Study Notes and Published Refences - Note SN 8I-308-00 - REGULATORS' PERSPECTIVE ON ACTUARIAL OPINIONS AND VALUATIONS

Valuation Methodology or Mythology - Robert J Callahan

dynamic valn int rate 3% = 80% of excess of 12 months moody's avg over 3%
if co mgmt decides to sell high yielding assets and replace them w/ lower yielding assets, valn actuary, in calcing stat formula reserves, shoudl ascertain whether yields of new supporting assets can still justify the valn int rate or whether he should lower the rate
- CF analysis might indicate need for more assets to support liabs
Reg 126 allows actuary to rely on inv officer to some extent
- notes that either actuary or investment officer make adjustment for junk
- suggests adjusting CF of assets by reduction in annual income of 2.5% of principal of junk bonds
valn actuaries work may serve as an audit of pricing
junk bond study - recommended diversification
- "prudent man rule"
Callahan feels MSVR insufficient for junk and s/b liability instead of earmarked surplus
NY DOI prefers to place specific limits as to portion of total assets which may be invested into junk bonds
Actuary cannot make any judgement as to adequacy of assets and future prems w/o considering u/w, mktg, contractual provisions and investments
actuaries need to coordinate w/ other, rely on others, and advise others
Callahan feels AAA stds need updating and effects of quality of assets cannot be ignored until standards are developed
He prefers an objective std for reserves
statement reserves s/b higher of formula reserves and those indicated as necessary by Valn Act

What Regulators Need - John O Montgomery

The need
- regulators need to be aware of a deteriorating financial condition of an insurer in time to protect its PO from consequences of insolvency
The Std Valn Law
- controversy has arisen over what is meant by "present value of future benefits"
- some regulators insist its PV future guar benfits, incl nonf benfits, thus requiring the greatest PV of these two to be used in above formulas
- analagous to CARVM for specified annuity and endowment contracts
- what is needed is a SVL which will define basic concepts and distinguish between reasonable and plausible assumptoins as to determinatino of reserves and margins in surplus which s/b held for plausible contingencies
- restated: SVL should define basis for reserve and min req'd suplus (risk assumed buffer)
- revised SVL will probalby include general rules - NLP and deposit fund approach, depending on nature of plan
  - woudl require a redefinition of LOBs by valn method as well as by risk structure
- supporting regs woudl define specific requirements for documentation including int rates, mort, morbidity, persistency, and expense limitations
- actuary woudl be permitted to depart from such limitations if supported by actual experience demonstratoins acceptable to the regulator
The need for specific guidelines or instructions
- less than 1/3 of US companies have one or more company actuaries
- rest rely on consultants
- if a US insurer has operated w/o actuarial advice, it is revealed at time of state ins exam
Summary - What do Regulators Need
- practical procedures for projecting the development of reseves and teh effect of such developments on teh production of surplus
- practical procedures for probabilistic multivariate analysis of the various factors contributing to development of surplus and verifying the adequacy of reserves
- readily verifiable systems for testing credibility of projections
- if procedures for projecting surplus generation are not practically attainable for political reasons, system of credible surplus benchmark criteria
- financial stm that clearly shows financial progress of an ins cu, but retains sufficient info to validate teh proper accounting of ins transactions adn to verify projections made w/r to adequacy of reserves and suplus margins for plausible deviations
- revision of financial acctg procedures in conflict w/ concepts of analysis developed for the projection of cash flows and surplus generation
b/c of large volume of cos to review, survellance procedures needed to distinguish those insurers requiring detailed indiv company analysis from those requiring only a perfunctory monitoring

Copyright © 2004 Steve Welander.
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