Session 49 IF, Assumption Governance and … · actuarial and non-actuarial functions across the organization ... during assumption development? ... Assumption Governance and Management

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

2 Copyright © 2015 Deloitte Development LLC. All rights reserved.

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


What needs to be aligned to best optimize the assumption setting process?

Opportunity to Optimize Process


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


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


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


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.)


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


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


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


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


Assumption Setting


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




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


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


Assumption Setting


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




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


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


Governance

Identify Assumptio

ns

Sensitivity & Risk

Assessment

Experience Studies

Industry Monitoring


Assumption Setting


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




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


Assumption Setting


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


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

23

Jeffrey R. Lortie, FSA, MAAASociety of Actuaries – 2015 Valuation Actuary SymposiumSeptember 1, 2015

Assumption Governance and Management


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.


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


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)


Resolution Life’s Assumption Setting Framework

27

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


Activity 1: Identify Assumptions / Sensitivity & Risk Assessment

28

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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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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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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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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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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Confidential: Privileged Attorney-Client Communication 33

Thank you!

Documents

Session 49 IF, Assumption Governance and … · actuarial and non-actuarial functions across the organization ... during assumption development? ... Assumption Governance and Management