Session 49, Assumption Governance and Management – Advantages of a Formal Assumption Process Framework
Moderator:
Jeffrey R Lortie FSA, MAAA
Presenters: Maria Itteilag
Danielle Rose Kuhn ASA, MAAA
Assumption Governance and ManagementAdvantages of a Formal Assumption Process Framework
Maria ItteilagDanielle Kuhn, ASA, MAAA
Society of Actuaries – 2015 Valuation Actuary Symposium
September 1, 2015
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What is driving the opportunity for a change in an insurer’s approach for managing and setting actuarial assumptions?
Challenges Impacting Insurers
• Changing regulatory requirements
• Increased auditor requests
• Multiple stakeholders
• Low interest rate environment
• Too much time spent reconciling assumptions and addressing questions on differences
• Ability to reproduce results over time
• Explaining why changing assumptions now
Macro Challenges Micro Challenges
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What needs to be aligned to best optimize the assumption setting process?
Opportunity to Optimize Process
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Who are the key stakeholders interested in assumptions and why?Interested Parties in Assumptions
Interested Parties Concern Assumptions
CFO / Finance • GAAP financial accuracy• Earnings stability
• GAAP best estimate• Financial plan (e.g. sales)
Appointed Actuary • Solvency• Statutory compliance
• Cash Flow Testing• Prudent best estimate (e.g.
AG 43)Pricing Executive • Profitability • New business
Chief Actuary • Overall compliance and accuracy
• All actuarial
CRO / Risk • Statutory capital compliance• Risk mitigation and tail risk
• Economic capital• Embedded value
CAO / Controller • Compliance • External auditor
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What activities make up a good assumption setting process?A Framework for Setting Assumptions
Governance
Identify Assumptions
Sensitivity & Risk
Assessment
Experience Studies
Industry Monitoring
Experience Monitoring
Assumption Setting
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Committee Structure for Assumption Setting
Chief ActuaryValuation LeadPricing Lead
Forecasting LeadALM Lead
CFOCAO/Controller
CROCIO
Sponsorship Committee(s)
OperationalWorking Group(s)
Appointed Actuaries LOB - Chief ActuaryLOB - Valuation LeadLOB - Pricing Lead
LOB - Forecasting LeadLOB - ALM Lead
Sponsorship Committee
Executive Committee
Executive Committee
Supporting Roles
Chief ActuaryValuation LeadPricing Lead
Forecasting LeadALM Lead
Assumption OwnersDocumentation Owners / Steward
LOB Representation
Operational Working Group
What is a possible committee structure?
Assumption Delivery
Assumption Oversight
Assumption Strategic Guidance
Supporting Roles
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Do you have chartered committee(s) with representation from actuarial and non-actuarial functions across the organization to review, challenge and approve assumptions?
Polling Question
1. No committee(s) in place
2. Yes, committee(s) in place with actuarial representation but with limited representation from non-actuarial functions
3. Yes, committee(s) in place with representation from actuarial and non-actuarial functions (e.g. risk, finance, etc.)
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What are the key roles and responsibilities of the committees?
Defining Roles and Responsibilities
Executive Committee
• Provides direction for defining approach to setting company-wide assumptions
• Grants final approval all assumptions proposed
Sponsorship Committee
• Ensures consistency and alignment of assumptions• Reviews, challenges, and approves assumptions proposed
by Operational Working Groups• Communicates and releases official approved assumptions
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What are the key roles and responsibilities of the committees?
Defining Roles and Responsibilities
Operational Working Group
• Discuss and agree on differences across model purposes and propose any assumption changes
• Propose Best Estimate Assumptions to the Sponsorship committee(s)
Supporting Roles
• Conduct experience studies• Recommend assumptions to the Operational Working Group(s)
based on experience studies• Quantify and implement assumption changes
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What are the major activities for the following assumption setting process step:
Deeper Dive into the Assumption Setting
Develop assumption inventory by product the universe of assumptions
Identify and document variations between the Business Function specific assumptions
Identify Assumptions
Governance
Identify Assumptio
ns
Sensitivity & Risk
Assessment
Experience Studies
Industry Monitoring
Experience Monitoring
Assumption Setting
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What are the major activities for the following assumption setting process step:
Deeper Dive into the Assumption Setting
Identify sensitivities to be performed
Perform sensitivity testing to understand and prioritize best estimate assumptions
– Identify sensitivity tests performed outside of the actuarial assumption setting process
– For new sensitivity tests, identify testing parameters and update models to determine the financial impact
Sensitivity Testing
Governance
Identify Assumptio
ns
Sensitivity & Risk
Assessment
Experience Studies
Industry Monitoring
Experience Monitoring
Assumption Setting
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Do you consider a range around your single best estimate assumption?
Polling Question
1. Sensitivities are performed and documented for all material assumptions to produce a range around the single best estimate
2. Sensitivities are only performed and documented on an as needed basis
3. Sensitivities are only performed on an as needed basis but results are rarely documented
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What are the major activities for the following assumption setting process step:
Deeper Dive into the Assumption Setting
Classify the riskiness of the best estimate assumptions and Business Function specific assumptions by line of business and product
Define assumption risks as low, normal or significant, documenting justification for rankings
Assumption Significance
Governance
Identify Assumptio
ns
Sensitivity & Risk
Assessment
Experience Studies
Industry Monitoring
Experience Monitoring
Assumption Setting
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What are the major activities for the following assumption setting process step:
Deeper Dive into the Assumption Setting
Determine formal experience studies to perform each year
Execute experience studies in line with company policy
Perform data validation and reconciling the underlying data
Communicate experience studies results to stakeholders
Create documentation supporting experience studies developed
Experience Studies
Governance
Identify Assumptio
ns
Sensitivity & Risk
Assessment
Experience Studies
Industry Monitoring
Experience Monitoring
Assumption Setting
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Does your organization consistently follow an experience study policy that outlines the company’s experience study methodology and schedule?
Polling Question
1. Actuarial functions / LOB’s create studies independently as needed without following a policy
2. Actuarial functions / LOB’s create studies independently as needed under the guidance of a formalized policy
3. A centralized group is responsible for all experience studies, but a policy with formalized standards and schedules is limited or does not exist
4. A centralized group is responsible for all experience studies with the schedule and standards documented in a formalized policy
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What are the major activities for the following assumption setting process step:
Deeper Dive into the Assumption Setting
Monitor published industry studies and notifying key stakeholders when new studies become available
Identify industry data to leverage in assumption setting process
Monitor regulatory actions and tax law changes that might warrant a review of current assumptions
Industry Monitoring
Governance
Identify Assumptio
ns
Sensitivity & Risk
Assessment
Experience Studies
Industry Monitoring
Experience Monitoring
Assumption Setting
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What are the major activities for the following assumption setting process step:
Deeper Dive into the Assumption Setting
Monitor trends in policyholder behavior and material movements in rates such as interest rate/credit spread/asset defaults each quarter
Identify material product design and pricing design changes
Track policy or process changes and identifying any qualitative items
Experience Monitoring
Governance
Identify Assumptio
ns
Sensitivity & Risk
Assessment
Experience Studies
Industry Monitoring
Experience Monitoring
Assumption Setting
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Do you document your comfort with assumptions ever quarter, regardless if they are updated or not?
Polling Question
1. Material assumptions are reviewed (e.g. trend analysis, A/E’s, etc.) and documented every quarter
2. Material assumptions are reviewed (e.g. trend analysis, A/E’s, etc.) every quarter but documentation supporting comfort with assumption is only captured once a year
3. Assumptions are only reviewed and documented once a year during the annual assumption setting process
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What are the major activities for the following assumption setting process step:
Deeper Dive into the Assumption Setting
Develop assumptions and validating them with experience study results and other relevant industry experience Recommend and present proposed assumptions to committee(s) for
review, challenge and approval Document and store rationale supporting decision to update or keep
current assumptions Communicate company-wide assumption updates to key functions Implement the approved assumptions in modeling environment and
perform final testing in the QA environment Release new production models with all reviewed and approved
assumption updates
Assumption Development
Governance
Identify Assumptio
ns
Sensitivity & Risk
Assessment
Experience Studies
Industry Monitoring
Experience Monitoring
Assumption Setting
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What is the committee interaction during assumption development?Committee Interaction for Assumption Development
Develop Assumptions
Timeline (e.g. July – August)
Gov
erna
nce
Executive Committee
Sponsorship Committee(s)
Operational Working Group(s)
Supporting Roles
Develop and recommend assumption
Propose assumption
change
Review, iterate and approval
Quantify financial impact(testing
environment)
Review and iterate
Gain committee approval
Approve final assumption
Publish assumption
release memo
Implement final
assumption in QA
environment
Release new production
models
Executive committee has final authority on assumptions
Sponsorship committee(s) are responsible for reviewing, challenging and approving assumptions in addition to communicating company-wide assumptions to Business Functions
Operational working group(s) are responsible for proposing assumption changes to the Sponsorship committee(s)
Supporting roles are responsible for developing assumptions, implementing in models and quantifying results
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Recap of Assumption Management Trends
Regulatory and Audit Requirements – Assumption management should take into consideration changing regulation and auditor requirements
Assumption Governance – Assumptions should be consistently defined and governed using a consistent framework across the organization
Assumption Development – Assumptions should be reviewed, approved and challenged by committees with representation from all Business Functions; the concert of assumptions should be reviewed instead of assumptions in isolation
Experience Studies – Experience studies should be actively managed across Business Functions using a consistent source of data
Documentation - Developed assumptions and corresponding rationale should be stored in assumption repository center allowing for easy replication and understanding in future
Copyright © 2013 Deloitte Development LLC. All rights reserved.Member of Deloitte Touche Tohmatsu Limited
Confidential: Privileged Attorney-Client Communication
DRAFT - Proposed Reserve AdjustmentsQ3 2014
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Jeffrey R. Lortie, FSA, MAAASociety of Actuaries – 2015 Valuation Actuary SymposiumSeptember 1, 2015
Assumption Governance and Management
Confidential: Privileged Attorney-Client Communication
The Resolution Life Story (to date)
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Resolution Life is a private specialist U.S. life insurance company — Our mission is to build a substantial, diversified and lasting life insurance company. — Our focus is providing excellent policyholder service and delivering sustainable
financial results to our investors within a well-controlled risk framework.
Resolution Life took ownership of Lincoln Benefit Life (“LBL”) on April 1, 2014 for approximately $600m
— 350 thousand policyholders and $13 billion of assets
Breadth of product types— Traditional Life, Universal Life, Deferred Annuities, Long-term Care
Ongoing business relationships— Reinsurance in place with Allstate for a portion of life insurance block— Retrocession in place (Allstate to Prudential) for VAs
In latter stages of transitioning retained business onto our administrative platforms, valuation systems, etc.
Confidential: Privileged Attorney-Client Communication
Resolution Life’s Actuarial Management Structure
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The establishment of a governance framework to manage critical actuarial analysis and decision-making, set forth by high-level policies, and supported by repeatable procedures, was
immediately identified as a critical need of the organization.
Board of Directors
Actuarial Balances Committee (ABC)
Voting Members: President, CFO, CIO, Appointed Actuary
Non-Guaranteed Elements Committee
Voting Members: Chief Legal Officer, CEO, ABC
Non-Voting Members / Supporting Staff
Corporate, Capital Management, ALM, Valuation, Modeling, Product Management, ERM
Management Risk Committee
Confidential: Privileged Attorney-Client Communication
Actuarial Balances Committee
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Duties and Responsibilities— Review at least annually: Comprehensive review of actuarial assumptions,
review of detailed experience studies, unlocking of actuarial assumptions for modelling or other purposes
– Plan, CFT, Dividend Projections, Valuation, GAAP/PGAAP— Review at least once per quarter: Life rate setting, Annuity rate setting,
Experience updates— Review periodically as needed: Model changes, Controls, Reserve
actions/changes, Updates on special projects
Process— Meetings conducted monthly, with set agenda— Prior meeting minute approval / update on previously-identified action items— Discussion of current topics— Active approval from voting members explicitly sought
Informed Parties— Audit Committee of the Board (Quarterly)— Nebraska Department of Insurance (As needed)
Confidential: Privileged Attorney-Client Communication
Resolution Life’s Assumption Setting Framework
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2. Experience Monitoring
3. Industry Monitoring
4. Experience Studies
5. Best Estimate
Assumption Setting(ABC)
1. Identify Assumptions / Sensitivity
& Risk Assessment
(ABC)
Though a primary order of activities exists under the governance structure, other factors and analysis may impact the process.
Primary Order of Activities
Additional Influences— Asset Adequacy Results, ORSA— Stress Testing and Capital Management— Macro-economic conditions— Regulatory Changes
Confidential: Privileged Attorney-Client Communication
Activity 1: Identify Assumptions / Sensitivity & Risk Assessment
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An exhaustive set of assumptions is established for each product as part of the acquisition process (i.e., appraisal), and defines the initial benchmark for experience
— Mortality, Longevity, Lapse / policyholder behavior, Morbidity, Claims
Appraisal contains sensitivities that can highlight key risks— Can help identify key assumptions that have large risk exposures— Helps ERM actuaries define meaningful stress tests— Provides insight to Appointed Actuary for Cash Flow Testing
Risk assessment is continually informed by ongoing analysis — Asset Adequacy Analysis, Stress Testing, ORSA— Results help re-focus company on risk exposures
Determine frequency of experience studies (determined formally by ABC)— Some quarterly, some annual, some triennial, etc.
– Life mortality, annuity lapses: annual– Mortality for annuitizations: scheduled for 2017
— Regulatory changes and business mix shifts may adjust frequency
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Confidential: Privileged Attorney-Client Communication
Activity 2: Experience Monitoring
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Experience monitoring is the development of a series of indicators to monitor actual experience to expected between formal experience studies, primarily to serve as an early-warning system for deviations and possible assumption updates
Formal process performed monthly using controlled data— Valuation supplies Account Value Rollforward— Corporate Actuarial provides Claims Experience
More focus is put on deviations in results during the experience monitoring process and may lead to assumption updates prior to full experience study
Assumption EIA Lapses MVA Lapses
Post-acquisition experience
As of 8/31/2014, YTD 2014 lapses were running higher than expected for EIA and MVA
Rationale Adverse experience was expected to continue and a factor was applied to appraisal assumptions to project higher future lapse rates for EIA
It was determined that the resultingadverse experience was from contracts coming to the end of their initial 5-year guarantee period
Decision Increase lapse rates No change to lapse rates
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Confidential: Privileged Attorney-Client Communication
Activity 3: Industry Monitoring
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Evaluate published industry studies for consideration in experience study analysis
— Enhances analysis of company experience– Post-acquisition experience is only now beginning to emerge
and cannot yet be used on a standalone basis to produce a meaningful experience study
– Challenges could be encountered to obtain appropriate historical data from seller
– Industry experience can be used as a guide in reviewing and setting assumptions
– Annuitization mortality, post-level term experience
Also conduct independent informal surveys— Dynamic lapse formula
Monitor regulatory action, which could impact how studies are conducted, and which studies are conducted (VM-20, VM-22)
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Confidential: Privileged Attorney-Client Communication
Activity 4:Experience Studies
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Evaluation of detailed data, interim experience monitoring, and industry-wide considerations to create a proposed best estimate assumption that will serve as a baseline for many actuarial activities
Performed on a set schedule established by ABC (required by Insurance Risk Guideline) unless experience emerges significantly differently and dictates a change to the schedule
Data scrubbing / validation can be time-consuming— Data acquired as part of transaction— Need to understand the data before using it for anything
Proposal provided to ABC after completion of study and related analysis:— Written communication
– Definition of data used and current assumption– Summary of experience– Incorporation of other factors (industry data)– Proposed changes (if any)– Financial impacts (if any)
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Confidential: Privileged Attorney-Client Communication
Activity 5:Assumption Setting
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Written communication is submitted to ABC for review and challenge
All discussions regarding actuarial assumption review are documented through ABC meeting minutes.
— Challenges documented through meeting minutes, as well as follow-up— Decision to update or not update assumptions are documented and then
communicated to all functional areas
Approval given for best estimate assumptions and adjusted as needed for other purposes
— Appointed Actuary may adjust for Asset Adequacy Analysis
Change management — Documentation of approval in ABC minutes and approval of those minutes— Assumptions based upon revised best estimates are tested and implemented
for official use in actuarial models— Subject to additional function-specific change management
– X Factors (Internal Controls over Financial Reporting)– Premium Persistency (Model Risk Management Guideline)
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