Listen now as April Shen, FSA, MAAA interviews Jennifer Caplin, FSA, MAAA on the components, challenges and project management for model validation under LDTI. 

Show Notes:

Key components of model validation under LDTI and examples of model validation procedures for each component

1. Review of Data & Inputs

• Actual historical cash flows which should be validated and reconciled to source systems
• Process should be put in place to monitor assumptions and review and update as needed at least annually
• Assumption will be updated more frequently than current GAAP (most applicable to the FAS 60 products)
• Discount rates based on single A or locked-in rates at transition are another key input to validate

2. Calculation Engine

• Modified retrospective transition method
• Net Premium Ratio (NPR) unlocking process for Liability for Future Policy Benefits (LFPB)
• NPR capped at 100%
• DAC amortized on a constant basis over the expected life of the contract
• Market Risk Benefits fair value calculation

3. Outcomes Analysis
Under LDTI, outcomes analysis may be more tailored to the company’s LDTI implementation and scope of the validation. Examples include trend analyses, stress tests, or reasonability checks to the model output.

4. Governance and Controls Framework

• LDTI represents a change in the reporting process and related controls infrastructure
• Additionally, given the requirement to evaluate and update assumptions, if needed, at least annually, the assumption governance should be in place to manage and provide effective review and challenge of assumptions

5. Model Performance

• Review the model's ability to produce results that meet close schedules, especially with requirement to obtain historical cash flows and the need to run the model multiple times in step-change fashion to produce the required disclosures
• Evaluate manual efforts and identify opportunities for increasing level of automation

Other Resources About Model Validation

• Reading the federal guidance SR 11-7 which, while only required for federally regulated companies, provides good guidance for insurance companies performing independent model validations
• There's a PN on Model Governance that has additional information on model validation: https://www.actuary.org/sites/default/files/files/publications/Model_Governance_PN_042017.pdf
• ASOP 56, which is a new ASOP effective in October, provides standards of practices around validation in a section on Evaluating and Mitigating Model Risk:
  http://www.actuarialstandardsboard.org/asops/modeling-3/
• SOA webcasts: There will be two webcasts available soon: one covering LDTI Model Validation on 9/4 and another on ASOP 56 will be held on 8/13.

Jen's Email:

[email protected]