Setting Assumptions (Third Exposure Draft)

Setting Assumptions

Exposure Draft

TRANSMITTAL MEMORANDUM

October 2020

TO: Members of Actuarial Organizations Governed by the Standards of Practice of the Actuarial Standards Board and Other Persons Interested in Setting Assumptions

FROM: Actuarial Standards Board (ASB)

SUBJ: Proposed Actuarial Standard of Practice (ASOP)

This document contains the third exposure draft of a proposed ASOP, Setting Assumptions.

Please review this exposure draft and give the ASB the benefit of your comments and suggestions. Each written comment letter or email received by the comment deadline will receive appropriate consideration by the drafting committee and the ASB.

The ASB requests comments be provided using the Comments Template that can be found here and submitted electronically to comments@actuary.org. Include the phrase “ASB COMMENTS” in the subject line of your message. Please note: Any message not containing this exact phrase in the subject line will be deleted by our system’s spam filter. Also, please indicate in the template if your comments are being submitted on your own behalf or on behalf of a company or organization.

The ASB posts all signed comments received to its website to encourage transparency and dialogue. Comments received after the deadline may not be considered. Anonymous comments will not be considered by the ASB nor posted to the website. Comments will be posted in the order that they are received. The ASB disclaims any responsibility for the content of the comments, which are solely the responsibility of those who submit them.

For more information on the exposure process, please see the ASB Procedures Manual.

Deadline for receipt of responses in the ASB office: April 15, 2021

History of the Standard

Assumptions are fundamental to the actuarial services performed by actuaries across all practice areas. The importance of actuarial assumptions continues to increase in the Sarbanes-Oxley environment, since the National Association of Insurance Commissioners promulgated the Model Audit Rule, and with the increased use of principle-based reserves and capital. Actuarial measurements often enter financial statements directly and are an integral part of managing the risk of an entity. In addition, the Public Company Accounting Oversight Board (PCAOB) has updated the audit guidelines for auditing financial statements that include information provided by specialists, including actuaries (see Appendix A to Accounting Standard 1105, Audit Evidence).

While certain practice-area assumption-setting standards exist (for example, ASOP No. 27, Selection of Economic Assumptions for Measuring Pension Obligations, and ASOP No. 35, Selection of Demographic and Other Noneconomic Assumptions for Measuring Pension Obligations), and assumption-setting guidance is included within certain other standards (for example, ASOP No. 43, Property/Casualty Unpaid Claim Estimates), there remain gaps in guidance. The ASB believes it would be useful to issue a standard on setting assumptions for all practice areas that will supplement the guidance that currently exists. Accordingly, in January 2016, the ASB created a multi-disciplinary task force under the direction of the General Committee to draft a standard on assumption setting for all practice areas.

First Exposure Draft

The first exposure draft was issued in December 2016 with a comment deadline of April 30, 2017. Forty-five comment letters were received and considered in making changes that are reflected in the second exposure draft.

Second Exposure Draft

The second exposure draft was issued in March 2019 with a comment deadline of July 31, 2019. Twenty-five comment letters were received and considered in making changes that are reflected in the third exposure draft. For a summary of issues raised in these comment letters, please see appendix 2.

Notable Changes from the Second Exposure Draft

The third exposure draft reflects significant revisions to coordinate with ASOP No. 56, Modeling, and in response to comments received on the second exposure draft of the proposed Setting Assumptions ASOP.

Notable changes made to the second exposure draft are summarized below. Additional changes were made to improve readability, clarity, or consistency.

1. The term “significant” has been replaced with “material.”
2. Section 1.1, Purpose, has been expanded to make it more consistent with section 1.2, Scope.
3. The definitions of Information Date, Prescribed Assumptions Set by Law, and Prescribed Assumptions Set by Another Party have been deleted. The term Information Date is no longer used in the ASOP, and the concept of prescribed assumptions is now only used in Section 4 to direct users to the corresponding sections of ASOP No. 41, Actuarial Communications.
4. Section 3.1(d) was added to take into account the balance between refined assumptions and materiality and practicality.
5. Section 3.3 (now section 3.6), Assumption Margins, was changed to acknowledge that margins can be either explicit or implicit, while providing guidance for explicit margins, and to expand the list of items to be taken into account when including an explicit margin.
6. Section 3.4, Range of Reasonable Assumptions, was added.
7. Section 3.6, Reasonable Assumptions in the Aggregate, has been deleted
8. Section 3.9, Reliance on Assumptions Set by Another Actuary, has been deleted.
9. Section 3.10, Reliance on Assumptions Set by Others, has been deleted.
10. Section 3.11, Documentation (now section 3.9), has been revised to indicate that an actuary, if preparing documentation, “should consider,” rather than “should” prepare documentation in the manner specified, and to remove the requirement that the documentation be prepared “such that another actuary qualified in the same practice area could assess the reasonableness of the actuary’s work and assume the assignment if necessary.” Note however that section 4.1(b) requires disclosure of the “information and analysis used for setting each material assumption in sufficient detail to permit another qualified actuary to assess the reasonableness of the assumption.”

The ASB voted in October 2020 to approve this third exposure draft.

Assumptions Task Force
Maria M. Sarli, Chairperson
Shawna S. Ackerman	Margaret Tiller Sherwood
Ralph S. Blanchard III	Mary H. Simmons
Raymond R. Brouillette

General Committee of the ASB
Judy K. Stromback, Chairperson
Ralph S. Blanchard III	Brian J. Mullen
Andrew M. Erman	Susan E. Pantely
Julie Fried	Hal Tepfer
Robert S. Miccolis	Christian J. Wolfe

Actuarial Standards Board
Kathleen A. Riley, Chairperson
Robert M. Damler	David E. Neve
Mita D. Drazilov	Cande J. Olsen
Kevin M. Dyke	Barbara L. Snyder
Darrell D. Knapp	Patrick B. Woods

The Actuarial Standards Board (ASB) sets standards for appropriate actuarial practice in the United States through the development and promulgation of Actuarial Standards of Practice (ASOPs). These ASOPs describe the procedures an actuary should follow when performing actuarial services and identify what the actuary should disclose when communicating the results of those services.

PROPOSED ACTUARIAL STANDARD OF PRACTICE

SETTING ASSUMPTIONS

STANDARD OF PRACTICE

Section 1. Purpose, Scope, Cross References, and Effective Date

1.1 Purpose

This actuarial standard of practice (ASOP or standard) provides guidance to actuaries when performing actuarial services that involve setting assumptions, giving advice on setting assumptions, or assessing the reasonableness of assumptions set by others.

1.2 Scope

This standard applies to actuaries in any practice area when performing actuarial services that require the setting of assumptions for which the actuary is taking responsibility, giving advice on setting assumptions, or assessing the reasonableness of assumptions set by others.

Setting assumptions includes, but is not limited to, activities that may variously be referred to as developing or selecting assumptions, and may include an analysis of data or experience, industry studies, trends, economic forecasts, and other analyses, as appropriate.

Throughout this standard, any reference to setting assumptions also includes giving advice on setting assumptions and, if the actuary’s assignment includes assessing assumptions set by others, assessing the reasonableness of assumptions set by others. If the actuary’s actuarial services involve assessing the reasonableness of assumptions set by others, the actuary should follow the guidance in section 3 to the extent practicable.

“Judgmental adjustments or assumptions [that] can be applied to data,” as described in section 3.4(c) of ASOP No. 23, Data Quality, are not within the scope of this ASOP.

Other ASOPs may provide guidance on setting assumptions. If the actuary determines that the guidance in this standard conflicts with a practice-area ASOP, the practice-area ASOP governs. If the actuary determines that the guidance in this ASOP conflicts with a cross-practice ASOP (i.e., an ASOP that applies to all practice areas), this ASOP governs.

If the actuary departs from the guidance set forth in this standard in order to comply with applicable law (statutes, regulations, and other legally binding authority), or for any other reason the actuary deems appropriate, the actuary should refer to section 4. If a conflict exists between this standard and applicable law, the actuary should comply with applicable law.

1.3 Cross References

When this standard refers to the provisions of other documents, the reference includes the referenced documents as they may be amended or restated in the future, and any successor to them, by whatever name called. If any amended or restated document differs materially from the originally referenced document, the actuary should consider the guidance in this standard to the extent it is applicable and appropriate.

1.4 Effective Date

This standard is effective for work performed on or after 12 months after adoption by the Actuarial Standards Board.

Section 2. Definitions

The terms below are defined for use in this actuarial standard of practice and appear in bold throughout the ASOP.

2.1 Assumption

A value that represents expectations, represents possibilities based on professional judgment, or is prescribed by law or by others to represent expectations or possibilities.

2.2 Data

Numerical, census, or classification information, or information derived mathematically from such items, but not general or qualitative information. Assumptions are not data, but data are commonly used in the development of assumptions.

Section 3. Analysis of Issues and Recommended Practices

3.1 General Considerations

The actuary should set assumptions that take into account the following:

a. the purpose of the assignment;

b. the guidance in ASOP No. 23, in the consideration and the choice of data underlying the assumptions;

c. the guidance in ASOP No. 25, Credibility Procedures, in the consideration of the credibility of data underlying the assumptions; and

d. the balance among refined assumptions, materiality, and practical matters such as cost and time within the scope of the assignment. The actuary is not required to set a more refined assumption when in the actuary’s professional judgment such use or selection is not expected to produce materially different results.

3.2 Data or Information Used When Setting Assumptions

When setting assumptions for which the actuary is taking responsibility, the actuary should consider using the following data or information:

a. actual experience adjusted to current conditions where applicable, to the extent it is available, relevant, and sufficiently reliable;

b. other relevant and sufficiently reliable experience, such as industry experience that is properly modified to reflect the circumstances, if actual experience is not available or relevant, or is not sufficiently reliable;

c. future expectations or estimates, including those inherent in market data, when available and appropriate, or a combination of both; and

d. other relevant sources of data or information.

3.3 Reasonableness of Assumptions

For assumptions for which the actuary is taking responsibility, the actuary should set assumptions that, in the actuary’s professional judgment, are reasonable with each such assumption having the following characteristics:

a. it is appropriate for the purpose of the assignment;

b. it takes into account data or information used when setting assumptions, as discussed in section 3.2; and

c. it is expected to have no material bias (i.e., it is not materially optimistic or pessimistic) relative to the purpose of the assignment, excluding the effect of a margin (as discussed in section 3.6).

3.4 Range of Reasonable Assumptions

Given the uncertain nature of the items for which assumptions are set, the actuary may consider various assumptions to be reasonable for a given measurement. Different actuaries may apply different professional judgment, so that a range of reasonable assumptions may develop, both for an individual actuary and across actuarial practice.

3.5 Consistency of Assumptions

If the assignment requires the actuary to set multiple assumptions, the actuary should set assumptions for which the actuary is taking responsibility that, in the actuary’s professional judgment, are reasonably consistent with one another to the extent the assumptions are related.

3.6 Assumption Margins

If appropriate for the purpose of the assignment, the actuary should consider including a margin in the assumption. A margin may be explicit or implicit. When setting an explicit margin, the actuary should take into account the following:

a. the degree to which there is uncertainty around the assumption due to the following:

1. lack of relevant, credible entity or industry experience data to support the assumption;

2. the inherent or historical variability in the data that supports the assumption; or

3. the possibility that the future may differ materially from the past in a manner that cannot be reliably predicted;

b. the variation of uncertainty over different periods of time within the projection period of the assignment; and

c. the range of possibilities relative to the expectations.

3.7 Subsequent Events

There may be circumstances where the actuary becomes aware of an event that occurs subsequent to the date(s) through which data or other information have been considered in developing the findings included in the actuarial report and before the date of the actuarial report that could result in a material change in assumptions. In this instance, the actuary may, but need not, reflect this event in setting assumptions, unless required by the purpose of the assignment.

3.8 Reliance on Data or Other Information Supplied by Others

When relying on data or other information supplied by others, the actuary should refer to ASOP Nos. 23 and 41, Actuarial Communications, for guidance.

3.9 Documentation

The actuary should consider preparing and retaining documentation to support compliance with the requirements of section 3 and the disclosure requirements of section 4, as appropriate for the purpose of the assignment. The degree of such documentation should be based on the professional judgment of the actuary and may vary with the complexity and purpose of the actuarial services. In addition, the actuary should refer to ASOP No. 41 for guidance related to the retention of file material other than that which is to be disclosed under section 4.

Section 4. Communications and Disclosures

4.1 Required Disclosures in an Actuarial Report

When issuing an actuarial report to which this standard applies, the actuary should refer to ASOP Nos. 23, 25, and 41. In addition, the actuary should disclose the following in such actuarial reports:

a. each material assumption;

b. the information and analysis used for setting each material assumption in sufficient detail to permit another qualified actuary to assess the reasonableness of the assumption;

c. material changes in assumptions since the most recent comparable actuarial report, to the extent known, relevant, and readily available; and

d. any explicit provisions for margins, as discussed in section 3.6.

4.2 Additional Disclosures

The actuary also should include the following disclosures, when applicable, in an actuarial report:

a. the disclosure in ASOP No. 41, section 4.2, of any prescribed assumptions set by law;

b. the disclosure in ASOP No. 41, section 4.3, if the actuary states reliance on other sources and thereby disclaims responsibility for any material assumption selected by a party other than the actuary (for example, prescribed assumptions set by another party); and

c. the disclosure in ASOP No. 41, section 4.4, if, in the actuary’s professional judgment, the actuary has deviated materially from the guidance of this ASOP.

4.3 Confidential Information

Nothing in this ASOP is intended to require the actuary to disclose confidential information.

Appendix 1—Background and Current Practices

Note:  This appendix is provided for informational purposes and is not part of the standard of practice.

Assumptions have always played a fundamental role in actuarial work for every discipline. Actuaries set assumptions, give advice on setting assumptions, and assess the reasonableness of assumptions set by others.

Historically, actuaries have used various approaches to setting and evaluating assumptions. For example, actuaries have used the actual experience of the entity being modeled, relied on detailed research by experts, used sophisticated projection techniques, and relied on their own professional judgment. Most actuaries have used a combination of these and other approaches.

Assumptions are set in order to produce estimates under conditions of uncertainty. Even assumptions that are prudently developed and carefully used cannot eliminate inherent uncertainty and variability, and actual experience may differ, sometimes significantly, from the estimates derived using assumptions. These differences, by themselves, do not indicate a flawed assumption-setting process or noncompliance with standards. Similarly, the fact that different actuaries may apply different professional judgment and may choose different reasonable assumptions does not indicate a flawed assumption-setting process.

While the setting of assumptions always has been an important part of actuarial practice, the importance of disclosing assumptions is increasing with the move to more principles-based financial reporting measurements and the increased focus on whether entities are properly funded or reserved to meet their obligations. Financial audits, reviews, and examinations also have evolved significantly in recent years. Sarbanes-Oxley and the Model Audit Rule promulgated by the National Association of Insurance Commissioners also have focused attention on assumptions. Furthermore, audits and examinations are increasingly conducted on a risk-focused basis, which contributes to the need for guidance on setting assumptions.

Appendix 2- Comments on the Second Exposure Draft and Responses

The second exposure draft of this proposed ASOP, Setting Assumptions, was issued in March 2019 with a comment deadline of July 31, 2019. Twenty-five comment letters were received, some of which were submitted on behalf of multiple commentators, such as by firms or committees. For purposes of this appendix, the term “commentator” may refer to more than one person associated with a particular comment letter. The Task Force carefully considered all comments received, and the General Committee and ASB reviewed (and modified, where appropriate) the proposed changes.

Summarized here are the significant issues and questions contained in the comment letters and the responses to each.

The term “reviewers” includes the Task Force, General Committee, and the ASB. Unless otherwise noted, the section numbers and titles used below refer to those in the second exposure draft.

Comments on this Exposure Draft

Click here to view the comments on this exposure draft in their entirety.