7) DETAILS ON ACTUARIAL/MODELING ASSUMPTIONS Q7.1 What do "best estimate" and “anticipated experience” mean? A: The terms “best estimates” and “anticipated experience” are used in describing the setting of deterministic assumptions to be used for modeling. The C-3 Phase II Report uses the term “best estimate” whereas AG 43 uses the term “anticipated experience”. Both are defined to be an actuary’s reasonable estimate of future experience, given the available, relevant information. Best estimate is defined in the Glossary of the C-3 Phase II report and anticipated experience is defined in Section III B) 8) of the AG 43 report. The reason for the difference in nomenclature is that concerns were raised about the term “best estimate” after C-3 Phase II had been completed, and was subsequently replaced by the term “anticipated experience”. Q7.2 What do "prudent best estimate" and “prudent estimate” mean? A: The terms “prudent best estimate” and “prudent estimate” are used in describing the setting of deterministic assumptions to be used for modeling. The C-3 Phase II Report uses the term “prudent best estimate” whereas AG 43 uses the term “prudent estimate”. A prudent best estimate (under C-3 Phase II) or prudent estimate (under AG 43) assumption would normally be defined by applying a margin to the actuary’s best estimate or anticipated experience for the given assumption. The amount of margin applied to the best estimate or anticipated experience, typically may reflect some or all of the following: • • • •
Potential estimate error; Potential random fluctuation from best estimates or anticipated experience; Potential for adverse trends in experience; and Potential anti-selection (e.g., possible correlation of lapses and mortality).
In general, the greater the uncertainty in any one of these factors the larger the margin, with each margin being set such that it increases the liability or provision over that which would be held in absence of the margin. For example, assumptions for circumstances that have never been observed would typically require more margin for estimation error than those for which abundant and relevant experience data are available. In addition, more margin might also be applied to risks that will occur farther into the future. For further guidance, refer to Section III.B.(8), Appendix 9, and Appendix 10 of AG 43, and the Glossary (page 7), Methodology Note C3-03, and Methodology Note C3-04 of C-3 Phase II. Q7.3 Are the margins included in “prudent best estimate” or “prudent estimate” assumptions developed assumption by assumption or in the aggregate? A: Principle 3 in the Appendix 7 of the C-3 Phase II Report and Section I) of the AG 43 Report states, “The choice of a conservative estimate for each assumption may result in a distorted measure of the total risk. Conceptually, the choice of assumptions and the modeling decisions should be made so that July 2009
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