Session 079 PD - Navigating Assumption Setting Across Valuation Bases. Moderator: Lisa Marie Veldman Domonkos, FSA, CERA, MAAA

Transcription

1 Session 079 PD - Navigating Assumption Setting Across Valuation Bases Moderator: Lisa Marie Veldman Domonkos, FSA, CERA, MAAA Presenters: Sebastian Joseph Kleber, FSA, MAAA Leonard Mangini, FSA, MAAA Kevin Piotrowski FSA, CERA, MAAA SOA Antitrust Compliance Guidelines SOA Presentation Disclaimer

2 2017 SOA Annual Meeting & Exhibit Session 79 Panel Discussion: Navigating Assumption Setting Across Valuation Bases Tuesday, October 17, :30am 9:45am Lisa Domonkos, FSA, CERA, MAAA Seb Kleber, FSA, MAAA Kevin Piotrowski, FSA, CERA, MAAA Leonard Mangini, FSA, FRM, CLU, FALU, MAAA

3 Moderator Biography Lisa Domonkos Lisa Domonkos, FSA, CERA, MAAA In Force Management Actuary, Swiss Re Lisa Domonkos is an In Force Management Actuary at Swiss Re. Her current work focuses primarily on YRT Management and Client Recaptures. She has five years of reinsurance experience at Swiss Re with prior involvement in Post Level Term management, Costing, Experience Studies, and Disability Income Valuation. Lisa attained her FSA and CERA designations in She received her bachelor's degrees in Actuarial Science and Statistics from Purdue University. 2

4 SOCIETY OF ACTUARIES Antitrust Compliance Guidelines Active participation in the Society of Actuaries is an important aspect of membership. While the positive contributions of professional societies and associations are well-recognized and encouraged, association activities are vulnerable to close antitrust scrutiny. By their very nature, associations bring together industry competitors and other market participants. The United States antitrust laws aim to protect consumers by preserving the free economy and prohibiting anti-competitive business practices; they promote competition. There are both state and federal antitrust laws, although state antitrust laws closely follow federal law. The Sherman Act, is the primary U.S. antitrust law pertaining to association activities. The Sherman Act prohibits every contract, combination or conspiracy that places an unreasonable restraint on trade. There are, however, some activities that are illegal under all circumstances, such as price fixing, market allocation and collusive bidding. There is no safe harbor under the antitrust law for professional association activities. Therefore, association meeting participants should refrain from discussing any activity that could potentially be construed as having an anti-competitive effect. Discussions relating to product or service pricing, market allocations, membership restrictions, product standardization or other conditions on trade could arguably be perceived as a restraint on trade and may expose the SOA and its members to antitrust enforcement procedures. While participating in all SOA in person meetings, webinars, teleconferences or side discussions, you should avoid discussing competitively sensitive information with competitors and follow these guidelines: Do not discuss prices for services or products or anything else that might affect prices Do not discuss what you or other entities plan to do in a particular geographic or product markets or with particular customers. Do not speak on behalf of the SOA or any of its committees unless specifically authorized to do so. Do leave a meeting where any anticompetitive pricing or market allocation discussion occurs. Do alert SOA staff and/or legal counsel to any concerning discussions Do consult with legal counsel before raising any matter or making a statement that may involve competitively sensitive information. Adherence to these guidelines involves not only avoidance of antitrust violations, but avoidance of behavior which might be so construed. These guidelines only provide an overview of prohibited activities. SOA legal counsel reviews meeting agenda and materials as deemed appropriate and any discussion that departs from the formal agenda should be scrutinized carefully. Antitrust compliance is everyone s responsibility; however, please seek legal counsel if you have any questions or concerns. 3

5 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. 4

6 Audience Polling We ll be asking you some questions using the polling devices There are 10 choices on the keypads 1/A, 2/B, 3/C, and so on through 9/I, 0/J so we ll label our available replies that way to help you pick your answers Some of our questions will be pick as many as apply so we ll show you how to select 2 or more responses for these We ll jump in now with a warm-up question to test the devices! 5

7 Audience Response System Keypad Enter your response when you see the answer now button A light on the keypad will indicate your response was recorded You may change your answer while polling is open No need to hit go Answer Now 6

8 Polling Question 0- Testing Multiple Responses Which of the following adjectives would describe actuaries? Choose as many as apply A. Brilliant B. Extraordinarily Witty C. Less Socially Adept then Accountants D. More Socially Adept then Accountants E. I m a consultant, how would you like me to describe you...? 28% 24% 32% F. Don t quit your day job. let s get serious please 14% 12% 14% A. B. C. D. E. F. 7

9 Polling Question 1- Who s Attending? What type of organization do you represent? Please choose ALL that apply to your firm A. Mutual Co B. Stock Co C. Fraternal D. Reinsurer E. Small Co- < $300M Exhibit 1 Premium F. Larger Co- > $300M Exhibit 1 Premium G. US Parent- No IFRS Reporting H. Foreign Parent- IFRS Reporting already I. Consultant/Software Vendor/Investment Bank/Service Provider J. Regulator/Industry Analyst/Rating Agency/Other Stakeholder 60% 48% 25% 19% 19% 15% 17% 9% 3% 1% A. B. C. D. E. F. G. H. I. J. 8

10 Polling Question 2- Personal Experience How much do YOU know About PBR, Assumptions and Modeling? Please choose ALL that apply to you personally A. Not Much- That s why I came to this Session! B. Minimal- I ve read ASOPs on PBR and Modeling C. Modest- I ve read SOA Implementation Guide, Academy Practice Note D. Deep- I ve read parts of Valuation Manual (VM) E. Significant- I ve read entire VM and/or on PBR/Modeling/Assumption team F. Guru- I Lead PBR/Modeling/Assumptions team 22% 32% 22% 20% 7% 3% A. B. C. D. E. F. 9

11 Polling Question 3- Company Awareness How much does your ORGANIZATION know about PBR, Assumptions, Modeling? Please choose ALL that apply to your firm A. I don t know! B. Not Much- My company sent me to learn more C. Minimal- Chief Actuary (CA) or AA are following D. Modest- Multiple executives are following E. Wide- PBR Team has been set up and been given roles F. Deep- Board/Senior Management are involved G. Wide and Deep- Pricing and Valuation PBR teams are already modeling H. Complete- were ready at 1/1/17 operative date, isn t everyone? 26% 20% 19% 14% 8% 9% 10% 6% A. B. C. D. E. F. G. H. 10

12 Polling Question 4- PBR Implementation Plan How is your organization handling the 1/1/2017 operative date? Please choose ALL that apply to your firm A. Implementing Term Right Away B. Delaying PBR for Term C. Implementing UL Right Away D. Delaying PBR for UL E. Taking Single State or Small Co Exemption F. Waiting- its expensive, complicated, and/or tax reserves not clear G. Don t Know 33% 32% 25% 27% 11% 11% 13% A. B. C. D. E. F. G. 11

13 Polling Question 5- Assumptions and Margins Has your Company decided how they ll establish assumptions and margins for PBR and how these will be synchronized across other valuation bases? Please choose ALL that apply to your firm A. No- we haven t dealt with that yet B. In progress- weighing pros/cons of different options C. Yes- Chief Actuary(CA) is Assumption and Margins Czar D. Yes- CA for Assumptions, Functions (Pricing, Risk, Capital) for Margins E. Yes- Top-Down: Company sets assumptions/margins, actuaries Buy-In F. Yes- Bottom-Up: Functions set assumptions/margins, Corporate approves G. Yes- Committees set assumptions/margins and CA/AA have Veto Power H. I don t know! 25% 19% 5% 2% 14% 19% 21% A. B. C. D. E. F. G. H. 5% 12

14 Polling Question 6- PBR Modeling Has your Company done a FULL inner/outer loop PBR reserve projection? (NO shortcuts, NO static assumptions, NO simplifications, etc.) Please choose ALL that apply to your firm A. No B. Yes- Term C. Yes- Simple ULSG D. Yes- Complex ULSG E. All of these I thought I said in Question 3- Isn t Everyone Ready? F. I don t know! 56% 27% 16% 7% 7% 5% A. B. C. D. E. F. 13

15 Navigating assumption setting across valuation bases SOA Annual Meeting: Session 79 Seb Kleber, FSA, MAAA

16 Presenter Biography Seb Kleber Sebastian Kleber, FSA, MAAA Assumption Development Actuary, Swiss Re Seb Kleber is an Assumption Development Actuary at Swiss Re where he is responsible for developing mortality and policyholder behavior assumptions for Swiss Re's in force life business. Previously he was member of the Experience Analysis team where he created and analyzed experience studies with a focus on policyholder behavior for internal and external clients. He has thirteen years of reinsurance experience. He has presented at prior SOA Annual Meetings about policyholder behavior topics and has volunteered on several SOA POGs. Seb received bachelor's degrees in actuarial science and statistics from Purdue University. He is a Fellow in the Society of Actuaries and Member of the American Academy of Actuaries. 15

17 Table of Contents / Agenda Convergence of valuation bases Assumption and margin development considerations Summary SOA Annual Meeting October 17,

18 Convergence of valuation bases SOA Annual Meeting October 17,

19 Purpose of the valuation bases Statutory GAAP Embedded Value Focus on maintaining insurer solvency and protecting policyholders Due to the conservative nature the earnings are back ended Ensure financial reporting is transparent and consistent from one organization to another Normalize and spread earnings by linking profits with revenues Commonly used for assessing the value of a block of business being sold Values the block of business today SOA Annual Meeting October 17,

20 Transition of valuation bases Statutory Transitioning from a rules based regime to a principle s based system Assumptions need to be reviewed and updated periodically Assumption changes affect both future and current PBR business GAAP Targeted improvement for FAS 60 Removing pads Assumption changes based on regular assessment will flow through the balance sheet Applies to all inforce as well as new business Embedded Value Based on company s philosophy of assumption setting and revaluation of block SOA Annual Meeting October 17,

21 Assumption convergence across valuation bases SOA Annual Meeting October 17,

22 Assumption and margin considerations SOA Annual Meeting October 17,

23 Mortality assumption considerations PBR requirements may cause differences with best estimate assumption Sample VM-20 Mortality Rates Relevancy vs. Credibility Balancing relevancy and credibility is a key consideration for segmentation decision PBR credibility drives the assumption margin and sufficient data period May be more willing to have marginally relevant data to increase credibility relative to a best estimate assumption Depending on segmentation, PBR mortality results may produce inconsistent relationships from other assumptions Rate per % 120% 100% 80% 60% Duration Male Female Ratio Female / Male Ratio Percentage Slope of the mortality table PBR assumptions grade from experience to a loaded version of the VBT table which creates a steeper slope than the VBT Using a different table for other best estimates will cause slope differences Excluding future MI has a large affect as well 120% 100% 80% 60% 40% 20% 0% Mortality as a % of Population VM-20 BE BE w MI SOA Annual Meeting October 17,

24 Mortality credibility and margin considerations PBR has prescribed requirements for determining credibility and margins Significant differences in credibility between Limited Fluctuation and Buhlmann VM-20 margin factors account for differences in credibility Includes implicit margin, no prospective mortality improvement Additional considerations where larger margins may be needed SOA Annual Meeting October 17,

25 Policyholder behavior assumption setting considerations Accounting for economic and market cycles is critical Change is the only constant in life - Heraclitus, the pre-socratic Greek philosopher Level Term Lapse Rate Example Anniv Year Lapse Rate A/ E Market Economy 5 Year Average % % % Decreasing Recession % Premiums % 124% % 118% % 111% % 108% % 103% % 100% Recession % Stable 100% % Premiums 100% % 100% % 98% % 95% % 88% SOA Annual Meeting October 17,

26 Lapse margin considerations External forces contribute more fluctuation to the assumption than statistical volatility 140% 130% 120% 110% 100% 90% 80% 70% 60% Annual Lapse Rate Analysis Lapse Rate A/E Average +2σ +1σ -1σ -2σ VM20 The company shall include margins to provide for adverse deviations and estimation error Standard deviation Percentile CTE Relationships based on normal distribution SOA Annual Meeting October 17,

27 Summary Valuation bases are moving toward a best estimate assumption as the starting block Potential for consistency in approach with assumption setting across divisions of a company PBR requirements may cause assumption deviations from the best estimate Policyholder behavior assumptions and margins are heavily influenced by market and economic forces SOA Annual Meeting October 17,

28 SOA Annual Meeting October 17,

29 Legal notice 2017 Swiss Re. All rights reserved. You are not permitted to create any modifications or derivative works of this presentation or to use it for commercial or other public purposes without the prior written permission of Swiss Re. The information and opinions contained in the presentation are provided as at the date of the presentation and are subject to change without notice. Although the information used was taken from reliable sources, Swiss Re does not accept any responsibility for the accuracy or comprehensiveness of the details given. All liability for the accuracy and completeness thereof or for any damage or loss resulting from the use of the information contained in this presentation is expressly excluded. Under no circumstances shall Swiss Re or its Group companies be liable for any financial or consequential loss relating to this presentation. SOA Annual Meeting October 17,

30 Session 79 Panel Discussion: Navigating Assumption Setting Across Valuation Bases Tuesday, October 17, :30am 9:45am Kevin Piotrowski, FSA, CERA, MAAA Manager, Ernst & Young LLP

31 Presenter Biography Kevin Piotrowski Kevin Piotrowski, FSA, CERA, MAAA Manager,Insuranceand ActuarialAdvisory Services, Ernst & YoungLLP Kevin is a Manager in the Insurance and Actuarial Advisory Services practice of Ernst & Young LLP s Financial Services Office. He is based in New York and has 7+ years of consulting experience. He serves as an advisor to large insurance companies and is focused on Financial Reporting. Kevin focuses his time on various aspects of insurance including assumption setting, valuation, reinsurance reporting and capital management. Additionally he has been involved in large scale model validation projects as well as assisting companies to transform their actuarial systems and processes (Actuarial Transformation). Recently, Kevin has focused his efforts on Principle Based Reserves - managing review of both AG-48 and VM-20 implementations at several companies. He has written articles around PBR implementation and is involved in the SOA s effort to provide more depth/breadth around Principle Based Reserves. Kevin is a Fellow of the Society of Actuaries (FSA), a Chartered Enterprise Risk Analyst (CERA) and a Member of the American Academy of Actuaries (MAAA) 30

32 Liability Disclaimer, Copyright, Use of Slides Although we ve attempted to capture the letter and spirit of the Valuation Manual, Code of Conduct, ASOPs, and Qualification standards faithfully- you have a personal professional duty to familiarize yourself with the original source material and apply professional judgment as to its specific application to your own work and those working under your direction as you perform covered Actuarial Services. The nature of your work, and other professional designations you hold, may require you to be bound by additional professional requirements from other organizations as well. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, legal, tax, or other professional advice, nor is it an Actuarial Opinion by Kevin Piotrowski or his respective firm or employer. Please refer to your advisors for specific advice. The views expressed by the presenters are not necessarily those of Ernst & Young LLP. Any U.S. tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Much of the original source material on VM-20/PBR and Professionalism is copyrighted material of the American Academy of Actuaries, Society of Actuaries, or National Association of Insurance Commissioners. This presentation paraphrases these for educational purposes to capture the intent of the regulations and standards of practice or results of SOA research, and every attempt has been made to identify and cite original sources, where applicable. These slides may NOT be copied, redistributed, or otherwise furnished to any party without prior written consent other than as required to comply with an audit of the attendee s annual CPD compliance. 31

33 What will you learn today? How reserves compare between various accounting frameworks on a sample policy How critical assumptions are set for VM-20 What the impacts of those assumption choices are for a sample policy Methods to review and report assumptions

34 Reserve Comparison Between Various Accounting Frameworks Term Life Product Description Product 10-year term with annual renewable term (ART) premiums in post-level term period Face value $150,000 Policyholder Male Issue age 40 Standard non-smoker Pricing Priced at ROI of 7.7% Assumptions Shock lapses of 85% in year 10 and 40% in year 11 ART premiums based on statutory mortality scale (2001 CSO M NS) Level earned rate of 4.5%

35 Reserve Comparison Between Various Accounting Frameworks Term Life Reserving Methodology Anticipated VM-20 accounting Greater of net premium reserve and deterministic reserve US Statutory: CRVM (regulation XXX) Mortality and interest follow prescribed assumptions and are consistent with a policy issued in 2014 US GAAP: FAS 60 net premium reserve and DAC Valuation assumptions are equal to the best-estimate assumptions DAC asset is amortized in proportion to premiums consistent with requirements in ASC (FAS 60) for traditional long-duration contracts Anticipated IFRS accounting First principles projection, risk adjustment, contractual service margin

36 Reserve Comparison Between Various Accounting Frameworks Term Life Overall Reserve Comparison Statutory VM20 US GAAP IFRS

37 Term life VM20 detail Assumption Differences Between NPR and DR Term Life VM20 Detail NPR Calculation Determinstic NPR 1/2 Cx VM20

38 Assumption setting for VM-20 Determining Assumptions VM-20 Assumptions Either prescribed, based on company experience or both Assumptions are prescribed for the NPR, are a hybrid of prescribed + company experience for mortality and asset default rates and company experience + margin for other assumptions Best estimate assumptions need to be reviewed frequently and reflect company experience Margins should address adverse deviations and estimation error in BE assumptions. The greater the uncertainty in the anticipated experience assumption, the larger the required margin. Margins are not required for assumptions when variations in the assumptions do not have a material impact on the modeled reserve. The total annual default cost factor by projection year for starting fixed income assets with an NAIC designation is the sum of three prescribed components Baseline annual default cost factor published by the NAIC using the PBR credit rating and WAL Spread related factor graded linearly in yearly steps from the prescribed amount in years 4+ Maximum net spread adjustment factor graded linearly in yearly steps from the prescribed amount in years 4+ The company shall determine inputs for each asset that are necessary to calculate the total annual default cost factors Investment expense Option adjusted spread (OAS) Weighted average life (WAL) Mortality is probably the most complex of the calculations and is a combination of several steps grading from experience to industry data

39 Assumption Differences Between VM-20 and Best Estimate Mortality The methodology for VM-20 mortality is prescribed. However, it is based on company experience and credibility. Company credibility experience drives how fast the company grades to industry experience, and the margin they must put on their own experience Mortality calculation in a nutshell: Input company s experience mortality Select the industry table that you are grading to (e.g., 2015 VBT) Input your credibility method and percentage (e.g., Limited Fluctuation) Choose whether to include mortality improvement to the valuation date (and what these factors are) Input final duration with sufficient data / years before grading begins Add it all together!

40 Assumption Framework Methods for Setting Best Estimate Assumptions and Margins Key items to address when setting best estimate assumptions and margins Sensitivity Analysis Sensitivity analysis could be used to determine the level of precision required in the modeling of each risk factor Credibility Advanced Analysis Techniques Planned Management Actions Guidance on balancing level of precision with amount of credible data Discussion of how sensitivity analysis is to be used in setting best estimate assumptions Definition of how credibility should be measured (e.g. threshold for full credibility, aggregation level, metrics) Discussion of appropriate circumstances for use of industry data and the methods to blend such data with company experience Assumptions that exhibit dynamic behavior may be developed using techniques such as predictive analytics. Documentation of key variables and metrics used for such analysis Framework for incorporating future management actions into model Guidance on developing assumptions that are not based on company experience nor industry data Documentation Incorporate experience study results in annual actuarial assumption update Select certain experience studies for review each year to perform an in-depth review over data used, methods employed, and conclusions drawn. PBR Application Description of the method used to determine anticipated experience assumptions for each material risk factor, including the degree to which the assumptions are based on experience versus actuarial judgment or other factors, and the source of the experience. VM-31 An explanation of how the results of sensitivity tests and varying assumptions were used or considered in developing assumptions including a description of, results of, and action taken with respect to sensitivity tests performed. VM-31 The company shall examine the results of sensitivity testing to understand the materiality of prudent estimate assumptions on the modeled reserve. VM-20 Description of the method to determine the level of credibility for the company s mortality exposure period. VM- 31

41 Assumption Framework Ongoing Assumption Monitoring Assumptions are subject to review based on their risk classification. Ongoing monitoring of known and emerging risks is a key element in the assumption framework. Formal thresholds establish a chain of events that trigger the assumption review process, which results in Assumption Unlocking. Timeliness of ongoing monitoring becomes essential to ensure that there is enough time allotted to conduct the procedures set out in the assumption framework. Ongoing monitoring Identification of assumptions requiring updates Q2 Assumption development Q2 Implementation Q1 Experience studies Q2 Approval process Q3 PBR Application mortality: The company shall review, and update as needed, the company experience data described in Subsection 9.C.2.b, whether based on actual experience or data from other sources, at least every three years. If updated experience becomes available prior to the end of three years since the last review or update, which alters the company s expected mortality for the mortality segments in a significant manner and such impact is expected to continue into the future, the company shall reflect the changes implied by the updated data in the current year. VM-20 section 9

42 Term life VM20 detail Assumption Differences Between DR, DR (using BE) Term Life VM-20 Deterministic reserve no margin VM-20 Deterministic reserve w margin

43 Assumption Differences Between DR, DR (using BE) Margin Analysis in total DR with no margin Expense + Lapse margin Expense margin Expense + Lapse + Mortality margin

44 Assumption Differences Between DR, DR (using BE) Mortality Components only BE w MI BE w No MI Padded w No Grading Padded w Grading

45 Assumption Framework Waterfall Analysis NPR Reserve Deterministic Reserve Stochastic Reserve Booked Reserve Best Estimate With Margin Best Estimate With Margin Max(NPR,SR,DR) Run Identifier Gross Net Gross Net Gross Net Gross Net Gross Net Net Prior Period Reserve Prior Period Reserve , , , , Time decay Natural change in reserve due to aging of policies Experience changes Terminations Impact from deaths, surrenders, and lapses Reinsurance Impact from new treaties, amendments, and termination of treaties Discount rate Change in discount rate (net earned rate (DR), risk-free rates (SR)) Economic assumption Asset changes Changes in portfolio composition changes Scenario update Changes in rates and spreads Reinvestment strategy Impact from changes in (re)investment strategy Modeling Model refinements Mortality Changes in anticipated experience Mortality Changes in credibility of company experience Actuarial assumption Surrenders Changes in anticipated experience changes Lapses Changes in anticipated experience Lapses Changes in quantification of margin Expenses Changes in anticipated experience Expenses Changes in quantification of margin New business New business Additional reserves for new business Unexplained Current Period Reserve Current Period Reserve , , , , Prior Period Reserve , , , , Experience changes Economic assumption changes Actuarial assumption changes New business Unexplained Total Change Current Period Reserve , , , ,

46 Kevin Piotrowski Manager Insurance and Actuarial Advisory EY

47 2017 SOA Annual Meeting Session 79: Navigating Assumption Setting Across Valuation Bases Governance and Regulatory Considerations Tuesday, October 17, 2017 Leonard Mangini, FSA, FRM, FALU, CLU, MAAA President and Managing Member Mangini Actuarial and Risk Advisory LLC

48 Presenter Biography Leonard Mangini Leonard Mangini, FSA, FRM, FALU, CLU, MAAA President and Managing Member, Mangini Actuarial and Risk Advisory LLC Mr. Mangini brings clients over 27 years of life, annuity, and health insurance and reinsurance expertise, holding senior Financial, Risk Management, Reinsurance and Product-related roles at Manulife, ACE, AXA, and USLIFE. Leonard has also assisted clients with Financial Reporting, Risk Management, Underwriting, Product Development, Reinsurance, M&A, and Market Conduct issues as a consultant with E&Y, Milliman, and now his own actuarial and risk advisory practice. Prior to forming Mangini Actuarial and Risk Advisory LLC, Leonard was SVP and Deputy Global Corporate Chief Actuary at Manulife. This role included supervising Principle-Based valuation assumption and margin setting, explaining Principle-Based earnings to stake-holders, supervising Principle-Based valuation governance in an ORSA environment for 19 business units in the US, Canada, and Asia and serving on Global Product Risk and Global ALM Committees. In previous reinsurance roles, Leonard has served as an internal Board member, President, Chief Actuary, Chief Pricing Officer, and Chief Risk Officer, including green-fielding a US life reinsurer. Mr. Mangini previously served as Chair of the SOA Financial Reporting Section Council, is a Member of the Academy s PBR Life Reserve Work Group, a Member of the Academy s Committee on Professional Responsibility, and serves as Chair of the SOA Oversight Group on PBR Earnings Attribution. Leonard is a Fellow of the Society of Actuaries (FSA), Certified Financial Risk Manager (FRM), Fellow of the Academy of Life Underwriting (FALU), and Member of the Academy of Actuaries (MAAA), qualified to sign Statements of Actuarial Opinion (PSAOs) SOA AM: Session 79: Navigating Assumption Setting Across Valuation Bases Oct 17,

49 Liability Disclaimer, Copyright, Use of Slides Although we ve attempted to capture the letter and spirit of the Valuation Manual and ASOPs, faithfully- you have a personal professional duty to familiarize yourself with the original source material and apply professional judgment as to its specific application to your own work and those working under your direction as you perform covered Actuarial Services. The nature of your work, and other professional designations you hold, may require you to be bound by additional professional requirements from other organizations as well. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, legal, tax, or other professional advice, nor is it an Actuarial Opinion by Leonard Mangini, Arnold Dicke, Tim Cardinal, Steve Stockman, or their respective firms Mangini Actuarial and Risk Advisory LLC, AADicke LLC, or Actuarial Compass LLC. Please refer to your advisors for specific advice. The views expressed by the presenter are not necessarily those of Mangini Actuarial and Risk Advisory LLC, AADicke LLC, or Actuarial Compass LLC. Much of the original source material on VM-20/PBR and Professionalism is copyrighted material of the American Academy of Actuaries, Society of Actuaries, or National Association of Insurance Commissioners. This presentation paraphrases these for educational purposes to capture the intent of the regulations and standards of practice or results of SOA research, and every attempt has been made to identify and cite original sources. These slides may NOT be copied, redistributed, or otherwise furnished to any party without prior written consent of Mangini Actuarial and Risk Advisory LLC, AADicke LLC, or Actuarial Compass LLC other than as required to comply with an audit of the attendee s annual CPE compliance SOA AM: Session 79: Navigating Assumption Setting Across Valuation Bases Oct 17,

50 Cynics View: Assumption Setting in the Good Old Days Pricing/Product Development Interact With Marketing Brilliant Product Idea They set pricing assumptions based on experience studies in a vacuum Product Almost Ready for Market Hey We Need Some Reinsurance! Consultation with reinsurers may lead to revised product designs/assumptions Modeling?: Assumptions: We have ours, Valuation has theirs, Capital worries about tail risk Reinsurance is Proportional (Coinsurance) or Replaces Assumptions (YRT) Reserves pop out of our actuarial software system s black box Agent Roll-Out Meeting in 10 Days Call Up Valuation to Kick the Tires Consultation with Valuation might lead to product tweaks and assumptions changes Roll-Out Product Tell Admin and ERM You Have a New Product Big Success- Pat Ourselves on the Back Get Around to Documenting Stuff When Things Are Slow 2017 SOA AM: Session 79 Mangini Actuarial and Risk Advisory LLC Oct 17,

51 PBR Valuation Is Easy! 2017 SOA AM: Session 79 AADicke LLC and Mangini Actuarial and Risk Advisory LLC Oct 17,

52 PBR Valuation Is Easy! Just 27 Simple Steps 2017 SOA AM: Session 79 AADicke LLC and Mangini Actuarial and Risk Advisory LLC Oct 17,

53 PBR Valuation Is Easy- Just 27 Simple Steps!...Slide 1 Determining Which Reserve Requirements Apply and Apply Exclusion Tests 1. Determine whether selling policies in scope of VM-20 (all variable and non-variable individual life except but credit life, pre-need and industrial life) 2. If company IS eligible, decide if wants to apply for PBR exemption (Y or N)- can defer until after 3-year transition, but cannot if sell any ULSG with material guarantees after 1/1/ If Y, use VM-A/VM-C for all policies w/2017 CSO, (may use 2001 CSO until 2020) 4. If N during 1 st 3 years,elect when to value blocks to value under VM-20 (irreversible decision), other blocks are valued under VM-A/VM-C (pre-pbr CRVM), 2017 CSO may be Elected 5. Calculate Minimum NPR, MNPR for all VM-20 policies 6. For ALL blocks of VM-20 policies, decide whether to apply SET and which( SERT, Demo, Certification) for each block (any block passing NY 7 or VM on a stand-alone basis can be certified)* 7. For any block for which SERT to be applied, build CF Model as per VM-20 Section 7.B.2, with anticipated experience or using Cash Flows from Asset Adequacy Testing 8. IF SET is Failed or NOT applied, SR or DR MUST be calculated (if CDHS- then deemed to fail) 9. For Other policies, if SET passed, decide whether to apply DET 10. For Term and ULSG and Other (where DET is Failed), DR must be calculated * SET must be applied separately (Term, ULSG, Other ). Cannot be grouped for SET if significantly different risk profile 2017 SOA AM: Session AADicke LLC and Mangini Actuarial and Risk Advisory LLC Oct 17,

54 PBR Valuation Is Easy- Just 27 Simple Steps!...Slide 2 Modeling policies requiring a DR or SR: 11. Choose Model Segments- VM Section 7A- align with insurer s asset segmentation plan, investment strategy, how allocate investment income for statutory report 12. Build CF model- seriatim of in scope inforce or grouped cells as per Section 2.G 13. Determine anticipated experience assumptions for each non-stochastic, non-investment risk factor (if not already determined for SERT), unless its Prudent Estimate is prescribed 14. Determine Prudent Estimate assumptions- adding margins to anticipated experience* 15. Select starting assets for each segment 16. Determine investment expense and default assumptions, by model segment 17. Calculate SR, VM-20 Section 5 (if required), choosing aggregation grouping by Integrated risk management and stand alone SR for each product group within aggregation subgroup 18. Calculate DR VM-20 Section 4 (if required), Choose groups for DR where NAER determined, calculate separate DRs for each product group within policy grouo- can use NAER of group of policies 19. Calculate aggregate modeled reserve = max (SR, DR) over all model segments 20. Apply Asset Collar If aggregate starting assets are either < 98% of aggregate modeled reserve or > max (102% of aggregate modeled reserve, aggregate NPR), provide assurance that min reserve is not understated (or re-select starting assets) * Mortality is more complicated 2017 SOA AM: Session AADicke LLC and Mangini Actuarial and Risk Advisory LLC Oct 17,

55 PBR Valuation Is Easy- Just 27 Simple Steps!...Slide 3 Apply Section 2 Aggregation 21. (Aggregate) minimum reserve (MR) = sum 2.A sum (1) through (7): (DR*,MNPR) (1) For group of Term policies, SET passed: MR= max (2) For group of Term policies, SET failed: MR= max (SR*,DR*,MNPR) (3) For group of ULSG policies, SET passed: MR= max (DR*,MNPR) (4) For group of ULSG policies, SET failed: MR= max (SR*,DR*,MNPR) (5) For group of Other policies, SET, DET pass: MR= MNPR (6) For group of Other policies, pass SET, fail DET: MR= max (DR*,MNPR) (7) For group of Other policies, fail SET, DET: MR= max (SR*,DR*,MNPR) MNPR= aggregate MNPR= ( pre-reinsure NPR) - ( SSAP61 reinsurance credits) DR*= DR + DDPA (after reinsurance), SR*= SR +DDPA (after reinsurance) 22. Due and Deferred Premium Asset, DDPA: offsetting statutory asset where surplus reduction is max[ ANPR - DDPA, DR, SR] 2017 SOA AM: Session AADicke LLC and Mangini Actuarial and Risk Advisory LLC Oct 17,

56 PBR Valuation Is Easy- Just 27 Simple Steps!...Slide 4 Apply Section 2 Allocation 23. Allocate within each of 7 groups based on policy MNPR in group ( 2.C) 24. REPEAT ENTIRE PROCESS (Step 6-22) excluding ceded reinsurance to determine the Pre-Reinsurance Ceded minimum reserve credit for reinsurance is excess, if any, of pre-reinsurance minimum reserve over (post-reinsurance) minimum reserve 25. Min (post-reinsurance-ceded) reserve for any group of policies is i (allocated min reserve)i over all policies in group; min pre-reinsurance-ceded reserve for a group of policies (other product groups Term, ULSG, Other) is not specified could use Sec 2.C, but this leads to anomalies 26. Use allocated post- and pre-reinsurance-ceded minimum reserves to develop minimum reserves by product type if needed for reporting 27. For PBR Actuarial Report: Calculate the impact of margin for each risk factor that has a material impact on the minimum reserve by repeating the DR calculation without the margin for that risk factor; calculate the aggregate impact of all margins by repeating the DR calculation without any margins 2017 SOA AM: Session AADicke LLC and Mangini Actuarial and Risk Advisory LLC Oct 17,

57 Step 24: Reinsurance VM-20 Section 8 (CF Model for DR and SR) must reflect reinsurance cash flows Based on Ceding Company assumptions Assumptions for cedant and reinsurer different- unless companies agree to share Reinsurer s Reserve for Assumed Business using Reinsurer s assumptions ANPR is sum of individual policy NPRs less SSAP 61R credit PBR Reserve is calculated before and after reinsurance Pre- and post-reinsurance-ceded minimum reserves MAY be on different bases e.g. SR for post- and DR for pre-reinsurance, both SR but different scenarios in CTE 70 Reinsurance Takeaways : PBR eliminates mirror reserving! Early Product Development process Cooperation with multiple external parties Need to examine underlying risk drivers in product designs for quirky behavior 2017 SOA AM: Session AADicke LLC and Mangini Actuarial and Risk Advisory LLC Oct 17,

58 Reinsurance Process Conclusion I guess we re calling our reinsurers earlier in the process! 2017 SOA AM: Session AADicke LLC and Mangini Actuarial and Risk Advisory LLC Oct 17,

59 Step 14: Prudent Estimate Assumptions Material Risks that Company has influence over Mortality, Morbidity, Lapses, Partial Withdrawals Premium Persistency, Loans, Rider/Option Election NGE such as Interest Crediting, Expenses Pending PBR ASOP: reflect PH viewpoint of policy value and embedded options Pending PBR ASOP: reflect expected Management Actions based on ERM in practice Actuary s Prudent Estimate of anticipated future experience, factoring in credibility- periodically reviewed and updated Margin for Adverse Deviation and Estimation Error Margin Magnitude reflects uncertainty in experience Must include element of conservatism Must include margin on each assumption 2017 SOA AM: Session AADicke LLC and Mangini Actuarial and Risk Advisory LLC Oct 17,

60 VM-G: Governance Guidelines PBR Assumptions, Methods, Models must be consistent with company s risk management processes Board must exercise oversight, review summary results, process documentation, actions to rely on processes Management must provide info to Board, review results, implement necessary controls, ensure adequate resources, competent staff, and maintain functionality Qualified actuary: legal requirement oversight over PBR calculation; reviews and approves assumptions, methods, models, controls; PBR Actuarial Report Appointed Actuary legally opines on PBR, non-pbr reserves Need to call in Valuation and Risk Management earlier! VM and the PD Actuary AADicke LLC and Mangini Actuarial and Risk Advisory LLC Oct 17,

61 Documentation of Assumptions in Pricing Documentation for Reserves- that s Valuation s Problem- Right? SOA AM: Session AADicke LLC and Mangini Actuarial and Risk Advisory LLC Oct 17,

62 Documentation of Assumptions in Pricing Documentation for Reserves- that s Valuation s Problem- Right?... Where did Valuation and Risk Management get their experience studies? Who set the anticipated experience assumptions (without margins)? Who decided on the material risks to use in pricing as inputs? Who analyzed underwriting and risk classification? Who complied with ASOP 12? Who applied credibility theory to input data? Who complied with ASOP 25? Who spoke to reinsurers and decided on assumptions gross and net? It likely originated in Pricing and Product Development Department! 2017 SOA AM: Session AADicke LLC and Mangini Actuarial and Risk Advisory LLC Oct 17,

63 Actuarial Standard of Practice SOA AM: Session AADicke LLC and Mangini Actuarial and Risk Advisory LLC Oct 17,

64 Revised Actuarial Standard of Practice 23 Data Quality Applies to any actuary using data clearly when preparing/reviewing PBR Report ASOP recently revised: Defines appropriate data as data suitable for intended purpose. Requires disclosure if regulation/ other circumstances require use of unsuitable data Data now defined to include data mathematically derived from other data Actuarial Services provided on or after April 30, 2017 that create data relied on or used by others MUST apply data quality ASOP 23 as if they were the end users! Requires actuaries using data to document limitations and impact of uncertainty or bias in data on actuarial work product QA legally charged with verifying appropriateness of assumptions may rely on you ASOPs 21: Auditors and State Examiners are end users of data, may ultimately rely on you VM requires uncertainty reflected in larger margins and NOT in assumptions themselves 2017 SOA AM: Session AADicke LLC and Mangini Actuarial and Risk Advisory LLC Oct 17,

65 VM-30- New AOMR Requirements 2017 SOA AM: Session AADicke LLC and Mangini Actuarial and Risk Advisory LLC Oct 17,

66 VM-30- New AOMR Requirements- Reliance on Others VM-30 Section 3.A.6: In forming my opinion on [specify types of reserves], I relied upon data, assumptions, projections, or analysis prepared by [name and title each expert providing the data, assumptions, projections, or analysis] as certified in the attached statements. I evaluated that data, assumptions, projections, or analysis for reasonableness and consistency. I also reconciled data to the extent applicable to [list applicable exhibits and schedules] of the company s current annual statement. In other respects, my examination included review of the assumptions projections, and analysis used and tests of the assumptions, projections, and analysis I considered necessary. I have received documentation from the experts listed above that supports the data, assumptions, projections, and analysis. Opinions for 12/31/17 Appointed Actuary can t merely rely on others in AOMR, regardless of whether valuation is being performed using PBR or Old CRVM : Probably will be coming to YOU for documentation and support of assumption setting, projections and analysis and will be reviewing and testing Pricing s work to the extent that it was used in helping set PBR valuation assumptions! 2017 SOA AM: Session AADicke LLC and Mangini Actuarial and Risk Advisory LLC Oct 17,

67 Pricing Software and Modeling Implications Margins, the VM-31 PBR Actuarial Report, and Internal Stakeholders Intent of Exhibits in PBR Actuarial Report is to show dollar amount of margins so relative size compared to minimum PBR Reserve is transparent to various stakeholders can judge degree of conservatism embedded in PBR reserves Operationally, must repeat DR calculation without material margins and without all margins to quantify impact of material margins, aggregate margin in reserves Combined with need to have Pre- and Post- Reinsurance model runs to quantify reinsurance reserve credit highlights importance of model run-time issues Takeaways Simple models to streamline multiple pricing and valuation iterations, VM-31 Valuation must be conversant, aligned on reinsurance, involved early in PD, may need to train your colleagues on the intricacies of your treaties and involve in negotiation QA, ERM must be involved closely and early in model risk management 2017 SOA AM: Session AADicke LLC and Mangini Actuarial and Risk Advisory LLC Oct 17,

68 Who should Maintain Assumptions and Models? Each Functional Unit? Centralized Teams with Pricing, Valuation and ERM clients? VM and the PD Actuary Mangini Actuarial and Risk Advisory LLC Oct 17,

69 Internal Hedging: Company Asset Segmentation And ERM Plans Impact PBR Reserves 2017 SOA AM: Session AADicke LLC and Mangini Actuarial and Risk Advisory LLC Oct 17,

70 Strategic Decision: Internal Hedging and Risk Offsets Company Asset Segmentation and ERM Plans Impact PBR Reserves VM S7.A: Requires aligning model segments for DR/SR with insurer s asset segmentation plan and how investment income allocated in statutory financials VM S5: Governs permitted aggregation of SR for Risk Offsets Term ULSG Other VM S7.B.3: Requires Aggregation Sub-Groups ~ Integrated Risk Management Risk Offset Takeaways Evaluate which Segments Provide Opportunity for Self-Hedging Consider Revising Asset Segmentation and ERM to Optimize Risk Offsets ERM must be involved closely and early 2017 SOA AM: Session AADicke LLC and Mangini Actuarial and Risk Advisory LLC Oct 17,

71 First Cut- Assumption Setting in a PBR World? Pricing/Product Development Interact with Valuation and RM from the Start Document Data, Credibility, Assumptions, Inputs, Decisions, Models as You Go Reinsurers called in Early: Provide you with Assumptions? Reserve Credit Info? Investment Department, CFO, and ERM to Optimize Aggregation Offsets? Centralized Internal Modeling Teams that have Business Unit/Functional Clients? One Version of The Truth - Best Estimate Assumptions agreed upon by Pricing, Valuation, ERM, Capital/Solvency as a Team? Different Margins around these Best Estimates for Different Purposes? US GAAP PBR Statutory ERM and Solvency Capital Feedback Loops for Unlocking Assumptions Data Repository for Storing Assumptions, Sensitivities, Experience Study Freshness? Explaining Profits- Release of Margins and Actual versus Best Estimate Assumptions 2017 SOA AM: Session AADicke LLC and Mangini Actuarial and Risk Advisory LLC Oct 17,

72 VM-G and PBR Governance Governance Provides Context for Roles and Responsibilities Who is Required to Do What?- Some are guidance some legal requirement Where do you have leeway? What must be disclosed? The Players and Their Roles: Regulators vs. Company- and the duties of actuaries Board- VM-G Section Senior Management- VM-G Section One or more Qualified Actuaries- VM-G Section Role of Qualified Actuary vs. Appointed Actuary Other Actuaries and Employees, Intended Users and Stakeholders 2017 SOA AM: Session 79 Mangini Actuarial and Risk Advisory LLC Oct 17,

73 The Roles of the Regulator and Company Under the Revised SVL 2017 SOA AM: Session 79 Mangini Actuarial and Risk Advisory LLC Oct 17,

74 Background: 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 & health contracts, and deposittype contracts of every company issued on or after the operative date of the manual. Except for insolvency or authorized control, usually the Commissioner causes the Company to value reserves. The Company has the responsibility for selecting assumptions, methods and models used in a PBR Valuation. Commissioner can hire independent actuary to do valuation if not satisfied with the Company s work in establishing reserves 2017 SOA AM: Session AADicke LLC- used with permission Oct 17,

75 VM-G: Company Assigns Responsibilities to One or More Qualified Actuaries 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 2017 SOA AM: Session AADicke LLC- used with permission Oct 17,

76 Summer 2016: LATF Request for Comment LATF requested comments on whether Qualified Actuaries assisting or advising the Company regarding its responsibility to establish principlebased reserves under VM-20 represent the interest of the Company or the interest of the Commissioner. Under VM-G, one or more Qualified Actuaries are essentially overseeing work that has been assigned to the Company by the Commissioner. So whose interest does the Qualified Actuary represent? 2017 SOA AM: Session AADicke LLC- used with permission Oct 17,

77 ACLI Response to LATF Request Points to legal status of employees have duty to their employer Also the Actuarial Code of Conduct- Principal is employer or client Code of Conduct outlines responsibilities of Actuary to his/her Principal Precept 5: Must identify Principal in communications Precept 7: Must disclose conflicts of interest Precept 10: Must cooperate with others (including Commissioner) in Principal s interest 2017 SOA AM: Session AADicke LLC- used with permission Oct 17,

78 AAA Life Practice Council Response Interest NOT clearly defined response doesn t speak directly to LATF s request Points to Code of Conduct and ASOPs Code of Professional Conduct: Precept 1: must fulfill profession s responsibility to public, uphold profession s reputation and 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 intended audience (interests of Company, Commissioner could be served differently) ASOP 41 (Communications): defines Intended User : Any person whom actuary identifies as able to rely on the actuarial findings (clearly includes Commissioner) If assumptions or methods chosen by someone other than the actuary, 3 choices: If actuary finds them reasonable, no disclosure is required If significantly conflict with what actuary finds reasonable, disclose fact and who set them If the actuary is unable or not qualified to judge reasonableness, disclose that fact 2017 SOA AM: Session AADicke LLC- used with permission Oct 17,

79 So Whose Interest Does the QA Represent? Responses were reviewed by LATF no action was taken 2017 SOA AM: Session AADicke LLC- used with permission Oct 17,

80 Two Practical Ways to View PBR Assumption Setting! 1) Company sets assumptions Do the actuaries (QAs, AAs, others) agree? If not, document and disclose per ASOP 41 QA under VM-G ensures complies with VM AA under VM-30 tests and opines on whether ensuing reserves are truly adequate Range: Low and High?? Actuaries pick what they feel comfortable with 2) An actuary sets assumptions on behalf of Company Self-police that comply with Code of Conduct, ASOPs, laws, regulations- document per ASOP 41 QA under VM-G ensures complies with VM-20 or VM-21 AA under VM-30 tests and opines on whether ensuing reserves are truly adequate Range: Low and High?? Company picks what they feel comfortable with Both are defensible implementations since ultimately the Company has chosen the assumptions, models and methods; a QA and AA have fulfilled their legal roles and ASOP disclosure duties; and if the two parties don t agree there is documentation about how and why for intended users! 2017 SOA AM: Session 79 Mangini Actuarial and Risk Advisory LLC Oct 17,

81 The Board s Role Under the Revised SVL 2017 SOA AM: Session 79 Mangini Actuarial and Risk Advisory LLC Oct 17,

82 VM-G Definition of the Board VM-G Section 1.C.2: The term board and board of directors means: (a) the board of an insurance company that has not been designated to be part of a group of insurance companies, or (b) the board of a single company within a group of insurance companies that is designated by the senior management of any holding company of all the insurance companies in such group of insurance companies, or a committee of such board, consisting of members of such board, duly appointed by such board and authorized by such board to perform functions substantially similar to those described in this section 2017 SOA AM: Session 79 Mangini Actuarial and Risk Advisory LLC Oct 17,

83 VM-G: Guidance for the Board VM-G Section 2: Commensurate with materiality of PBR reserves in to overall company risk and consistent with oversight role, Board is responsible for: Overseeing processes of Senior Management to identify/correct material weaknesses Overseeing infrastructure (policies, procedures, controls, resources) to implement PBR Receiving/Reviewing Qualified Actuaries Reports/Certifications under VM-G Section 3.A.6 Interacting with Senior Management to resolve questions Documenting Board actions related to PBR in Board Minutes Implementation Plan: will go the Board Processes/Controls: Model Audit Rule (MAR)/Sarbanes (SOX) due to material weakness language Stakeholders: ERM/CRO, Controller/Internal Audit, External Audit, Regulator 2017 SOA AM: Session 79 Mangini Actuarial and Risk Advisory LLC Oct 17,

84 Senior Management s Role Under VM-G 2017 SOA AM: Session 79 Mangini Actuarial and Risk Advisory LLC Oct 17,

85 VM-G Definition of Senior Management VM-G Section 1.C.3: includes the highest ranking officers of an insurance company or group of insurance companies with responsibilities for operating results, risk assessment, and financial reporting (e.g., the chief executive officer, chief financial officer, chief actuary, and chief risk officer) and such other senior officers as may be designated by the insurance company or group of insurance companies 2017 SOA AM: Session 79 Mangini Actuarial and Risk Advisory LLC Oct 17,

86 VM-G: Guidance for Senior Management VM-G Section 3: Responsible for directing implementation and ongoing operation of PBR valuation function: Ensuring infrastructure (policies, procedures, controls, resources) to implement PBR Reviewing PBR Assumptions, Methods, Models for consistency with other risk processes Reviewing and assessing significant unusual issues and findings of PBR valuation and sensitivity tests Ensuring adoption of internal controls that all material risks accounted for, comply with VM and actuarial standards; annual evaluation of controls report to Board Adequate resources for modeling with skill and competence, process to ensure SVL compliance, process to validate data for non-prescribed assumptions, process to ensure appropriate model input assumptions, process to find and limit material errors/weakness, and adequate reporting on controls Annual report to Board on infrastructure adequacy, PBR vs. ERM, knowledge and experience of Senior Management that monitor and control PBR Puts Senior Management into ORSA/Solvency II role as Pillar 2 guardians 2017 SOA AM: Session 79 Mangini Actuarial and Risk Advisory LLC Oct 17,

87 Qualified Actuary s Role Under VM-G 2017 SOA AM: Session 79 Mangini Actuarial and Risk Advisory LLC Oct 17,

88 Qualified Actuary vs. Appointed 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). Qualified Actuary is assigned responsibility for a group of policies VM-G Legal responsibilities, not merely guidance 2017 SOA AM: Session AADicke LLC- used with permission Oct 17,

89 VM-G Section 4: Qualified Actuary Legal Duties Oversee calculation of PBR reserves for that group of policies Verifying compliance with VM Assumptions, methods, models Company documented internal standards for processes and Controls over those processes Certify that Assumptions are Prudent Estimates with appropriate margins Provide Summary Report to Board and Senior Management Valuation Process Valuation Results General Level of Conservatism Materiality of PBR to total reserves of company Significant or unusual findings Prepare PBR Actuarial Report under VM SOA AM: Session 79 Mangini Actuarial and Risk Advisory LLC Oct 17,

90 QA Interactions with External Audit and Regulators Prepare the VM-31 PBR Report Disclose significant unresolved issues NOT certifying adequacy of aggregate reserves for group of policies, the company s surplus, or Company s financial condition that is still the role of the ONE Appointed Actuary 2017 SOA AM: Session 79 Mangini Actuarial and Risk Advisory LLC Oct 17,

91 Model Audit Rule- Reporting Requirements QA thrown into Controls World fortunately enters into an Existing Framework Model Audit Rule (MAR) Legislation- eff. 1/1/2010 (or when domicile adopts) Detailed Requirements- Controls, Reporting on Controls for Statutory Accounting Section 17: $500 Million Direct/Assumed Premium Threshold on Report on Controls Section 17.D.5: Defines two terms- Significant and Material Weakness Former- warrant attention of governance, Latter- reasonable probability of material misstatements Insurer MUST report Material Weakness to domicile within 60 days Audited Financials Model Law DOES NOT prescribe particular framework for review/evaluation of controls MAR Guide indicates most SEC registrants adopt COSO Internal Control-Integrated framework and that COSO ERM- Integrated framework and PCAOB Guidance for Smaller Companies are relevant Available Resources: NAIC Audit Rule Implementation Guide (MAR Guide)- clarifies MAR (without changing contents) Academy MAR Practice Note (Nov 2010)- guidance preparing documentation/controls for reserves 2017 SOA AM: Session 79 Mangini Actuarial and Risk Advisory LLC Oct 17,

92 Contact Information Leonard Mangini, FSA, FRM, CLU, FALU, MAAA President, Mangini Actuarial and Risk Advisory LLC Web: Mobile: (516)