Actuarial Modeling Controls
A survey of actuarial modeling controls in the context of a model-based valuation frame
As the life insurance and annuity industries move toward model-based approaches to reserve and capital valuation, actuarial models are increasing in complexity, sophistication, and riskiness. In the new environment, the high reliance that companies and regulatory agencies will place on model results will require a well-developed, monitored and maintained control system to assure the quality of models and supporting processes.
Deloitte Consulting LLP, with support from the Society of Actuaries (SOA) and direction from a Project Oversight Group, performed research and analysis to assess the current state of actuarial modeling controls within U.S. and Canadian life insurance and annuity companies around six key components of the actuarial modeling process. The research finds a wide variety of actuarial model governance and controls currently in place in the industry, and the report cites examples of leading practices currently implemented and also highlights areas where there are significant gaps between current and leading practices.
Resulting from our analysis, in Actuarial Modeling Controls: A Survey of Actuarial Modeling Controls in the Context of a Model-Based Valuation Framework, we highlight five significant findings as companies consider controls for model-based approaches to reserving and capital:
- Robustness of controls over desktop applications and spreadsheet applications will need to be significantly enhanced
- The tools in place (typically spreadsheets) to migrate actuarial modeling software results to financial statement entries are generally well controlled. Other output management tools, such as those used for peer review and management analysis, tend to be less controlled. There exists the risk that information provided for decision-making purposes could be incorrectly constructed and lead to flawed decisions.
- Governance frameworks should be set forth in order to ensure the sustainability and repeatability of the modeling process by visibly demonstrating structure and oversight.
- Companies that have established an independent, centralized model steward function, and appropriately empowered the steward, generally have more robust and effective controls in the current state
- Information technology (IT) involvement in the modeling process is currently minimal in the industry, but increased involvement could improve automation and controls.
Read the report to learn more.
© 2012 Society of Actuaries. All rights reserved. Posted with permission.