for a better estimate of the insured amounts, as: i) life expectancy for women is greater than for men; ii) the family composition of the beneficiaries with rights to the LSS's financial benefits varies according to sex; and, iii) the average wages of men are higher than those of women. In order to carry out the modifications to the model in 2009 and 2014, it was necessary for the work team to delve into every detail on the following areas: Modifications carried out by the National Commission of Insurance and Bonds. The change from static to dynamic in the mortality rates, which are applied to beneficiaries of the pensioner and the deceased workers to take into account the improvement rates that assume that beneficiaries die at a more advanced age. This change required that the work team look up for the mechanisms needed so that the model could simulate the estimate for the annuity, for the beneficiaries of a disabled or a deceased worker, with a mortality rate that considered the improvement rate as the beneficiary ages until they have 110 years old. Once we determined the annuity for the beneficiaries in each projected year, we estimated the corresponding constitutive and insured amounts. Modifications to the model in order to improve the estimate of the SIV and to optimize the model's functioning. To improve the estimate of the cumulative balance on the individual accounts of each worker for the valuation year, it was necessary to carry out a branching of the model to estimate the balance on the individual account of each covered patient valuated. To fulfill the above mentioned, the work team realized that the variables for each year differed, and consequently they had to consider a model that would encompass dynamic variables. On the grounds of the changes to the model for the application of dynamic mortality rates and financial hypothesis to estimate the cumulative balance on individual accounts, we implemented the use of dynamic variables to the model. We incorporated the estimate of management expenses in order to assess comprehensively the financial situation of the SIV.

5 4 To simulate the allocation policy of the IMSS, we modified the temporary term for which the pensions are considered as invalid, from 2 to 3 years. Assessment In order to validate that the system was appropriately modulating the pension scheme, the experts on demographic and actuarial areas created prototypes for the different modules of the system. The update of those prototypes in each stage in which the model underwent changes has been important. Furthermore, to audit annually the model, its processes and the results, we hire an external auditor who certifies the information process of the model, the safety note and the results obtained. Communication and Information Technology To develop the model, we worked with the staff of the IMSS who had expertise on software systems, to be able to fulfill the following: To have our own system according to the needs of the operational scheme of social security pensions. To use adequately the technological resources, procedures and techniques used for processing, storing, and transmitting information. To have a suitable connection between the system's different modules in order to optimize the completion period of the system - the process used to take 2 days and it now takes 30 minutes. To implement the necessary measures to secure the reliability, security, ease of use, efficacy and efficiency of the system. To document the model for someone else to operate it and, if applicable, to carry out changes or expansions to the model in the future.

6 5 CRITERIA 4 Have the resources and inputs been used in an optimal way to achieve the set objectives and the expected outcomes? Please specify what internal or external evaluations of the practice have taken place and what impact/results have been identified/achieved so far. Yes. In order to reach the objective of developing a comprehensive model, we created a team of experts specialized on systems, demographics and actuarial areas, who are part of the staff of the Institute. We required the close cooperation and continuous communication between the work team that developed the prototypes and the experts specialized on the development of the system. Besides, we used the technological infrastructure, facilities and equipment of the Institute. Furthermore, the model has optimized the process to execute the actuarial valuation, reducing the time and human resources that we used to spend for said task. CRITERIA 5 What lessons have been learned? To what extent would your good practice be appropriate for replication by other social security institutions? The effective communication between the experts in charge of designing the model was essential for the success of the development and implementation of the model. The close cooperation with the Management for Social and Financial Benefits and the National Commission of Insurance and Bonds was useful to learn about the policies to follow in terms of pensions. The team work focused on the achievement of the proposed objectives allowed us to direct the efforts towards the same goal. It is necessary to standardize the methodology used in the model for the actuarial valuation, the prototypes created and the safety notes. Pension regimes worldwide face the same challenges, which is why the reproduction of the model by other institutions is feasible, as long as the appropriate adjustments to the model are carried out, taking into account the characteristics of the pension system of each institution.