Actuaries Seek To Educate Treasury On Principles-Based Reserving

–Determination of mortality assumptions.

–Auditing of PBR.

The AAA letter “recognizes that upon initial examination, it may appear that the actuary is given wide latitude in setting valuation assumptions used to determine reserves under principles-based reserves.”

But, the letter goes on to say there are prescribed assumptions that are used for risks such as the projected new money interest rates on future new investments in which a company has very little or no control over the outcome.

And, there are also stochastically modeled assumptions used for risks that fall within prescribed parameters as well as prudent estimate assumptions for risks where companies have some influence over the outcome of the risk factor.

The Academy letter says that “there is a requirement to provide full disclosure and documentation of the rationale and methods used to determine the prudent estimate assumption for each material risk.”

It also notes that the PBR approach has a “requirement for companies to submit their company experience data (e.g., mortality, lapse, etc.) to a centralized statistical agent to be used to develop frequently updated industry experience tables.”

The letter notes that there are elements of PBR currently in the proposal that require prudent best estimate assumptions “based on relevant, available and credible experience.”

On the issue of auditing, the letter states that “while PBR will create complexity, the selection of assumptions is not an unfettered process. Additionally, there are full documentation and disclosure requirements to enable validation of the assumptions and methodology by peer reviewers, outside auditors and state examiners.”