ASOPs

Question 1

ASOP 23: Selection of data

Answer 1

1. Desired data elements
2. Appropriateness for intended purpose
3. Sufficiently current
4. Reasonableness and comprehensiveness
5. Internal and external consistency
6. Material limitations
7. Consider alternative data elements
8. Cost and feasibility of alternative data and time required
9. Benefit to be gained from alternative data
10. Sampling methods to collect the data

Question 2

ASOP 23: Data Reliance and Review

Answer 2

Reliance on information

1. 1 Validity of data is the responsibility of those who supply it
2. 2 Disclose reliance on data supplied by others

Review of data for reasonableness and consistency

2. 1 Data definitions
3. 2 Identify questionable data
4. 3 Consider further steps to improve data quality
5. 4 Disclose if do not review
6. 5 If data inadequate obtain different data or decline assignment

Question 3

ASOP 23: Limitation of actuary’s responsibility

Answer 3

1. Determine if data supplied by others falsified
2. Develop compilations solely to search for questionable data
3. Audit data

Question 4

ASOP 23: Communication and disclosure should include

Answer 4

1. Source of data
2. Whether actuary reviewed, and if not then disclose resulting limitations
3. Reliance on data and other information
4. Material adjustments or assumptions applied to data
5. Limitations on work due to data quality
6. Unresolved concerns
7. Highly uncertain results including potential magnitude
8. Conflicts from complying with laws and regulations

Question 5

Define actuarial communications, documents, and reports

Answer 5

1. Actuarial Communication: Written, electronic, or oral by actuary with respect to actuarial services
2. Actuarial document: actuarial communication in any recorded form (paper, email, spreadsheets, presentations)
3. Actuarial Report: actuarial documents available to an intended user that the actuary determines relevant to specific actuarial findings

Question 6

Requirements for actuarial communications and reports

Answer 6

1. Disclosures
2. Form and Content: appropriate to circumstances and intended audience
3. Clarity: language appropriate to circumstances and users
4. Timing of Communication: within reasonable period
5. Complete an actuarial report if intend for actuarial findings to be relied upon by any intended user
6. Sufficient clarity that another actuary qualified in same practice area could appraise reasonableness
7. Specific circumstances: be prepared to justify limiting the content
8. Explanation of material differences from earlier results

Question 7

ASOP 41 Disclosures

Answer 7

1. Scope of assignment
2. The intended users of the report
3. Methods, assumptions, and data used
4. Assumptions or methods prescribed by law
5. Actuarial findings
6. Cautions about risk and uncertainty
7. Limitations
8. Conflict of interest
9. Deviation from ASOP
10. Identification of responsible actuary
11. Acknowledgement of actuary’s qualification
12. Identification of actuarial documents comprising report
13. The information date
14. Subsequent events
15. When rely on other sources and disclaim responsibility
    15.1 The assumption or method that was set by another party
    15.2 Party who set the assumption or method
    15.3 Reason that this party set the assumption or method, and
    15.4 Either (the assumption conflicts with professional judgment) OR (Actuary was not
    qualified to judge reasonableness or unable to judge without substantial additional
    work)

Question 8

Considerations Relating to Stress and Scenario Tests: ASOP 46 - RISK EVALUATION IN ERM

Answer 8

1. Extent to which tests reflect similar or different degrees of adversity
2. Items in the business plan that describe how the organization will function during extreme events
3. How actions and reactions of various stakeholders and markets during extreme events may differ from those during normal times
4. Whether assumed interdependencies are appropriate under testing assumptions due to possibility of unanticipated consequences when risks interact in ways not seen historically
5. Some tests will be hypothetical situations, for which the actuary will not need to validate if it is realistic
6. Extreme event scenario may be a single event or series of events
7. How to define situations that result in non-quantifiable risk and how to show those effects

Question 9

Disclosure Elements Under ASOP 46: RISK EVALUATION IN ERM

Answer 9

1. Economic Capital and Economic Capital Models
2. Stress and Scenario Tests
3. Assumptions
4. Risks Included
5. Emerging Risks
6. Changes in System/Process
7. Model Validation

Question 10

Considerations Regarding Risk Treatment Under ASOP 47: RISK TREATMENT IN ERM

Answer 10

1. Financial Strength, Risk Profile and Risk Environment
2. 1 Financial flexibility
3. 2 Nature, scale and complexity of risks
4. 3 Potential differences between current and long-term risk environments
5. 7 Degree to which risks interact with one another and diversification benefits
6. 9 Organization’s exposure to risks compared to competitors
7. 6 Regulatory or rating criteria for risk levels and implications of those levels
8. 4 Strategic goals (including level of volatility of profits)
9. 5 Interests (risk/reward expectations of relevant shareholders)
10. 8 Fungibility of capital
11. Own Risk Management System
12. 1 Risk tolerance
13. 2 Risk appetite
14. 3 ERM control cycle
15. 4 Board of director’s knowledge and experience about risk management
16. 5 Execution of ERM control cycle
17. Relationship Between Financial Strength, Risk Profile and Risk Environment and Organization’s Risk Management System
18. Intended Purpose and Uses of Work Product

Question 11

Considerations for Reviewing Organizational Risk Parameters Under ASOP 47: RISK TREATMENT IN ERM

Answer 11

1. Financial and non-financial benefits associated with each activity
2. Regulatory or accounting constraints
3. Relationship between risk tolerance, risk appetite and risk limits
4. Historical volatility of organization’s results
5. Degree of concentration of risks
6. Opportunities to mitigate breaches of risk limits and tolerance (including cost and effectiveness of mitigations)

Question 12

Considerations for Reviewing Risk Mitigation Strategies Under ASOP 47: RISK TREATMENT IN ERM

Answer 12

1. Qualitative Aspects
2. 1 Resilience of organization under common fluctuations and extreme conditions
3. 2 Operational capabilities to implement risk mitigation
4. 3 Potential risk to organizational reputation
5. Cost and Potential Effectiveness
6. 1 Availability of risk mitigation instruments current and future
7. 2 Counterparty credit risk
8. 3 Basis risk nature and degree
9. 4 Degree of confidence that mitigation can be maintained/repeated
10. 6 Variability of outcomes after mitigation
11. 5 Availability of data
12. 7 Accounting treatment
13. 8 Regulatory constraints
14. 9 Granularity of modeling needed

Question 13

General Considerations of Capital Adequacy Assessment (per ASOP 55): CAPITAL ADEQUACY ASSESSMENT

Answer 13

1. Risk profile and capital
2. Business and risk drivers
3. Effect of changes in risk profile on capital adequacy
4. Existing or accessible resources (capital, data, computing power, human resources)
5. Timing and variability of projected liability and asset cash flows
6. Correlation of risks and events, concentration of exposures, diversification and interdependence
7. Insurer’s plans and strategies (and likelihood of success)
8. Future economic condition projections
9. Parameter uncertainty
10. Methodology for capital assessment

Question 14

Scenario Tests and Stress Tests -
Types of Tests and
Levels of Adversity

ASOP 55: CAPITAL ADEQUACY ASSESSMENT

Answer 14

1. Types of Tests
2. 1 Deterministic - challenge insurer in specific ways based on unique exposures
3. 2 Stochastic - from sets of stochastically generated scenarios
4. 3 Combination - multiple events happen simultaneously or sequentially
5. 4 Reverse - reverse-engineered tests that create adverse capital event
6. Levels of Adversity
7. 1 Periods of normal volatility
8. 2 Plausible adverse conditions
9. 3 Tail events

Question 15

Considerations in Selection of Risk Characteristics, per ASOP 12 RISK CLASSIFICATION

Answer 15

1. Relationship of Risk Characteristics and Expected Outcomes
2. Causality
3. Objectivity
4. Practicality
5. Applicable Law
6. Industry Practices
7. Business Practices

Question 16

Considerations in Establishing Risk Classes, per ASOP 12 RISK CLASSIFICATION

Answer 16

1. Intended Use
2. Actuarial Considerations
3. 1 Adverse selection
4. 2 Credibility
5. 3 Practicality
6. Other Considerations
7. 1 Legal compliance, industry practice, business practice limitations
8. Reasonableness of Results

Question 17

Considerations for Testing the Risk Classification System, per ASOP 12: RISK CLASSIFICATION

Answer 17

1. Test long-term viability of the system and determine any need for change
2. Effect of Adverse Selection: When material, estimate the potential impact and appropriate mitigation measures
3. Risk Classes Used for Testing: Consider using different set of risk classes for testing long-term viability if it improves the meaningfulness of the tests
4. Effect of Changes: Test effects of changes in risk classification system, business or industry practices
5. Quantitative Analysis: Analyze impact of compliance limitations, departures from industry practice, limitations of business practices, changes made by actuary, and effects of adverse selection

Question 18

Model Selection and Implementation Considerations, per ASOP 45 USE OF HEALTH STATUS RISK ADJ. METHODOLOGIES

Answer 18

1. Intended Use
2. Population and Program
3. Predictive Ability
4. Transparency
5. Timing of Data Collection, Measurement and Estimation
6. Impact on Program
7. Reliance on Experts
8. Practical Considerations
9. Model Version

Question 19

Considerations Regarding Consistency of Input Data, per ASOP 45: USE OF HEALTH STATUS RISK ADJ. METHODOLOGIES

Answer 19

1. Provider Contracts: Consider differences in provider contracts and the potential impact on the risk adjustment results
2. Diagnostic Services (Test if disease exist): Determine how model handles diagnostic services and whether data for those services should be included in the data input into the model
3. Coding and Other Data Issues: Consider impact of differences in accuracy and completeness of coding across organizations and time periods. Adjustments may be made such as phase-in, use of alternate models, and adjustment for changes in coding over time or across organizations

Question 20

ASOP 45 – USE OF HEALTH STATUS BASED RISK ADJUSTMENT METHODOLOGIES

Analysis of Issues and Recommended Practices

Answer 20

Model Selection and Implementation

Input Data

Assigning Risk Scores to Individuals with Limited Data: Minimum criteria required

Use in Combination with Other Rating Variables: actuary should consider whether those variables capture differences already captured by the risk adjustment model

Budget or Cost Neutrality: Consider changes in composition of group between historic and projected periods, changes in data coding and quality, program changes and any other changes, as one of the goals may be to shift funds without increasing or decreasing the overall budget or cost

Program Specifics: Consider specifics of program such as reinsurance or carve-outs

Addressing Model and Methodology Limitations: Consider limitations with the data, model or underlying program fundamentals.

Recalibration: Consider the necessity and advantages of recalibration in the context of available resources, materiality of expected changes in results, appropriateness of the unadjusted model risk weights, level of transparency of the model and limitations in data