Since the beginning of my career, the insurance industry has been piling more responsibility on the Valuation Actuary. I think this is a good thing. Nobody wants to see insurance companies fail to keep their promises to policyholders. It’s flattering for the actuarial profession that the industry and the regulators believe we can make a positive contribution in the effort to test solvency. However, this additional responsibility has brought more risk to our profession, and risk is never comfortable.
I believe that an effective Valuation Actuary can create a competitive advantage for insurance organizations. He or she can streamline relationships with regulators, investors, auditors, rating agencies, and even agents. An effective Valuation Actuary can give all interested parties comfort that the insurance organization is a going concern. What does a Valuation Actuary need to do to be effective?
First, the Valuation Actuary is ultimately responsible for valuation records. If he or she doesn’t know what policies are in force then they can’t hold the correct reserve. This sounds simple, but it never is. Further, even when you think the systems are established to produce accurate valuation records, something gets screwed up and mistakes happen. The Valuation Actuary must, by definition, have final authority over maintenance of in-force records.
Second, the Valuation Actuary must maintain on-going cash flow models that consider both assets and liabilities. Entries on a balance sheet don’t mean anything if the insurance organization doesn’t have the cash to pay its claims. These models should be maintained and run annually, and a cash flow report should be generated. For most interested parties this is merely a “check the box” requirement. However, it is a very important box.
Finally, solvency testing is not done with a snapshot. It is a moving picture. Insurance organizations enter new businesses, exit other businesses, introduce new products, and contract with new third parties. A regulatory requirement coming down the line is ORSA (Own Risk and Solvency Assessment). This new regulatory tool asks the company to analyze its current business plans and project their impact on future solvency. Clearly, the Valuation Actuary needs to play a key role. He or she is the person who thinks of everything that could go wrong and then helps figure out what would be done if that bad thing should happen.
The Valuation Actuary may not be the person you want to take to lunch every day, but he or she is the person you depend upon to keep you out of trouble.