Professionalism Counts is a column in Actuarial Update, the Academy's monthly newsletter.
THE NEW ASOP No. 20: IMPORTANT CHANGES FOR P/C CLAIM ESTIMATE DISCOUNTING
The Actuarial Standards Board recently adopted a revision of Actuarial Standard of Practice (ASOP) No. 20, Discounting of Property/Casualty Claim Estimates. Actuarial Update sat down with Robert Walling, chairperson of the task force that revised the standard, to learn about the changes and how they may affect actuaries’ work. The revised ASOP No. 20 takes effect Dec. 1, 2023.
The scope of the ASOP has been broadened. What activities now fall under ASOP No. 20 that didn’t previously?
Previously, ASOP No. 20 focused on unpaid claims liabilities—that is, loss reserves—and it was the opinion of the Casualty Committee and the task force that a lot of actuaries working in self-insurance and captive insurance were discounting prospective funding estimates at the same time they were discounting loss reserves. Practice has really changed, expanding where discounting is applied. So, we expanded the scope of ASOP No. 20 to go beyond unpaid claims estimates and include prospective estimates. As a practical matter, the change creates a lot of parallel thinking, between looking at how ASOP No. 20 applies to loss reserves under ASOP No. 43 [Property/Casualty Unpaid Claim Estimates] and also prospective claim estimates under ASOP No. 53 [Estimating Future Costs for Prospective Property/Casualty Risk Transfer and Risk Retention]. The expansion brings actuarial activities and actuarial work products regarding loss reserves and funding estimates under the scope of ASOP No. 20 when it comes to discounting.
The ASOP now includes guidance on risk margins. Why was it important to include this guidance?
In many situations, understanding how discounting removes an implicit margin and how the implicit margin can be replaced with an explicit margin is really important to the practitioner. The new guidance on how risk margins and discounting fit together and complement one another is an important revision in ASOP No. 20.
Guidance on discount rates has also been added. What does the actuary need to do now with respect to discount rates?
Again, this is an area where actuarial practice has changed. There are more situations where investment managers or finance professionals are giving the practitioner information that influences their discount rate assumptions. We’ve really expanded the guidance on the portfolio approach to selecting a discount rate. We’ve also added more guidance on considering economic conditions when selecting a discount rate or a vector of discount rates that vary by payment period. A lot of that really echoes some of the guidance in ASOP No. 7 [Analysis of Life, Health, or Property/Casualty Insurer Cash Flows], which relates to discounted cash flow estimates.
Another critical change to the guidance on discount rates is in section 220.127.116.11, which provides guidance on discount rates selected by another party. The change here is that, when using a discount rate selected by another party, the actuary should assess the discount rate for reasonableness. That’s an important change—that the actuary, when provided a discount rate by investment managers, by the finance department of an insurance company, is now being proactively placed in a position of assessing that reasonableness and assessing it as part of their work product. That’s a pretty significant change.
What would you say to an actuary who thinks the discount rate is out of scope and therefore they need not comment on it?
We had a pretty extensive discussion about situations where some practitioners were carving the discount rate out of their scope and saying, because it was outside the scope, they weren’t required by ASOP No. 41 [Actuarial Communications] to comment on the reasonableness of the discount rate.
The discount rate is one of the most fundamental assumptions in producing a discounted claim estimate, so we really beefed up the disclosures section of ASOP No. 20 to make it clear that we want the practitioner to look at the discount rate and assess whether it’s reasonable. We’re trying to place the actuary in a position where they’re looking critically at the discount rate—and not just looking at it critically, but documenting and disclosing. Section 4 now requires more detailed disclosures in several areas, aimed at getting actuaries to document and disclose how they developed this kind of claim estimate