Title: Effect of PBA on Actuarial Software University of Connecticut Department of Mathematics Actuarial Sc
1Effect of PBA on Actuarial Software University
of ConnecticutDepartment of MathematicsActuarial
Science Seminar
- Presented by
- Charles S. Linn, FSA, MAAA
- MG-Triton Actuary
- Milliman
March 3, 2009
2Effect of PBA on Actuarial SoftwareKey Topics
- Current Actuarial Software Market
- Accounting Bases
- What is PBA?
- Actuarial Software of the (Not-Too-Distant)
Future - Lingering Issues
3Current Actuarial Software Market
- Purpose
- Reserve Valuation
- Pricing/Asset-Liability Management
- Source
- Homegrown
- Vendor
4Current Actuarial Software MarketValuation
Software
- Liability only
- Controls
- Locked-down
- SOX
- Seriatim
- Deterministic (single scenario)
- Rigid, formulaic calculations
- One run per period
5Current Actuarial Software MarketPricing/Asset-Li
ability Management Software
- Assets and liabilities
- Open code
- Allows for what-ifs?
- Modeled cells
- Stochastic (multiple scenarios)
- Interest
- Policyholder behavior
- Multiple runs per period
6Current Actuarial Software MarketSource
- Homegrown
- Company control
- Customized for companys needs
- Vendor
- Available resources
- Expertise
- Audit acceptability
- Maintenance
7Accounting Bases
- Statutory
- Tax
- GAAP
- Other
- Embedded Value
- International
- International Financial Reporting Standards
(IFRS) - Solvency II
8Accounting BasesStatutory
- State insurance departments
- Very conservative assumptions
- Prescribed methods/assumptions
- Standard by which companies can be compared
9Accounting BasesTax
- Internal Revenue Service
- Credit for increase in reserves during year
- Prescribed methods/assumptions like Statutory
- More realistic interest rate
- Capped at Statutory reserve
10Accounting BasesGAAP
- Accounting profession
- Realistic values
- Company experience
- Recognition of expenses and commissions
11Accounting BasesOther
- Embedded Value
- Analyze distributable earnings
- Assets are introduced
- International
- International Financial Reporting Standards
(IFRS) - Solvency II
12Principle-Based Approach (PBA)What Is It?
- More Actuarial Judgment
- Principles, not prescribed assumptions/methods
- Consistency
- Across product lines
- Across states
- Mixture of deterministic and stochastic
- Ensures accounting for all risks
13Principle-Based ApproachActuarial Judgment
- Methods/assumptions appropriate for a given
product type - Company experience, where credible and relevant
- More difficult for regulators/auditors
- Analysis of methods and assumptions, in addition
to results - Comparisons across companies
- Varying interpretations
14Principle-Based ApproachConsistency
- Across product lines
- Eliminate need for different regulations by
product - Require more actuarial interpretation
- Across states
- Eliminate need for 50 states having their own
regulations - Will the regulators go for this?
- Across accounting bases
- Does this eliminate the differences....
- ....or does it create an ADDITIONAL basis?
- Tax impact
15Principle-Based ApproachMixture of Deterministic
and Stochastic
- Deterministic
- One scenario
- Looks at each contract separately
- Gross Premium Valuation (GPV) or Greatest PV of
accumulated deficiencies (GPVAD) - Might be needed for Tax reserve cap
- Stochastic
- Multiple scenarios, reflecting policyholder
behavior - Modeled cells
- Conditional Tail Expectation (CTE)
- Hold greater of the two to ensure recognition of
all risks
16Actuarial Software The PBA Future
- Parts of Both Valuation and ALM Software
- Valuation software provides structure for
deterministic calculations - ALM software provides structure for stochastic
calculations - Integration/Communication
- The software needs to be integrated....
- ....or at least communication needs to be
established
17Actuarial Software The PBA FutureValuation
Software
- Input appropriate assumptions
- Calculate seriatim/deterministic PBA reserve
- May still be used to calculate standalone Tax
reserves - Aggregate reserve floor
- Results used to create modeled subset
- Stochastic-modeled results re-allocated back to
individual contracts
18Actuarial Software The PBA FutureALM Software
- Takes modeled results from valuation software
- Run multiple scenarios (interest and policyholder
behavior) - Produce stochastic-modeled results based on CTE
level - Aggregate results compared to aggregate
deterministic results - Pass excess reserve results back to valuation
software for re-allocation to individual
contracts - Controls
19Actuarial Software The PBA FutureIntegration/Co
mmunication
- Systems must be integrated, or at least
communicate with one another - Consistent inputs
- Enter assumptions once
- Transfer from one system to the other
- Create modeled subset from seriatim results
- Reduces model drift
- Clustering
- Re-allocate excess stochastic reserve to
individual contracts
20Actuarial Software The PBA FutureFuture Horizon
- Efficient Hardware
- More processors
- Grid technology
- Evolution of Commercial Software
- Historically, minimal customization
- More customization due to introduction of company
processes - Difficult for existing company personnel
21Actuarial Software The PBA FutureLingering
Issues
- Continued delays
- Types of products covered
- Tax consequences
- Regulator comfort
- State exceptions
- The Quick Close
- Reporting financial results requires quick
turnaround - Thousands of scenarios/ judgment lengthens
process - Hardware configuration
- Analysis of results
- Period-to-period changes