As the life insurance and annuity industries move toward model-based approaches to reserve and capital valuation, actuarial models are increasing in complexity and sophistication while the imperative to avoid modeling errors also increases, according to a recent report from Deloitte, titled “Actuarial Modeling Controls: A Survey of Actuarial Modeling Controls in the Context of a Model-Based Valuation Framework.”

Some of the model-based approaches included in this trend are U.S. statutory principle-based approaches, U.S. GAAP, Solvency II, market consistent embedded value, economic capital and proposed International Financial Reporting Standards (IFRS) approaches. With this increased reliance that companies and regulatory agencies will place on model results, well-developed, monitored and maintained control systems are becoming a requirement.

Key findings listed in the report include:

  • Controls over desktop applications and spreadsheet applications exhibited at companies will need to be significantly enhanced in order to meet the heightened levels of auditor scrutiny when reserves are reported under an model-based valuation (MBV) framework.
  • 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.
  • Companies with an independent, centralized model steward function, and appropriately empowered the steward, generally have more robust and effective controls in the current state, and as such have fewer areas to improve when moving toward controls under an MBV framework.
  • IT involvement in the modeling process in currently minimal in the industry but increased involvement could improve automation and controls. For example, removing the manual aspect of creating data files and referencing data files in the model would make the process more efficient.

Deloitte also found the companies that had suffered modeling errors or subject to Canadian or European reporting requirements were generally further along in implementing leading practice actuarial model controls. The report lists several best practices to follow, including establishing a model steward, implementing a formal change management process for governing model code changes, and automating and standardizing several steps in the process.

Deloitte’s Jason Morton and Jeffrey Lortie, who received support from the Society of Actuaries and the Project Oversight Group, led the research and analysis for the report. The insights were culled through the combination of an online survey, follow-up discussions with survey respondents, and additional sources.

For a full copy of the report, click here.

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