Professionalism Counts, February 2024

Proposed Revisions to ASOP No. 12: ASB Wants Your Input on Risk Classification

The Actuarial Standards Board (ASB) released an exposure draft of a proposed revision to Actuarial Standard of Practice (ASOP) No. 12, Risk Classification (for All Practice Areas). ASOP No. 12 Task Force Chairperson Brian Mullen offered insight on the proposed changes.

The proposed revisions would broaden the scope of the ASOP. What activities would fall under ASOP No. 12 that didn't previously?

Brian Mullen: The current version of ASOP No. 12 applies to “designing, reviewing, or changing risk classification systems.” The proposed revision would also apply to “developing, selecting, evaluating or opining on any elements of a risk classification framework.” Another change is that the standard would apply to actuaries “using any elements of a risk classification framework in connection with financial or personal security systems, to the extent practical and consistent with the scope of the actuary’s assignment.”

The exposure draft includes several new terms, such as “risk measure,” “unintended bias,” and “risk subject.” Why was it important to add these to the ASOP?

BM: The current ASOP makes numerous references to “expected outcomes.” This could lead an actuary to think primarily only of the expected value, or mean, of the loss distribution. The proposed change to using the term “risk measure” is to reinforce that the actuary may want to consider other aspects of the loss distribution.

The term “risk subject” would replace the current term “risk(s)” and would have an almost identical definition. The change is to differentiate between the use of the word “risk” to mean a risk subject and the use of the word “risk” to mean a peril that has the potential to lead to a loss.

Unintended bias is an emerging issue. Actuaries may need to be aware of this issue and monitor how it evolves and whether that evolution has an impact on their work.

Several new sections have been added, including Data and Model, Multivariate Effects, Effectiveness, Potential for Unintended Bias, Protected Classes. What are some of the things the actuary needs to know about this new guidance?

BM: In the current ASOP, the word “risk” appears more than 100 times in the body of the ASOP and in the appendix; the word “model” does not appear at all. The use of models is highly

embedded in much risk classification work today. The proposed additional language would help the actuary to find guidance with respect to the use of these models.

Technological advances since the current ASOP was approved in 2005 allow the actuary to do many new forms of analysis and better understand multivariate effects and correlations. The proposed revision to the ASOP includes guidance for the actuary on this subject.

The current ASOP, in section 3.4.1, addresses that adverse selection can potentially threaten the long-term viability of a financial or personal security system. The proposed section on effectiveness highlights that the actuary should evaluate the impact of the risk classification framework on the viability of the security system. We hope that giving this concept its own section will encourage actuaries to evaluate other ways that a risk classification framework could impact a security system beyond just the effect of adverse selection.

Protected classes and unintended bias are issues that actuaries need to stay informed about.

Is there anything else you’d like to highlight?

BM: Each of the practice areas has seen tremendous change over the past 20 years in the ways that risk classification work is done and in how the results of that work are incorporated into other business practices. The proposed revisions to ASOP No. 12 give the actuary more guidance in relation to these changes. Because of the tremendous evolution of practice, the proposed changes to this ASOP are robust. The ASB highly values feedback on the proposed changes and encourages the submission of comments.

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Please consider submitting comments on ASOP No. 12; the deadline is May 1. The draft and instructions for submitting comments may be found on the ASB website.