Assumption Setting Under Multiple Frameworks

Transcription

1 Assumption Setting Under Multiple Frameworks Yvonne McCullough June 19, 2014 Contents Governance Process Storage and Documentation Issues and Challenges Nationwide Financial June 19,

2 SOA Assumption Development and Governance Group Led by Liz Olson Sponsored by Financial Reporting and Product Development Sections Meets quarterly via phone 2 My Background Large, domestic company 20+ years in corporate modeling Several years in annuity assumption development 3 2

3 Governance Process Assumption Council - Nationwide Investments NF Model Assumption Council Chief Actuary, ALM Risk Manager, Appointed Actuary Working Group Life Annuities Retirement Plans Other Attendees Line CFOs Illustration Actuary Valuation Actuaries Pricing Actuaries Controllership/Accounting Hedging Anyone who did the work Product Support Ad hoc working groups Corporate 5 3

4 Approving Body - Industry Chief Actuary Appointed Actuary Valuation Enterprise Risk Management CFOs Pricing Actuaries Accountants Illustration Actuary Tie to Model Steward and/or Model Governance Other Larger and foreign companies started putting processes in place 3+ years ago. Smaller, domestic companies are just starting the process. 6 What is reviewed for approval? Internal experience studies Industry studies SOA, LIMRA, Consultants, Reinsurers Business and general knowledge Regulatory considerations Sales practices at issue and current Underwriting practices Business evolution Demographics 7 4

5 Example: Mortality Mortality Actual/Expected Actual / Expected Calendar Year 8 Example: Mortality Life Expectancy - Age x Gender y Life Expectancy Today In 10yrs In 20yrs Current Proposed 9 5

6 Example: Renewal Premium Renewal Premium Old Assumption New Assumption Actual 10 Example: Statistical Lapse Study Benefits Pinpointing significant variables Interaction between variables Calibrating base vs. dynamic Process Define universe of variables Test in model Review Revise and test 11 6

7 Example: Statistical Lapse Study : Result Base Rate * f 1 (x 1 ) * f 2 (x 2 ) * f 3 (x 3 ).. * where each x n is a separate parameter and each f n may be a separate function * and the functions can vary by policy epoch (eg. with and without CDSC) 12 Example: Statistical Dynamic Lapse Study Parameter 1 Lapse Factor Parameter 1 Value Epoch 1 Epoch 2 Lapse Factor Parameter 2 Parameter 2 Value Epoch 1 Epoch

8 Example: Statistical Dynamic Lapse Validation Actual Lapse Rates vs. Assumptions Over Time Lapse Rate Calendar Month Actual Experience New Assumption Previous Assumption 14 Example: Statistical Dynamic Lapse Validation Actual Lapse Rates vs. Assumptions by Duration Lapse Rate Policy Duration Actual Experience New Assumption Previous Assumption 15 8

9 Example: Statistical Dynamic Lapse Validation Persistency by Policy Duration Percentage of Policies Remaining Policy Duration Consultant 1 Consultant 2 Industry New Assumption 16 Assumption Review - Nationwide Timeframe Item Approve Involve Inform March-June June June - August 3Q 3Q 3Q 3Q 4Q Best estimate and prudent estimate assumptions (DAC unlock products) Valuation and hedging assumptions Illustration Actuary testing self and lapse support tests Best estimate and prudent estimate assumptions (remaining products) Corporate Risk Models (also used for ALM) Pricing assumptions Enterprise Risk Management Reserve Adequacy Testing assumptions Meetings are conducted separately for each product line. Span of control and structure of meetings varies widely by company. 17 9

10 Consistency Across product lines? Across applications? The guiding principle: Assumptions should be consistent. The overriding principle: Assumptions should make sense. Another principle: Work should not be done more than once. 18 Storage and Documentation 10

11 Goals of Documentation Auditor-friendly trail Clear final answer Easily retrievable Records decisions 20 Examples of Documentation in Industry Database for storage Database that feeds models Models themselves Spreadsheets Word documents SharePoint or other collaborative environment Shared drive 21 11

12 Issues and Challenges Resources Is it worth it? How many? 23 12

13 Other Industry Challenges Credible data Small company New product Skewed data eg. interest rates Recent experience is all down Anticipating competitor re-pricing on the ride up Legacy assumptions Provisions for Adverse Deviations 24 Contact Information SOA Assumption Development and Governance Group If you are interested in joining quarterly calls around assumption topics: Liz Olson Nationwide Financial

14 Questions? 26 14