Statements of Actuarial Opinion Based on Asset Adequacy Analysis for Life Insurance, Annuity, or Health Insurance Reserves and Other Liabilities
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- Transmittal Memorandum
- Purpose, Scope, Cross References, and Effective Date
- 1.1 Purpose
- 1.2 Scope
- 1.3 Cross References
- 1.4 Effective Date
- Section 2. Definitions
- 2.1 Asset
- 2.2 Asset Adequacy Analysis
- 2.3 Cash Flow
- 2.4 Cash Flow Risk
- 2.5 Cash Flow Testing
- 2.6 Gross Premium Reserve
- 2.7 Gross Premium Reserve Test
- 2.8 Liability
- 2.9 Moderately Adverse Conditions
- 2.10 Scenario
- 2.11 Subsequent Events
- Section 3. Analysis of Issues and Recommended Practices
- 3.1 Asset Adequacy Analysis
- 3.1.1 Analysis Methods
- 3.1.2 Assumptions
- 3.1.3 Reinsurance Ceded
- 3.1.4 Aggregation During Testing
- 3.1.5 Use of Cash Flows from Other Financial Calculations
- 3.1.6 Separate Account Assets
- 3.1.7 Management Action
- 3.1.8 Use of Data or Analyses Predating the Valuation Date
- 3.1.9 Testing Horizon
- 3.1.10 Changes in Methods, Models, or Assumptions
- 3.1.11 Completeness
- 3.1.12 Reliance on Others for Data, Projections, and Supporting Analysis
- 3.1.13 Subsequent Events
- 3.2 Forming an Opinion with Respect to Asset Adequacy Analysis
- 3.2.1 Reasonableness of Results
- 3.2.2 Adequacy of Reserves and Other Liabilities
- 3.2.3 Analysis of Scenario Results
- 3.2.4 Aggregation of Results
- 3.2.5 Results from Prior Years
- 3.2.6 Opinions of Other Actuaries
- 3.2.7 Deficiencies
- 3.3 Statement of Actuarial Opinion Based on Asset Adequacy Analysis
- 3.4 Documentation
- Section 4. Communications and Disclosures
- 4.1 Required Disclosures in an Actuarial Report
- 4.2 Additional Disclosures in an Actuarial Report
- Appendix
September 2021
TO: Members of Actuarial Organizations Governed by the Standards of Practice of the Actuarial Standards Board and Other Persons Interested in Statements of Actuarial Opinion Based on Asset Adequacy Analysis for Life Insurance, Annuity, or Health Insurance Reserves and Other Liabilities
FROM: Actuarial Standards Board (ASB)
SUBJ: Proposed Revision of Actuarial Standard of Practice (ASOP) No. 22, Statements of Actuarial Opinion Based on Asset Adequacy Analysis for Life Insurance, Annuity, or Health Insurance Reserves and Other Liabilities
This document contains a revision of ASOP No. 22, now titled Statements of Actuarial Opinion Based on Asset Adequacy Analysis for Life Insurance, Annuity, or Health Insurance Reserves and Other Liabilities.
History of the Standard
In 1993, the ASB adopted ASOP No. 22, Statutory Statements of Opinion Based on Asset Adequacy Analysis by Appointed Actuaries for Life or Health Insurers, which replaced Financial Reporting Recommendation No. 7, Statement of Actuarial Opinion for Life Insurance Company Statutory Annual Statements, and No. 11, Statement of Actuarial Opinion for Interest-Indexed
Universal Life Insurance Contracts, as guidance for opinions under section 8 of the model Actuarial Opinion Memorandum Regulation (1991).
Prior to the adoption, there had been discussions about whether ASOP No. 22 should cover opinions under both section 7 and section 8 of the model regulation. The ASB decided to limit ASOP No. 22 to cover opinions required under only section 8 and adopted Actuarial Compliance Guideline (ACG) No. 4, Statutory Statements of Opinion Not Including an Asset Adequacy Analysis by Appointed Actuaries for Life or Health Insurers, in October 1993 to provide guidance on opinions required under section 7. At the time of this revision to ASOP No. 22, ACG No. 4 continues to be relevant for actuaries working for companies that receive an exemption from asset adequacy analysis.
In the late 1990s and early 2000s, the ASB reviewed all standards of practice related to cash flow testing. Portions of ASOP No. 14, When to Do Cash Flow Testing for Life and Health Insurance Companies, were incorporated into ASOP No. 7, Analysis of Life, Health, or Property/Casualty Insurer Cash Flows, and ASOP No. 22. In 2001, the ASB adopted the revised ASOP No. 7 and ASOP No. 22 and repealed ASOP No. 14.
In December 2012, the National Association of Insurance Commissioners (NAIC) initially adopted the Valuation Manual, which sets forth the minimum reserve and related requirements for jurisdictions where the Standard Valuation Law, as amended by the NAIC in 2009, has been enacted. The Valuation Manual took effect on January 1, 2017, pursuant to section 11 of the Standard Valuation Law. Requirements for the annual actuarial opinion and memorandum pursuant to section 3 of the Standard Valuation Law are provided in “VM-30, Actuarial Opinion and Memorandum Requirements.” In December 2017, the NAIC also adopted Actuarial Guideline LI, The Application of Asset Adequacy Testing to Long-Term Care Insurance Reserves, which provides uniform guidance and clarification of requirements for asset adequacy testing for long-term care insurance.
In response to these NAIC activities, the ASB decided to revise this ASOP.
First Exposure Draft
The first exposure draft was approved by the ASB in December 2018 with a comment deadline of June 1, 2019. Fourteen 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 approved by the ASB in March 2020 with a comment deadline of November 30, 2020. Eight comment letters were received and considered in making changes that are reflected in this standard.
For a summary of issues contained in these comment letters, please see appendix 2.
Notable Changes from the Second Exposure Draft
Notable changes made from the second exposure draft to the final standard are summarized below. Additional changes were made to improve readability, clarity, or consistency.
- Modified the definition of subsequent events in section 2.11.
- Added references to ASOP Nos. 23, 25, and 56 in sections 3.1.2.1, 3.1.12, and 4.1, as appropriate.
- Modified the discount rates language in section 3.1.2.3.
- Added item (e) on reflecting in-force management actions in asset adequacy testing in section 3.1.7.
- Added a disclosure for discount rates in section 4.1(h).
Notable Changes from the Existing ASOP
A cumulative high-level summary of the notable changes from the existing ASOP are summarized below.
- Changed the purpose, scope, and title from applying to actuaries when providing a statement of actuarial opinion for life and health insurers to applying to actuaries when providing a statement of actuarial opinion relating to asset adequacy analysis of life insurance, annuity, or health insurance reserves and other liabilities.
- Added sections to provide guidance on the following:
- trends in assumptions (section 3.1.2.1);
- assumption margins (section 3.1.2.2);
- discount rates (section 3.1.2.3);
- sensitivity testing (section 3.1.2.4);
- reinsurance ceded (section 3.1.3);
- the use of cash flows from other financial calculations (section 3.1.5);
- separate account assets (section 3.1.6); and
- changes in methods, models, or assumptions (section 3.1.10).
- Significantly revised the management action section (section 3.1.7).
- Strengthened documentation requirements (section 3.4).
- Modified disclosure items (section 4).
The ASB is currently converting Actuarial Compliance Guideline (ACG) No. 4, Statutory Statements of Opinion Not Including an Asset Adequacy Analysis by Appointed Actuaries for Life and Health Insurers, into an ASOP. ACG No. 4 will remain in effect until the ASOP is adopted to continue providing guidance to actuaries issuing opinions not including an asset adequacy analysis.
The ASB wishes to thank everyone who took the time to contribute comments and suggestions to the exposure drafts, and in particular offers special thanks to John MacBain and Martin Snow, previous members of the ASOP No. 22 Task Force who contributed to earlier drafts.
The ASB voted in September 2021 to adopt this standard.
Task Force to Revise ASOP No. 22
Laura A. Hanson, Chairperson
Bryan N. Amburn
Linda M. Lankowski
Thomas A. Campbell
Leslie M. Jones
Laurel A. Kastrup
Life Committee of the ASB
Linda M. Lankowski, Chairperson
Janice A. Duff
Gabriel Schiminovich
Lisa S. Kuklinski
Jeremy Starr
Donna C. Megregian
Actuarial Standards Board
Darrell D. Knapp, Chairperson
Elizabeth K. Brill
Cande J. Olsen
Robert M. Damler
Kathleen A. Riley
Kevin M. Dyke
Judy K. Stromback
David E. Neve
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.
ACTUARIAL STANDARD OF PRACTICE NO. 22
STATEMENTS OF ACTUARIAL OPINION BASED ON ASSET ADEQUACY ANALYSIS OF LIFE INSURANCE, ANNUITY, OR HEALTH INSURANCE RESERVES AND OTHER LIABILITIES
STANDARD OF PRACTICE
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 with respect to providing a statement of actuarial opinion relating to asset adequacy analysis of life insurance, annuity, or health insurance reserves and other liabilities, pursuant to applicable law (statutes, regulations, and other legally binding authority).
1.2 Scope
This standard applies to actuaries when performing actuarial services with respect to providing a statement of actuarial opinion based on asset adequacy analysis of life insurance, annuity, or health insurance reserves and other liabilities, under the following circumstances:
a. the statement of actuarial opinion is prepared to comply with applicable law based on the model Standard Valuation Law and VM-30 of the NAIC Valuation Manual; or
b. the statement of actuarial opinion is prepared for an insurance company to comply with other applicable law.
If the statement of actuarial opinion encompasses health insurance liabilities, ASOP No. 28, Statements of Actuarial Opinion Regarding Health Insurance Assets and Liabilities, may also apply. If the statement of actuarial opinion includes reinsurance, ASOP No. 11, Treatment of Reinsurance or Similar Risk Transfer Programs Involving Life Insurance, Annuities, or Health Benefit Plans in Financial Reports, may also apply.
If the actuary departs from the guidance set forth in this standard in order to comply with applicable law, 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 all statements of actuarial opinion covered by the scope of this ASOP issued on or after June 1, 2022.
Section 2. Definitions
The definitions below are defined for use in this actuarial standard of practice and appear in bold throughout the ASOP.
2.1 Asset
Any resource that can generate revenue cash flows or reduce disbursement cash flows.
2.2 Asset Adequacy Analysis
An analysis of the adequacy of reserves and other liabilities being tested, in light of the assets supporting such reserves and other liabilities, as specified in the statement of actuarial opinion.
2.3 Cash Flow
Any receipt, disbursement, or transfer of cash or asset equivalents; includes policy cash flows and cash flows that are not policy related, such as cash flows from assets, corporate expenses, and litigation costs.
2.4 Cash Flow Risk
The risk that the amount or timing of cash flows will differ from expectations or assumptions.
2.5 Cash Flow Testing
The projection and comparison of the timing and amount of cash flows under one or more scenarios in order to evaluate cash flow risks.
2.6 Gross Premium Reserve
The actuarial present value of future benefits, expenses, and related amounts less the actuarial present value of future gross premiums and related amounts.
2.7 Gross Premium Reserve Test
The comparison of the gross premium reserve computed under one or more scenarios to the financial statement reserves and other liabilities.
2.8 Liability
Any commitment by, or requirement of, an insurer that can reduce revenue cash flows or generate disbursement cash flows.
2.9 Moderately Adverse Conditions
Conditions that include one or more unfavorable, but not extreme, events that have a reasonable probability of occurring during the testing period.
2.10 Scenario
A set of economic and other assumptions used in asset adequacy analysis.
2.11 Subsequent Events
Material events that occur after the valuation date and before the date the statement of actuarial opinion is signed.
Section 3. Analysis of Issues and Recommended Practices
3.1 Asset Adequacy Analysis
When performing an asset adequacy analysis, the actuary should choose a block of assets such that the statement value of those assets is no greater than the statement value of the reserves and other liabilities being tested. The actuary should determine whether additional assets are needed to support the reserves and other liabilities being tested under moderately adverse conditions. If the actuary determines that additional assets are needed, then the actuary should establish an additional reserve equal to the statement value of those additional assets and test that the total assets, including the additional assets, are adequate to support the reserves and other liabilities under moderately adverse conditions.
The actuary should use professional judgment in choosing assets that are appropriate for the analysis method and are not used to support reserves and other liabilities other than those being tested by the actuary. The actuary should take into account the types and associated risks of the assets and liabilities in the asset adequacy analysis.
3.1.1 Analysis Methods
The actuary should use professional judgment in choosing an appropriate analysis method. The actuary may use a single method of analysis for all reserves and other liabilities or a number of different methods of analyses for each of several blocks of business.
The actuary should consider using cash flow testing and should refer to ASOP No. 7, Analysis of Life, Health, or Property/Casualty Insurer Cash Flows. Cash flow testing is generally appropriate where cash flows vary under different economic scenarios.
The actuary may consider using analysis methods other than cash flow testing to evaluate the adequacy of the assets to support the reserves and other liabilities being tested. The following are examples of other analysis methods:
- Gross Premium Reserve Test-A gross premium reserve test may be appropriate when the testing would emphasize the sensitivity of cash flows arising from liabilities under moderately adverse conditions. For example, this type of method may be appropriate for term insurance backed by noncallable bonds.
- Demonstration of Conservatism-A demonstration of conservatism may be appropriate when the degree of conservatism in the reserves and other liabilities is so great that the cash flows are covered under moderately adverse conditions. For example, this type of method may be appropriate for a block of accidental death and dismemberment insurance if that block is reserved using conservative interest rates and mortality/morbidity tables.
- Demonstration of Immaterial Variation-A demonstration that the risks are not subject to material variation may be appropriate when the cash flow risks have been limited by product design and the investment strategy. For example, this type of method may be appropriate for a non-life contingent payout annuity backed by a cash flow matched asset portfolio.
- Risk Theory Techniques-Analysis using risk theory techniques may be appropriate when the risks inherent in products with short-duration liabilities are supported by short-duration assets. Such techniques can be used to measure cash flows for risks that are subject to large fluctuations that arise infrequently since the cash flows arising from liabilities can rarely be matched to the cash flows arising from assets under moderately adverse conditions. For example, this method may be appropriate for risks involving a small number of large individual claims over a short period, such as catastrophe or stop loss coverage.
- Loss Ratio Methods-Loss ratio methods may be appropriate when the cash flows are of short duration. Under these methods, morbidity or mortality costs may be tested under moderately adverse conditions. For example, these methods may be appropriate for certain short-term disability coverages.
3.1.2 Assumptions
The actuary should choose assumptions that are appropriate for the analysis.
3.1.2.1 Trends
The actuary should consider reflecting anticipated trends in the assumptions. When determining the level of trend to apply, if any, the actuary should take into account the following:
- whether different trends should be used for different types of business. For example, mortality improvement may be different between life and annuity products;
- the source and credibility of the data from which the assumptions are derived (for further guidance, the actuary should refer to ASOP No. 23, Data Quality, and ASOP No. 25, Credibility Procedures). For example, different trends may be appropriate when using company experience vs. industry studies; and
- the impact of trends on cash flows. For example, the effect of future economic conditions on policyholder elections.
3.1.2.2 Margins
The actuary should consider including margins in assumptions to reflect adverse deviation. When determining the level of assumption margins, if any, the actuary should take into account the following:
- the level of uncertainty for the assumption, including sparsity of data;
- the degree of adverse deviation covered by the margin;
- whether the margins vary over time;
- whether individual margins or aggregate margins are used in the analysis;
- the interaction between assumptions, including the overall impact of margins; and
- the possibility that more than one adverse condition could occur at one time.
3.1.2.3 Discount Rates
When using an analysis method that requires the use of discount rates, the actuary should choose discount rates that are consistent with the yield on assets chosen for the analysis, any investment strategy used in the analysis, and the testing horizon used in the analysis.
3.1.2.4 Sensitivity Testing of Assumptions
In setting assumptions and assumption margins, the actuary should consider performing sensitivity testing of how variations in an assumption or combinations of assumptions affect the asset adequacy analysis results.
3.1.3 Reinsurance Ceded
The actuary should consider reflecting reinsurance ceded cash flows in the asset adequacy analysis regardless of whether the analysis is performed for a direct writing company or a reinsurer. In deciding whether and how to reflect the reinsurance ceded cash flows, the actuary should solicit information from management regarding the extent of reinsurance, the associated cash flows, their collectability, any disputes with reinsurers, and practices regarding provisions for reinsurance ceded. The actuary’s consideration of reinsurance ceded does not imply an opinion on the financial condition of any reinsurer.
3.1.4 Aggregation During Testing
When performing an asset adequacy analysis, the actuary may aggregate reserves and other liabilities for multiple blocks of business if the assets or cash flows from the blocks are available to support the reserves and other liabilities of the aggregated blocks of business. When performing this aggregation, the actuary should not use assets or cash flows from one block of business to discharge the reserves and other liabilities of another block of business if those assets or cash flows cannot be used for that purpose.
3.1.5 Use of Cash Flows from Other Financial Calculations
If the actuary uses cash flows from other financial calculations (for example, principle-based reserve or capital models) in the asset adequacy analysis, the actuary should take into account any differences between the cash flows in the financial calculations and the asset adequacy analysis due to items such as the following:
- starting assets;
- assumptions, including margins;
- sensitivities;
- any interim shortfalls in accumulated cash flows;
- any requirements for the aggregation of results that are specified by applicable law;
- distribution of surplus; and
- taxes.
If the actuary uses cash flows from other financial calculations, the actuary should confirm that the assumptions underlying these cash flows are appropriate for an asset adequacy analysis under moderately adverse conditions.
3.1.6 Separate Account Assets
When separate account business is included in the analysis, the actuary may include separate account assets in excess of separate account reserves and other liabilities. This treatment would result in fewer general account assets being used in the analysis than if the separate account business had been excluded.
The actuary should determine whether it is appropriate to use cash flows from separate account assets to support reserves and other liabilities that are not associated with the separate account. When making the determination, the actuary should take into account any legal restrictions, such as separate account assets that are not chargeable with liabilities arising out of any other business under state law.
3.1.7 Management Action
When reflecting in-force management actions in the asset adequacy analysis, the actuary should take into account the following:
- the insurer’s capacity and intent to take such actions;
- the insurer’s documented procedures and historical practice;
- the policy provisions;
- whether other assumptions, such as policyholder behavior assumptions, are reasonable in light of the actions;
- whether there are impediments to the implementation timeline, such as the need to obtain regulatory approval or process limitations; and
- whether the actions are reasonable and comply with applicable law.
The actuary should consider quantifying the impacts of these actions as part of the analysis.
3.1.8 Use of Data or Analyses Predating the Valuation Date
If appropriate, the actuary may use data or analyses predating the valuation date. When using data or analyses prior to the valuation date, the actuary should take into account the reasonableness of such prior period data, studies, analyses, or methods; whether key assumptions are still appropriate; and whether any material events have occurred prior to the valuation date that would invalidate the asset adequacy analysis on which the statement of actuarial opinion is based.
Examples of data or analyses an actuary may use include:
- data taken from a time that predates the valuation date, such as data from September 30 to support a December 31 valuation;
- an asset adequacy analysis performed prior to the valuation date;
- an analysis performed at the time of policy issue; and
- prior analysis of a closed block of business.
3.1.9 Testing Horizon
The actuary should perform an asset adequacy analysis over a period that extends to a point at which, in the actuary’s professional judgment, the use of a longer period would not materially affect the results of the analysis.
3.1.10 Changes in Methods, Models, or Assumptions
If the methods, models, or assumptions differ from those in the prior statement of actuarial opinion, the actuary should consider quantifying the impacts of these changes.
The use of new methods, models, or assumptions for new liability segments (for example, a new line of business or product) or new asset amounts is not a change within the meaning of this section.
3.1.11 Completeness
When performing the asset adequacy analysis, the actuary should take into account anticipated material cash flows such as renewal premiums, guaranteed and nonguaranteed benefits and charges, expenses, and taxes. In determining the assets supporting the tested reserves and other liabilities, the actuary should take into account any asset segmentation system used by the company.
The actuary should confirm that the total amount of any reserves and other liabilities reported as “not analyzed” is immaterial.
3.1.12 Reliance on Others for Data, Projections, and Supporting Analysis
The actuary may rely on data, projections, and supporting analysis supplied by others. When practicable, the actuary should review the data, projections, and supporting analysis for reasonableness and consistency. For further guidance, the actuary should refer to ASOP No. 23, ASOP No. 41, Actuarial Communications, and ASOP No. 56, Modeling. The actuary should disclose the extent of any such reliance.
3.1.13 Subsequent Events
The actuary should make a reasonable effort to be informed about subsequent events.
3.2 Forming an Opinion with Respect to Asset Adequacy Analysis
When forming an opinion with respect to asset adequacy analysis, the actuary should follow the guidance below.
3.2.1 Reasonableness of Results
The actuary should review the modeled future economic and experience conditions and test results for reasonableness.
3.2.2 Adequacy of Reserves and Other Liabilities
The actuary should determine whether the reserves and other liabilities being tested are adequate under moderately adverse conditions, in light of the assets supporting such reserves and other liabilities The actuary should recognize that holding reserves or other liabilities so great as to withstand any conceivable circumstance, no matter how adverse, may imply an excessive level of reserves or other liabilities.
3.2.3 Analysis of Scenario Results
If the supporting assets are insufficient to meet the reserves and other liabilities under a scenario, the actuary should consider whether further analysis is required. However, this situation does not necessarily mandate additional reserves or other liabilities. Further analysis may indicate that current reserves and other liabilities are adequate. For example, if a large number of scenarios were run, the failure of a small percentage of them may not indicate the need for additional reserves or other liabilities.
3.2.4 Aggregation of Results
If business segments are modeled separately, the actuary may consider offsetting deficiencies in one business segment with sufficiencies in another business segment for the purposes of reporting and documenting the results of testing. When considering aggregation of results to offset deficiencies, the actuary should take into account the type and timing of cash flows, the related cash flow risks, and the comparability of elements of the analysis such as analysis methods, scenarios, discount rates, and sensitivity of assumptions.
3.2.5 Results from Prior Years
The actuary should consider analyzing the results over time and reconciling the results from prior years.
3.2.6 Opinions of Other Actuaries
When more than one actuary contributes to the asset adequacy analysis, the opining actuary should form an overall opinion without claiming reliance on the opinions of other actuaries.
3.2.7 Deficiencies
The actuary should be aware of any deficiencies or limitations in the data, analyses, assumptions, or related information used in the asset adequacy analysis.
3.3 Statement of Actuarial Opinion Based on Asset Adequacy Analysis
The actuary should follow the form, content, and recommended language of the statement of actuarial opinion, as specified by applicable law. The actuary should identify the intended purpose of the statement of actuarial opinion. The actuary should include a statement on the adequacy of reserves and other liabilities based on an asset adequacy analysis, the details of which are contained in the supporting memorandum.
3.4 Documentation
The actuary should prepare and retain documentation to support compliance with the requirements of section 3 and the disclosure requirements of section 4. The actuary should prepare such documentation in a form such that another actuary qualified in the same practice area could assess the reasonableness of the actuary’s work. 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, including statements of actuarial opinion, regulatory asset adequacy issues summaries (RAAISs), and supporting memoranda, the actuary should refer to ASOP Nos. 7, 11, 23, 25, 28, 41, and 56, as applicable. In addition, the actuary should disclose the following, whether or not required by applicable law:
- the intended purpose of the statement of actuarial opinion and a statement on the adequacy of reserves and other liabilities based on an asset adequacy analysis (see section 3.3);
- whether additional reserves have been established due to the asset adequacy analysis (see section 3.1);
- the assets chosen, the methodology used for their selection, and their appropriateness for the analysis method (see section 3.1);
- the asset adequacy analysis methods chosen, and the information and analysis used to support the determination that the method is appropriate for the reserves and other liabilities being tested (see section 3.1.1);
- the material risks analyzed, any sensitivity tests performed on those risks, and the results of those tests, when relevant (see sections 3.1 and 3.1.2.4);
- the assumptions chosen and any trends reflected in the assumptions (see sections 3.1 and 3.1.2);
- the margins chosen, even if the actuary concludes that a margin is not necessary (see section 3.1.2.2);
- any discount rates used (section 3.1.2.3);
- whether and how reinsurance ceded cash flows were reflected in the asset adequacy analysis (see section 3.1.3);
- whether any aggregation was done, either during testing or during analysis of results (see sections 3.1.4 and 3.2.4);
- the use of cash flows from other financial calculations in the asset adequacy analysis (see section 3.1.5);
- the use of assets, reserves and other liabilities, and cash flows from the separate account in the asset adequacy analysis (see section 3.1.6);
- any management actions reflected in the asset adequacy analysis (see section 3.1.7);
- the use of any prior period data, studies, financial analyses, and methods; whether such use is still appropriate; and whether any material events have occurred prior to the valuation date that would invalidate the asset adequacy analysis on which the statement of actuarial opinion is based (see section 3.1.8);
- the testing horizon used in the asset adequacy analysis (see section 3.1.9);
- any material changes in the methods, models, or assumptions from those used in the prior statement of actuarial opinion or if the models, assumptions, or methods used in the prior statement of actuarial opinion are unknown (see section 3.1.10);
- the basis of any judgment that the total amount of any reserves and other liabilities reported as “not analyzed” is immaterial (see section 3.1.11);
- the extent of any reliance on the data, projections, or supporting analysis of others (see section 3.1.12);
- any subsequent events of which the actuary is aware (see section 3.1.13);
- the criteria used to form an opinion about the adequacy of reserves or other liabilities (see section 3.2.2); and
- any deficiencies or limitations in the data, analyses, assumptions, or related information used in the asset adequacy analysis (see section 3.2.7).
4.2 Additional Disclosures in an Actuarial Report
The actuary should also include disclosures in accordance with ASOP No. 41 in an actuarial report for the following circumstances:
- if any material assumption or method was prescribed by applicable law;
- if the actuary states reliance on other sources and thereby disclaims responsibility for any material assumption or method selected by a party other than the actuary; and
- if in the actuary’s professional judgment, the actuary has deviated materially from the guidance of this ASOP.
Appendix
Background and Current Practices
Note: This appendix is provided for informational purposes and is not part of the standard of practice. BackgroundIn 1975, the National Association of Insurance Commissioners (NAIC) began requiring that a statement of actuarial opinion on reserves and related actuarial items be included in the annual statement filed by life and health insurance companies. In response to this requirement, the American Academy of Actuaries promulgated Financial Reporting Recommendation No. 7, Statement of Actuarial Opinion for Life Insurance Company Statutory Annual Statements, setting forth the actuary’s professional responsibilities in providing such an opinion.
The form and content of this actuarial opinion, as specified in the instructions to the annual statement, dealt specifically with reserves and did not explicitly address the adequacy of the assets supporting these reserves and other liabilities to meet the obligations of the company. Although not explicitly required to do so by the opinion or by existing professional standards, some actuaries began to analyze the adequacy of assets in forming their opinions. In addition, when the state of New York adopted the 1980 amendments to the Standard Valuation Law, it established an optional valuation basis for annuities, permitting lower reserves provided that an asset adequacy analysis supported the actuarial opinion with respect to such reserves.
The type of asset adequacy analysis most widely used by actuaries is multi-scenario cash flow testing. To guide actuaries choosing to use this technique, the Actuarial Standards Board (ASB) adopted ASOP No. 7, then titled Performing Cash Flow Testing for Insurers, in October 1988. In addition, in July 1990, the ASB adopted ASOP No. 14, When to Do Cash Flow Testing for Life and Health Insurance Companies, to provide guidance in determining whether to do cash flow testing in forming a professional opinion or recommendation.
In December 1990, the NAIC amended the Standard Valuation Law, and, in June 1991, the NAIC adopted the Actuarial Opinion and Memorandum Regulation (AOMR). These actions had the effect of moving the requirement for the statement of actuarial opinion from the annual statement instructions into the model law itself and provided detailed instructions for the form and content of the opinion and the newly required supporting memorandum. The most significant changes made by the NAIC in the 1991 AOMR were that comÂpanies were required to name an appointed actuary, and, for companies subject to section 8 of the AOMR, statements of actuarial opinion on reserve and other liability adequacy were required to be based on an asset adequacy analysis described in the supporting memorandum. The asset adequacy analysis required by the regulation must conform to the standards of practice promulgated by the ASB.
For companies subject to section 7, the 1991 AOMR required an actuarial opinion that the reserves and related actuarial items have been calculated in accordance with the Standard Valuation Law and supporting regulations. Section 7 of the 1991 AOMR did not require an opinion on reserve adequacy.
The ASB adopted Actuarial Compliance Guideline (ACG) No. 4, Statutory Statements of Opinion Not Including an Asset Adequacy Analysis by Appointed Actuaries for Life and Health Insurers, in 1993 to provide guidance for section 7 opinions.
In 1993, the ASB also adopted ASOP No. 22, Statutory Statements of Opinion Based on Asset Adequacy Analysis by Appointed Actuaries for Life or Health Insurers, which replaced Financial Reporting Recommendation Nos. 7 and 11 as guidance for section 8 opinions.
In the late 1990s and early 2000s, the ASB reviewed all standards of practice related to cash flow testing. Portions of ASOP No. 14 were incorporated into ASOP Nos. 7 and 22. In 2001, the ASB adopted the revised ASOP Nos. 7 and 22 and repealed ASOP No. 14.
Starting in 2001, the model AOMR adopted by the NAIC required all actuarial opinions to be based on asset adequacy analysis.
In addition to the AOMR, actuarial opinions are required under the NAIC’s Synthetic Guaranteed Investment Contracts Model Regulation and under the NAIC’s Separate Accounts Funding Guaranteed Minimum Benefits under Group Contracts Model Regulation.
In 2012, the NAIC initially adopted the Valuation Manual, which sets forth the minimum reserve and related requirements for jurisdictions where the Standard Valuation Law, as amended by the NAIC in 2009, has been enacted. The Valuation Manual took effect on January 1, 2017, pursuant to section 11 of the Standard Valuation Law. Requirements for the annual actuarial opinion and memorandum pursuant to section 3 of the Standard Valuation Law are provided in “VM-30: Actuarial Opinion and Memorandum Requirements.” In December 2017, the NAIC adopted Actuarial Guideline LI, The Application of Asset Adequacy Testing to Long-Term Care Insurance Reserves, which provides uniform guidance and clarification of requirements for asset adequacy testing for long-term care insurance.
In response to these NAIC activities, the ASB decided to revise this ASOP. Current PracticesStatements of actuarial opinion on reserves and related items have been provided since 1975, and practice regarding the basic elements of the opinion is well established. With respect to opinions based on asset adequacy analysis, current practice continues to evolve.
Actuaries who perform asset adequacy analysis use professional judgment in choosing the appropriate methods, testing periods, modeling techniques, levels of aggregation, etc. The actuary forms an opinion based on the results of the asset adequacy analysis results and any additional analyses needed to render that opinion. The actuarial memorandum discloses the details of the asset adequacy analysis and the basis for the actuary’s opinion. Additional documentation may be prepared by the actuary as appropriate to support the actuarial memorandum.
APPENDIX 2
COMMENTS ON THE SECOND EXPOSURE DRAFT AND RESPONSES
The second exposure draft of this ASOP, Statements of Actuarial Opinion Based on Asset Adequacy Analysis for Life Insurance, Annuity, or Health Insurance Reserves and Other Liabilities, was approved in March 2020 with a comment deadline of November 30, 2020. Eight 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 ASOP No. 22 Task Force and Life Committee carefully considered all comments received, and the ASB reviewed (and modified, where appropriate) the changes proposed.
Summarized here are the significant issues and questions contained in the comment letters and responses. Minor wording or punctuation changes that were suggested but not significant are not reflected in the appendix, although they may have been adopted.
The term “reviewers” in appendix 2 includes the ASOP No. 22 Task Force, the ASB Life Committee, and the ASB. Also, unless otherwise noted, the section numbers and titles used in appendix 2 refer to those in the second exposure draft.