1. Assumptions ASOP Exposure Draft
Speaker:
Maria M. Sarli, FCA, FSA, EA, MAAA – Willis Towers Watson

2. Agenda Introduction Requirements When Setting Assumptions
Disclosure Requirements
Comments on Exposure Draft

3. Presentation Title
Wednesday, September 19, 2018
Introduction

4. Reasons for Development of Assumptions ASOP
Actuaries must effectively police ourselves to:
Protect reputation of the profession
Avoid or reduce risk of external regulation
Provide a defense against charges of bad practice
ASB believes there should be ASOPs that cover all activities commonly performed by actuaries
ASB believes that assumptions are fundamental to the work virtually every actuary does

5. Cross-Practice or Practice-Specific?
Separate assumption guidance for each type of activity, or cross- practice ASOP?
Only the pension practice has detailed guidance on assumption setting
i.e., separate ASOPs focused on demographic and economic assumption setting
Many gaps for other practice areas that will take significant time to fill
Even if all of the most common activities are covered, there will still be activities not covered
International Accounting Standards Board (IASB) has significant, cross practice assumption setting guidance in ISAP 1
ASB decided to develop a cross-practice ASOP
ASB General Committee was tasked with development

6. ASB General Committee
Tasked with developing/updating cross-practice ASOPs, e.g.
Introductory ASOP (ASOP No. 1)
Modeling (including Catastrophe Modeling)
Assumptions
Working with Auditors (ASOP No. 21)
Data Quality (ASOP No. 23)
Expert Testimony by Actuaries (ASOP No. 17)
Committee includes actuaries practicing in
Pension
Life
Health
P&C
Miscellaneous other areas (e.g., enterprise risk management)

7. Approach Taken High level guidance provided
Intended to be supplemented with activity-specific guidance
If this ASOP conflicts with an ASOP providing activity-specific assumption setting guidance, activity-specific guidance will control
Unlikely to be a direct conflict
If ASOPs overlap but don’t conflict, must comply with both
Modeled to some extent on approach taken in ISAP 1, with some influence by pension and post-retirement welfare benefits assumptions ASOPs
ASOP No. 27 (economic assumptions)
ASOP No. 35 (demographic assumptions)
Tricky to find language that will be understood the same way by different practice areas

8. Requirements When Setting Assumptions
Presentation Title
Wednesday, September 19, 2018
Requirements When Setting Assumptions

9. Proposed Effective Date
Presentation Title
Wednesday, September 19, 2018
Proposed Effective Date
Applies to any actuarial work product with an Information Date 12 months after adoption of final standard by ASB
i.e., no earlier than early 2019
Information Date is date through which data and information is considered when setting assumptions for a work product
Will differ depending on specific activity
May be the date work product is finalized
May be an earlier “as of” date
e.g., financial reporting is often as of a specific measurement date, reflecting only economic environment and information known as of that date

10. Applicability Guidance applies if actuary:
Develops or otherwise sets assumptions
Assesses the reasonableness of assumptions set by others
Provides advice to another party who has the responsibility to set assumptions
Uses assumptions set by others
If setting of assumptions is largely inseparable from the selection of methodology, includes selection of methodology and the matching of assumptions to the selected methodology
Expected to have limited applicability (primarily P&C)

11. Applicability
As with all ASOPs, need not be applied to immaterial items
“Material” defined in ASOP No. 1
Does not apply to “prescribed assumptions set by law”
Specific assumptions that are mandated or that are selected from a specified range or set of assumptions that are deemed to be acceptable by applicable law (statutes, regulations, and other legally binding authority)

12. Use Professional Judgement
Guidance is fairly common-sense and we would expect most actuaries already follow it
Use professional judgement in evaluating reasonableness of assumptions, considering
Nature of the assignment
Available, relevant and credible data
Other available and relevant information

13. Assess Whether Assumptions are Reasonable
Considerations
Do assumptions have a known tendency to significantly underestimate or overestimate the result?
Is the set of assumptions reasonable in the aggregate?
Prudence or optimism in multiple assumptions may result in a set of assumptions that is no longer reasonable
Are the assumptions reasonably consistent with each other?
Other than prescribed assumptions set by law
Disclose any material inconsistency, and the reasons therefor
To the extent known to the actuary, are the assumptions consistent with similar assumptions used for other assignments within the entity?

14. Changes in Conditions
Consider any material changes in conditions or experience known to the actuary by the information date that might cause assumptions that reflect prior conditions or experience to no longer be appropriate
For example, changes in
Internal circumstances regarding the entity, such as changes in claims processing
Mix of business
External circumstances affecting the entity
e.g., changes in the economic, legislative, regulatory, demographic, technological, or social environments

15. Reliance on Others
An actuary may rely on information from others when setting assumptions
e.g., the principal, representatives of the entity, investment advisers, demographers, economists, scientists, statisticians, health care providers, and other professionals
Can consider views of such experts, but setting or assessment of assumptions should reflect actuary’s professional judgment
Disclose if the actuary relies on other sources and disclaims responsibility for any material assumption
Actuaries with complementary qualifications in different practice areas may collaborate
Identify who is responsible for each assumption
Otherwise all signers assumed responsible for all assumptions

16. Assumptions Set by Others
In assessing whether assumptions set by another party are reasonable, the actuary should follow the ASOP as though the actuary was setting the assumption
In determining whether to use assumptions selected by others for which the actuary disclaims responsibility, the actuary should be guided by Precept 8 of the Code of Professional Conduct
“An actuary who performs Actuarial Services shall take reasonable steps to ensure that such services are not used to mislead other parties.”

17. Adjustments for Data Deficiencies or Adverse Deviation
Consider to what extent it is appropriate to adjust assumptions to compensate for known deficiencies in data
Document any such adjustments made
Consider making disclosures
Consider whether it is appropriate to adjust the assumptions by including margins for adverse deviation
Or choose assumptions that have already been adjusted
Margins might be appropriate to allow for uncertainty in the underlying data or assumptions
Disclose any such explicit adjustments made to material assumptions

18. Assess Whether Results are Reasonable
Disregarding the effect of prescribed assumptions set by law
Treat them as deemed reasonable and independent of the other assumptions
Ensure that assumptions are not set for the purpose of counteracting the effect of prescribed assumptions set by law
If the results of the analysis are not reasonable, the actuary should review the set of assumptions to determine whether adjustments are needed
Consider using sensitivity analysis to evaluate the potential effects of reasonable alternative assumptions on the findings

19. Disclosure Requirements
Presentation Title
Wednesday, September 19, 2018
Disclosure Requirements

20. Disclosures Required by ASOP No. 41, Actuarial Communications
Requirements of ASOP No. 41 Mentioned in this ASOP
Subsequent events or changes in circumstances that become known to the actuary after the information date and that may have otherwise affected assumptions set as of the information date
Any prescribed assumptions set by law
If the actuary states reliance on other sources and thereby disclaims responsibility for any material assumption selected by a party other than the actuary
Otherwise, Assumptions ASOP provides that all actuaries who issued communication will be considered to have taken responsibility for all assumptions and should satisfy the guidance for all assumptions
Of course, other requirements of ASOP No. 41 apply to actuarial communications even if not mentioned in another ASOP

21. Additional Disclosures Required by Assumptions ASOP
Material assumptions in sufficient detail to permit another qualified actuary to assess the reasonableness of the assumptions, including rationale if necessary for this purpose
Material inconsistencies among assumptions and the reasons for such inconsistencies
In the case of prescribed assumptions set by law, can limit to identifying the possibility of an inconsistency
Any explicit margin for adverse deviation
Material changes in assumptions since the most recent comparable results communicated
If, in the actuary’s professional judgment, the actuary has deviated materially from the guidance of the Assumptions ASOP

22. Comments on Exposure Draft
Presentation Title
Wednesday, September 19, 2018
Comments on Exposure Draft

23. Comments Received Comment Deadline: April 30
23 comment letters received through April 17 from
Regulators (e.g., Insurance Departments)
Actuaries specializing in the following areas:
Pension
Life
Health
P&C
ERM
Litigation

24. General Comments – Is ASOP Needed and Useful?
A few respondents questioned whether the ASOP was needed
Provides common sense guidance that everyone is already following
Potential conflicts with the assumption guidance in the Modeling ASOP
Is this also needed?
Will it will be rendered moot by the Modeling ASOP?
Potential conflicts with ASOP No. 41 and possibly other ASOPs
Better to enhance guidance in practice-specific guidance
Specific vs. generic guidance
A number of respondents made suggestions that were tailored to specific areas of actuarial practice and might be confusing to actuaries practicing in other areas in a cross-practice ASOP

25. General Comments - Title
Some questioned whether the term “setting” in the title is appropriate
Since it includes selecting or developing, or giving advice about selecting or developing, assumptions, and reviewing assumptions set by others
Some suggested that the term “assumptions” be replaced with “actuarial assumptions”

26. Responses to ASB’s 7 Specific Questions
Most respondents agreed that the scope should include the selection of methodology in cases where the setting of assumptions is largely inseparable from the selection of methodology
Some suggested wording changes, mostly intended to further regulate methodology
Not the intent of the ED
Methods not covered unless inextricably intertwined with methodology
E.g., Squaring the Triangle in P&C practice

27. Responses to ASB’s 7 Specific Questions
Most respondents agreed that the proposed standard provides appropriate guidance across all practice areas
Some questioned whether the standard provides enough guidance for assumptions used in modeling with long projection periods
Some suggested that modeling that involves several assumptions should include an analysis of the effects of different sets of assumptions
ED attempts to focus on assumptions only and leave modeling to the Modeling ASOP

28. Responses to ASB’s 7 Specific Questions
Most respondents agreed that the proposed standard is clear on how to handle conflicts with practice‐specific ASOPs
At least one respondent felt that any such conflicts should be documented in the actuarial work product
Most respondents agreed that the guidance that the actuary should consider the reasonableness of the results from using the assumptions, and not simply the reasonableness of each individual assumption, was clear and appropriate
One respondent indicated that judging the reasonableness of results of long term projections was problematic and that sensitivity analysis should be required

29. Responses to ASB’s 7 Specific Questions
Some suggestions were made in response to ASB’s question about whether additional terms should be defined
Suggestions
Assumptions
ASB’s original feeling was that the term “assumption” was clear
Principal (defined in ASOP No. 1)
Reasonable (discussed in ASOP No. 1)
Methodology
Some felt that the distinction between models and assumptions was not clear and definitions of both would help
Material (defined in ASOP No. 1)
An item or a combination of related items is material if its omission or misstatement could influence a decision of an intended user

30. Responses to ASB’s 7 Specific Questions
Most respondents agreed that the proposed standard appropriately addresses sensitivity analysis
Some felt that more discussion about correlated assumptions and varying single assumptions vs. multiple assumptions was needed
One respondent felt more discussion was needed regarding long projection periods
Most respondents agreed that the disclosures about assumptions and changes in assumptions were clear and appropriate

31. Common Themes in Additional Comments – Clarifications Needed
Effective date should key off delivery of work product, not “information date”
Some suggested meaning of “information date” is not clear
Others made other comments that revealed that their understanding of “information date” was different than drafters intended
Questioning of the meanings behind terms like “materially inconsistent” or “reasonably consistent’
Not clear how guidance applies to reviewing assumptions set by others or using assumptions as opposed to setting assumptions

32. Common Themes – Assumptions Prescribed by Law
If law/regulation specifies a range of acceptable assumptions, the choice within the range should be subject to ASOP
The actuary should have to disclose if
Prescribed assumptions are inconsistent with other assumptions
Assumptions in the aggregate are unreasonable taking prescribed assumptions into account
The actuary should have to use assumptions that are reasonable in the aggregate even when certain assumptions are prescribed
Would permit actuaries to subvert intent of prescribed assumptions
All of the above would require analyzing reasonableness of prescribed assumptions
Intent of drafters was that should not be required

33. Common Themes – Strengthen Certain Requirements
Actuaries should be required to disclose adjustments for data deficiencies, rather than being required to document them and consider disclosing them
Require disclosure of all margins for adverse deviation
Requires first determining a “best estimate”
Enhance requirements regarding sensitivity testing, particularly when projection period is long
Should not be able to disclaim an assumption prescribed by others without showing effect of a substitute assumption that is reasonable