ASOP 22: Statements of Actuarial Opinion Based on Asset Adequacy Analysis

Question 1

Basic Approach

Answer 1

• Choose appropriate methods, testing periods, and modeling techniques
• Form an opinion based on results of the analysis
• Write the actuarial memorandum to document the details and basis for the opinion

Question 2

Section 1 - Purpose and Scope

Answer 2

Purpose and Scope- Provide guidance to actuaries in providing a satement of actuarial opinion relating to asset adequacy analysis of life insurance, annuity, or health insurance reserves and other liabilities

Question 3

Analysis of Issues and Recommended Practices - Asset Adequacy Analysis

Answer 3

1. Choose a block of assets such that statement value of those assets is no greater than statement value of reserves and other liabilities
2. If additional assests are needed, actuary should establish an additional reserve equal to the statement value of those additional assets and test that the total assets, including the additional assets, are adequate to support the reserves and other liabilities under moderately adverse conditions
3. Use professional judgment in choosing assets that are appropriate for the analysis method
4. Take into account the types and associated risks of the assets and liabilities in the asset adequacy analysis
5. Analysis Methods
   - Use a single method of analysis for all reserves and other liabilities or a number of different methods for each of several block of business
   - Cash flow testing is generally appropriate where cash flows vary under different economic scenarios
6. Other acceptable methods:
   - Cross premium reserve test
   - Demonstration of conversatism - A demostration of conversatism may be appropriate when the degree of conservatism in the reserves and other liabilities is so great that the cash flows are covered under moderately adverse conditions
   - Demostration of immaterial variation - Demonstration that the risks are not subject to material variation may be appropriate when the cash flow risks have been limited by product design and the investment strategy
   - Risk theory techniques (appropriate when products with short-duration liabilities are supported by short-duration assets)
   - Loss-ratio methods (when cash flows are for short durations)
7. Assumptions - methods of selecting assumptions
   - Trends - consider reflecting anticipated trends in the assumptions
   - Margins - include margins to reflect adverse deviation
   - Discount rates - consistent with the yield on assets chosen for the analysis, any investment strategy used in the analysis, and the testing horizon
   - Sensitivity testing of assumptions - testing of how variations in an assumption or combination of assumptions affect the asset adequacy analysis results
8. Reinsurance Ceded
   - Reflect reinsurance ceded cash flows in the asset adequacy analysis regardless of whether the analysis is performed for a direct writign company or a reinsurer
9. Aggregation during testing
   - Actuary may aggregate reserves and other liabilities for multiple blocks of business if the assets or cash flows from the blocks are available to support the reserves and other liabilities of the aggregated blocks of business
10. Use of cash flows from other financial calculations
    - If the actuary uses cash flows from other financial calculations in the asset adequacy analysis, take into account any differences between the cash flows in the financial calculations and the asset adequacy analysis due to the listed items
11. Separate Account Assets
    - When separate account business is included in the analysis, the actuary may include separate account assets in excess of separate account reserves and other liabilities
12. Management action
    - When reflecing in-force management actions in the asset adequacy analysis, consider the insurer’s capacity and intent to take such actions, the policy provisions, etc
13. Use of Analyses or Data Predating the Valuation Date
    - The actuary should take into account the reasonableness of such prior period data, studies, analyses, or methods; whether key assumptions are still appropriate; and whether any material events have occurred prior to the valuation date that would invalidate analysis
14. Testing Horizon
    - Period must be such that a longer period would not materially affect the analysis
15. Change in methods, models, assumptions
    - If the methods, models, assumptions differ from those in prior statement of actuarial opinion, the actuary should consider quantifying the impacts of these changes
16. Completeness
    - Should account for anticipated material cash flows
17. Reliance on others for data, projections and supporting analysis
    - The actuary may rely on data, projections, and supporting analysis supplied by others
18. Subsequent Events
    - The actuary should make a reasonable effort to be informed about subsequent events

Question 4

Statement of Actuarial Opinion & Documentation

Answer 4

1. Forming an Opinion with respect to Asset Adequacy Analysis - should consider the following:
   - Reasonableness of Results
   - Adequacy of reserves and other liabilities
   - Analysis of scenario results
   - Aggregation of results
   - Results from prior years
   - Opinions of other actuaries
   - Deficiencies
2. Statement of Actuarial Opinion Based on Asset Adequacy Analysis
   - The actuary should follow the form, content, and recommended language of the statement of actuarial opinon, as specified by applicable law
3. Documentation
   - The actuary should prepare and retain documentation to support compliance with the requirements of section 3 and the disclosure requirements of section 4

Question 5

Section 4 - Communications and Disclosures

Answer 5

1. Required Disclosures in an Actuarial Report
   - The intended purpose of the statement of actuarial opinion and a statement on the adeuqacy of reserves and other liabilities
   - Whether additional reserves have been established due to the asset adequacy analysis
   - The assets chosen, the methodolody used for their selection, and their appropriateness for the analysis method
   - The asset adequacy analysis methods chosen, and the information and analysis used to support the determination that the method is appropriate
   - The material risks analyzed, any sensitivity tests performed on those risks, and the results of those tests, when relevant
   - The assumptions chosen and any trends reflected in the assumptions
   - The margins chosen, even if the actuary concludes that a margin is not necessary
   - Any discount rates used
   - Whether and how reinsurance ceded cash flows were reflected in the asset adequacy analysis
   - Whether any aggregation was done, either during testing or during analysis of results
   - the use of cash flows from other financial calculations in the asset adequacy analysis
   - The use of assets, reserves and other liabilities, and cash flows from the separate account
   - Any management actions reflected in the asset adequacy analysis
   - The use of any prior period data, studies, financial analyses, and methods
   - The testing horizon used in the asset adequacy analysis
   - Any material changes in the methods, models, or assumptions from those used in the prior statement of actuarial opinion or if the models, assumptions, or methods used in the prior statement of actuarial opinion are unknown
   - the basis of any judgment that the total amount of any reserves reported as “not analyzed” is immaterial
   - The extent of any reliance on the data, projections, or supporting analysis of others
   - Any subsequent events of which the actuary is aware
   - The criteria used to form an opinion about the adequacy of reserves or other liabilities
   - Any deficiencies or limitations in the data, analyses, assumptions, or related information used in the asset adequacy analysis
2. Additional Disclosures
   - If any material assumptions or method was prescribed by applicable law
   - If the actuary states reliance on other sources and thereby disclaims responsibility for any material assumption or method selected by a party other than the actuary
   - If in the actuary’s professional judgment, the actuary has deviated materially from the guidance of this ASOP