Analysis of Methods for Determining Margins for Uncertainty Under a Principle–Based Framework for Life Insurance and Annuity Products
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Background
Margins for uncertainty are a required element in determining assumptions under a Principle–Based framework for statutory minimum reserves and RBC calculations that is currently under development by the NAIC. Margins are needed for selected risk factors including but not limited to mortality, lapse, expense, and default costs.
Over the years, actuaries have employed diverse methodologies for determining margins for uncertainty. A few examples follow:
- Using a conservative aggregate actuarial assumption with the margin for uncertainty being an implicit unspecified amount.
- Establishing an explicit assumption for the margin.
- Analyzing the uncertainty by stochastic modeling to quantify the margin
Identifying and understanding the methods and techniques for measuring margins for uncertainty for risk factors should lead to better estimates and assist regulators in assessing the appropriateness of the estimates and/or establishing requirements for quantifying the margins.
Purpose
The purpose of this project is to create reference material that addresses the methods and techniques for quantifying margins for uncertainty in actuarial assumptions under a Principle–Based framework. This project will also assist practicing actuaries in developing margins under a Principle–Based framework, as well as assisting the Life and Health Actuarial Task Force (LHATF) of the National Association of Insurance Commissioners in finalizing guidelines and requirements for determining margins for uncertainty under a Principle–Based reserves approach for life insurance and annuities.
For the current exposure draft of the Principle–Based framework for life insurance and annuity products please see the American Academy of Actuaries Web site.
Research Objective
The objective for part one of this project is to perform analysis to identify, review, compile and compare approaches to determine margins for uncertainty in actuarial assumptions from existing literature/studies and/or original research. Inputs to be considered in meeting the research objective include but are not limited to: a literature search and a formal/informal survey of company practices. The researcher should examine approaches and company practices in other countries besides the US.
The objective for part two of this project is to examine the approaches identified in part one given a Principle–Based framework. The researcher will review and compare the appropriateness of the use of the approaches under a Principle–Based framework and if needed identify new methodologies for determining margins for uncertainty and/or modifications to existing methods.
The project should address methods and approaches used to determine margins in the aggregate that reflect risk offsets between the various risk factors, as well as margins on individual risk factors.
Research results will be summarized in a report that consists of but is not limited to the following:
- A comprehensive description of each approach including a discussion of the appropriateness of the use of the approach under a Principle–Based framework.
- A comparison of the approaches and the appropriateness of the use of the approach under a Principle–Based framework outlining the pros and cons.
- For statistical–type approaches a discussion of the distributions that can be used and how the selection of the underlying distribution impacts the result. For example what is the difference in the outcome in a stochastic modeling approach utilizing a lognormal distribution with a standard deviation of 5% vs. a binomial distribution with a 3% standard deviation.
- A discussion of US company practices for determining assumption margins for valuation purposes to practices in other countries such as Canada and European countries. In addition to identifying the methodologies utilized in other countries for determining margins, include in the discussion how the methods came about, reasons for using these margin methods and why the method was chosen over others.
- A discussion of company implementation issues of each approach.
- A discussion of new methods or modifications to existing approaches for determining margins for uncertainty in actuarial assumptions under a Principle–Based framework.
To provide timely information to LHATF, it is expected that the project will be completed no later than November 30, 2008.
Proposal
For final evaluation of proposals, it is important that researchers comment on their ability to meet the required time schedule.
To facilitate the evaluation of proposals, the following information should also be submitted:
- Resumes of the researcher(s), including any graduate student(s) expected to participate, indicating how their background, education, and experience bear on their qualifications to undertake the research. If more than one researcher is involved, a single individual should be designated as the lead researcher and primary contact. The person submitting the proposal must be authorized to speak on behalf of all the researchers as well as for the firm or institution on whose behalf the proposal is submitted.
- An outline of the approach to be used, emphasizing issues that require special consideration. Details should be given regarding the techniques to be used, collateral material to be consulted, and possible limitations of the analysis.
- Cost estimates for the research. We expect to reach agreement on a fixed cost for this project with the Researcher.
While cost will be a factor in the evaluation of the proposal, it will not necessarily be the decisive factor.
- A schedule for completion of the research, identifying key dates or time frames for research completion and report submissions.
- Ideas regarding the form and distribution of the final report, both for immediate release and for permanent reference (e.g., submission to The Actuarial Practice Forum or other SOA publication).
- Other related factors that give evidence of a proposer's capabilities to perform in a superior fashion should be detailed.
Selection Process
The SOA's sponsoring committees are responsible for the selection of the proposal to be funded. Input from other knowledgeable individuals also may be sought, but the sponsoring committees will make the final decision. The SOA's Research Actuary will provide staff actuarial support.
Questions
Any questions regarding this RFP should be directed by fax, or e–mail to:
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Notification of Intention to Submit Proposal
If you intend to submit a proposal, please send written notification by August 1, 2008 to:
- Jan Schuh, SOA Research Administrator
- f: 847.706.3599
- e–mail: jschuh@soa.org
Submission of Proposal
Please e–mail a copy of the proposal to: Jan Schuh at jschuh@soa.org
Proposals must be received no later than August 8, 2008. It is anticipated that all researchers who have submitted proposals will be informed of the status of their proposal no later than September 12, 2008.
Note: Proposals are considered confidential and proprietary.
Conditions
The Society of Actuaries reserves the right to not award a contract for this research. Reasons for not awarding a contract could include, but are not limited to, a lack of acceptable proposals or a finding that insufficient funds are available to proceed. The Society of Actuaries also reserves the right to redirect the project as is deemed advisable.
The Society of Actuaries intends to copyright and publish the results of this research. The research will be considered work–for–hire and all rights thereto belong to the Society of Actuaries. However, appropriate credit will be given to the Researcher(s).