Proposed Revision of Actuarial Standard of Practice No. 38
Using Models Outside the Actuary’s Expertise (for All Practice Areas)
STANDARD OF PRACTICE
TRANSMITTAL MEMORANDUM
March 2006
TO: Members of Actuarial Organizations Governed by the Standards of Practice of the Actuarial Standards Board and Other Persons Interested in the Use of Models Outside the Actuary’s Expertise (for All Practice Areas)
FROM: Actuarial Standards Board (ASB)
SUBJ: Proposed Revision of Actuarial Standard of Practice (ASOP) No. 38
This booklet contains the second exposure draft of the proposed revision of ASOP No. 38, now titled Using Models Outside the Actuary’s Expertise (for All Practice Areas). Please review this second exposure draft and give the ASB the benefit of your comments and suggestions. Each written response and each response sent by e-mail to the address below will be acknowledged, and all responses will receive appropriate consideration by the drafting committee in preparing the final document for approval by the ASB.
The ASB accepts comments by either electronic or conventional mail. The preferred form is e-mail, as it eases the task of grouping comments by section. However, please feel free to use either form. If you wish to use e-mail, please send a message to comments@actuary.org. You may include your comments either in the body of the message or as an attachment prepared in any commonly used word processing format. Please include the phrase “2nd Exposure Draft: ASOP No. 38” in the subject line of your message.
If you wish to use conventional mail, please send comments to the following address:
2nd Exposure Draft: ASOP No. 38
Actuarial Standards Board
1100 Seventeenth Street, NW, 7th Floor
Washington, DC 20036-4601
Deadline for receipt of responses in the ASB office: July 15, 2006
Background
The ASB originally adopted ASOP No. 38, Using Models Outside the Actuary’s Expertise (Property and Casualty) (Doc. No. 071), in June 2000. Recognizing that actuaries in all areas of practice are now using models that incorporate specialized knowledge outside the actuary’s expertise, the ASB created a task force to review ASOP No. 38 and develop a recommendation as to whether this ASOP, which now applies only to the property/casualty practice area, should be expanded in scope to apply to some or all of the other areas of actuarial practice.
The current task force inquired of actuaries that developed the existing ASOP No. 38 as to the reasons for the decision to limit the scope of the standard to just property/casualty practitioners. At the time of exposure of the existing standard, some commentators recommended that the scope be so limited. A number of commentators from other practice areas believed that the proposed standard was unnecessary or could be burdensome for their practice areas. Many property/casualty actuaries believed that there was a critical need for the standard in their area and did not want its implementation to be delayed by the time that may be required to develop a consensus of all practice areas. Limiting the standard to the property/casualty practice area seemed the most efficient way to solve the most urgent need.
After a careful review of the existing standard, the task force came to the conclusion that circumstances similar to those that prompted the development of ASOP No. 38 for the property/casualty practice area are present for the other areas of actuarial practice. See Appendix 1 for descriptions of the following examples of models that may contain components that are outside the expertise of many of the actuaries who use them:
1. natural catastrophe models;
2. terrorism models in property and other insurance lines;
3. cost analysis models in health insurance;
4. behavioral models;
5. interest rate and equity return models;
6. credit risk models;
7. option pricing models; and
8. pension forecast models.
The task force recommends that ASOP No. 38 be expanded to apply to all areas of actuarial practice by revising the existing standard as reflected in the changes throughout.
The task force notes that the proposed standard presents complex issues and that each section should be read in connection with the others.
First Exposure Draft
The first exposure draft of this proposed revision was issued in October 2003 with a comment deadline of March 31, 2004. The Task Force to Revise ASOP No. 38 carefully considered the twenty-six comment letters received and made changes to the language in several sections in response. For a summary of the substantive issues contained in these comment letters, please see Appendix 2.
The comment letters were particularly helpful in addressing a concern of the task force, which was to state the scope so that the proposed ASOP would not apply beyond its intended use. Another area for which the task force drew heavily on the ideas in the comment letters was in avoiding wording that would appear to require additional work where that was not the intent. In order to accomplish this, the proposed ASOP was restructured to focus on three concepts:
1. the considerations for choosing a model;
2. the level of prior review and use of the model; and
3. the steps the actuary takes when personally reviewing or personally working with the model versus the steps the actuary takes when collaborating with or using the work of other actuaries or experts.
The comments indicated that the first exposure draft conveyed a sense of significantly greater work requirements than the task force had intended. Therefore, this matter was given consider-able attention and extensive changes were made to clarify the meaning.
Also, for the same reason, the concepts were delineated to separate the level of actuary’s responsibility from the description of the work to be done by the actuary in various circum-stances, thereby avoiding the implication of additional and unneeded work.
The most significant changes from the first exposure draft were as follows:
1. References throughout the proposed ASOP to the actuary’s “own area of expertise” were changed to the actuary’s “expertise” to make it clear that an actuary’s expertise could be narrow or vast and could include multiple practice areas. The actuary’s “own area of expertise” seemed to imply to some readers that each actuary has only one such area.
2. A definition of “expertise” was added in section 2.
3. Section 3 was restructured in order to distinguish among the following:
a. the considerations for choosing a model;
b. the level of prior review and use of the model; and
c. the steps the actuary takes when personally reviewing or personally working with the model versus the steps the actuary takes when collaborating with or using the work of other actuaries or experts.
In particular, section 3.1 was revised to clarify the level of responsibility and reduce the work required of an actuary who is a member of a group that uses a model in preparation of an actuarial work product if the specialized knowledge of that model is within the collective expertise of the group preparing the actuarial work product.
4. In the first exposure draft, specific items (a) and (f) under section 4.1 were listed as considerations that the actuary should refer to when making disclosures in an actuarial communication. It was determined that items (d) and (e) were covered by ASOP No. 41, Actuarial Communications, to which section 4.1 refers, and those items were removed from this list.
5. The phrase “where the actuary disclaims responsibility for the model and its results by stating reliance on other sources” was added to section 4.1 to clarify the guidance on disclosure.
Request for Comments
The Task Force to Revise ASOP No. 38 appreciates comments on all sections of this proposed standard, and would like to draw readers’ attention to the following issues in particular:
1. Are the key changes listed above appropriate, and does this second exposure draft more accurately represent generally accepted actuarial practice? If not, how should it be changed?
2. Does the structure of section 3 clearly identify and distinguish between the work expected of those actuaries who are personally using the models (i.e., using the model in a “hands-on” fashion) and those who are collaborating with or using the work of others?
3. As part of reviewing the comment letters on the first exposure draft, the task force considered how to clarify what is required of an actuary who is a member of a group that uses a model in preparation of an actuarial work product if the specialized knowledge of that model is within the collective expertise of the group preparing the actuarial work product. One option was to add an explicit statement to the scope to say that the proposed standard does not apply to actuaries who are part of such a group.
The ASB ultimately decided that the second exposure draft should not exempt actuaries who are part of such a group from the entire standard, so the proposed standard is written in such a way as to relieve those actuaries of duplicative work by providing guidance in such situations (see sections 3.1 and 3.8). Does the proposed standard provide an appropriate level of guidance with respect to an actuary who is part of such a group? Or, would it be more appropriate to exclude automatically actuaries who are part of such a group entirely from the proposed standard? If so, under what circumstances and for what reasons?
4. Does the guidance in section 3.3 clearly distinguish the types of models based on their prior review and use in a way such that onerous, additional work is avoided where it is not needed? Does it reflect generally accepted actuarial practice? If not, how should it be changed?
5. Is the guidance in section 3.4 regarding personally reviewing or personally working on models appropriate? If not, what changes should be made?
6. Is the guidance in section 3.5 regarding collaborating with or using the work of other actuaries and experts appropriate and sufficient? If not, what guidance should be added?
7. Is the second paragraph of section 4.1 clear and appropriate? If not, how should it be revised?
The Task Force to Revise ASOP No. 38 thanks everyone who took the time to contribute comments and suggestions on the first exposure draft.
The ASB approved the draft for second exposure in March 2006.
Task Force to Revise ASOP No. 38
Burton D. Jay, Chairperson
David V. Axene James W. Lamson
Nick Bieter Jeffrey A. Mohrenweiser
Luke N. Girard Martin M. Simons
Lance D. Grigsby James E. Turpin
David N. Ingram Richard Q. Wendt
Ronald T. Kozlowski
General Committee of the ASB
W. H. Odell, Chairperson
Charles A. Bryan Mark E. Litow
Thomas K. Custis Chester J. Szczepanski
Burton D. Jay Ronnie Susan Thierman
Actuarial Standards Board
Cecil D. Bykerk, Chairperson
William C. Cutlip Godfrey Perrott
Alan D. Ford William A. Reimert
Robert S. Miccolis Lawrence J. Sher
Lew H. Nathan Karen F. Terry
The ASB establishes and improves standards of actuarial practice. These ASOPs identify what the actuary should consider, document, and disclose when performing an actuarial assignment. The ASB’s goal is to set standards for appropriate practice for the U.S.
Section 1. Purpose, Scope, Cross References, and Effective Date
1.1 Purpose
This actuarial standard of practice (ASOP) provides guidance to actuaries when performing professional services with respect to developing an actuarial work product where models that incorporate specialized knowledge outside the actuary’s expertise are used. This guidance addresses the nature and extent of the actuary’s obligation to choose the model and use it appropriately.
1.2 Scope
This standard applies to actuaries when performing professional services with respect to developing an actuarial work product where models that incorporate specialized knowledge outside the actuary’s expertise are used. This standard applies to actuaries in all practice areas. Where the actuarial work product is an actuarial communication or is transmitted or referenced by an actuarial communication, the standard also applies to the actuary or actuaries who are primarily responsible for the actuarial communication.
For the purpose of determining the applicability of this standard, each actuary should determine if the specialized knowledge incorporated in the model is outside the actuary’s expertise, based on the actuary’s own education, training, and experience.
This standard applies to the actuary’s use of such models whether or not they are proprietary or actuarial in nature.
This standard does not apply to the actuary’s use of a computer program where the mathematical equations, logic, and algorithms described in section 2.3 fall within the actuary’s expertise.
The actuary should satisfy the requirements of applicable law (statutes, regulations, case law, and other legally binding authority) and this standard. However, to the extent applicable law conflicts with this standard, compliance with such applicable law shall not be deemed a deviation from this standard, provided the actuary discloses that the actuarial assignment was performed in accordance with the requirements of such 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 work performed on or after four months after adoption by the Actuarial Standards Board.
Section 2. Definitions
The terms below are defined for use in this actuarial standard of practice.
2.1 Expert
An actuary or other individual who is qualified by knowledge, skill, experience, training, or education to render an opinion concerning the matter at hand.
2.2 Expertise
The specialized skill or knowledge possessed by an individual.
2.3 Model
A representation (including actuarial models ), usually mathematical, of a specified phenomenon or behavior. A model typically includes mathematical equations, logic, algorithms, and associated data.
Section 3. Analysis of Issues and Recommended Practices
3.1 Overview
Actuaries use or authorize the use of models outside of their expertise from time to time in order to complete an actuarial work product. The actuary who assumes professional responsibility for the actuarial work product also assumes professional responsibility for the selection of the model to be used, its appropriateness for the actuarial work product, its use, and its output, unless the actuary disclaims such responsibility by stating reliance on other individuals or sources through the steps described in section 4.1.
Because the actuary is not an expert in the model, professional judgment should be used. This standard provides guidance the actuary should take into account when exercising that professional judgment in the selection and use of such models .
The actuary may collaborate with or use the work of experts in the field covered by the model. For example, when an actuary is a member of a group that uses a model in preparing an actuarial work product, and the specialized knowledge of that model is within the collective expertise of the group preparing that work product, the actuary may collaborate with or use the work of other members of the group who are experts in the field covered by the model, based on the guidance in section 3.5.
When preparing an actuarial work product based on such a model, the actuary should be familiar enough with the basic operation and output of the model to apply professional judgment as to whether the model is appropriate for use in developing the intended actuarial work product.
3.2 Appropriateness of the Model for the Intended Use
When selecting a model, the actuary should consider whether the model is appropriate for use in developing the actuarial work product, taking into account the following to the extent appropriate and practical:
3.2.1 Prior Review and Use
The actuary should consider the level of prior review and use of the model (see section 3.3).
3.2.2 Historical Data
If historical data are used in the development of the model or the establishment of model parameters, the actuary should consider whether the historical data represent a range of reasonably expected outcomes, consistent with current knowledge about the phenomena or behavior being analyzed.
3.2.3 Other Data and Assumptions Implicit in the Model
Many models contain extensive non-historical data, assumptions, parameters, or subjective judgments that affect the output of the model. The actuary should consider whether such data, assumptions, parameters, or judgments are appropriate for the intended use of the model.
3.2.4 Developments in Relevant Fields
The actuary should consider whether significant current developments in the subject matter addressed by the model and in relevant fields of knowledge are likely to affect the actuarial work product materially.
3.2.5 Adjustments to the Model
The actuary should consider the following:
a. whether there are known current circumstances such that the use of the model might be inappropriate, that adjustments might need to be made to the model, or that the usefulness of the model output might be reduced;
b. whether the model has known limitations that are significant and relevant; and
c. whether modifications to the model, the model parameters, or the model assumptions are needed in order to apply the model output appropriately.
3.3 Levels of Prior Review and Use
Models outside the actuary’s expertise may have undergone varying levels of prior review and use. Some models might be widely used for the intended purpose and widely accepted for the intended use. Other models might have undergone thorough review but may not be as widely accepted for the intended use. The actuary should use professional judgment to determine whether the model under consideration is appropriate for the intended use without additional review. If the actuary determines that additional review would be appropriate, the actuary can personally review the model or collaborate with or use the work of experts to review the model.
At times, the actuary may work with models that have apparently undergone relatively little review or use, are related to emerging practices, or are otherwise not yet widely accepted for the intended use. In such cases, the actuary should either personally review the model or collaborate with or use the work of experts to review the model.
3.4 Considerations for Actuaries Personally Reviewing or Personally Working with Models
When the actuary personally reviews or personally works with the model to produce results to be used in the actuarial work product, the actuary should be reasonably familiar with the basic operation of the model, as described in the following sections. The actuary may need to take more steps to become reasonably familiar with models that have undergone relatively little review than with models that have undergone thorough review.
3.4.1 Model Components
The actuary should identify the basic components of the model and have a basic, reasonable understanding of how such components interrelate or have interdependence within the model. For example, hurricane models include meteorological, vulnerability, and actuarial components; earthquake models might include seismological, vulnerability, and actuarial components; and an asset/liability management model might contain components that project interest rates, mortgage prepayments, equity returns, and liability cash flows.
3.4.2 Fields of Expertise Used
The actuary should consider identifying which fields of expertise were used when developing or updating the model and should consider determining if the model is based on generally accepted practices within the applicable fields of expertise.
When personally reviewing a model, the actuary should be reasonably familiar with the testing and validation of the model and the level of independent expert review and testing, if any, that the model has undergone.
3.4.3 User Input
User input can comprise input data or user assumptions. If the model requires user input, the actuary should evaluate the reasonableness of the user input and should have a reasonable understanding of the specifications for the user input and the relationship between the model’s input and output. The actuary should take reasonable steps to confirm that the precision and accuracy of the user input are consistent with the intended use of the model.
3.4.4 Model Output
The actuary should take reasonable steps to confirm that the precision and accuracy of the model output are consistent with the actuary’s intended use of the model. In view of the intended use of the model, the actuary should review the model output for reasonableness, considering factors such as the following:
a. the results derived from alternate models or methods, where available and appropriate;
b. the comparison of historical observations, if applicable, to results produced by the model;
c. the consistency and reasonableness of relationships among various output results; and
d. the sensitivity of the model output to variations in the user input and model assumptions.
3.5 Considerations for Actuaries Collaborating with or Using the Work of Other Actuaries or Experts
If, based on professional judgment, the actuary chooses to collaborate with or use the work of other actuaries or experts to review the model or to produce output for the actuarial work product, the actuary need not personally apply the guidance in section 3.4. However, the actuary should be familiar enough with the basic operation and output of the model in order to use professional judgment as to whether to use the model, or output produced by the model, to develop the actuarial work product.
When applying professional judgment in these circumstances, the actuary should consider the following factors:
a. Collaborating with or Using the Work of Actuaries Who Are Not Experts: The actuary may take responsibility for the actuarial work product when collaborating with or using the work of other actuaries who have, for a particular model, conducted some or all of the practices described in this standard for the model. However, the actuary should take reasonable steps to confirm that the guidance provided by this standard has been observed and that the steps taken by the other actuaries were appropriate for the intended use.
b. Collaborating with or Using the Work of Experts: The actuary may take responsibility for the actuarial work product when collaborating with or using the work of experts . The experts may be either the experts who provided the model or other experts in the applicable field(s). When determining whether to take responsibility for the actuarial work product where the work product was produced in collaboration with or using the work of experts in the applicable field(s), the actuary should consider factors such as the following:
1. whether the model has been reviewed or opined on by experts in the applicable field(s);
2. whether the individuals whom the actuary is collaborating with or using the work of are experts in the applicable field(s);
3. whether there are any known significant differences of opinion among such experts concerning aspects of the model that could be material to the actuary’s use of the model;
4. whether the model has changed significantly since any review; and
5. whether there are professional standards that apply to the development, testing, validation, or use of the model, and whether the model has been evaluated and has met such standards.
3.6 Relative Importance of the Model Output
The actuary’s level of effort in understanding and evaluating a model should be consistent with the relative importance of the model’s output to the results of the actuarial work product. Model output is important to the results of the actuarial work product if variances in the model input could cause variances in the model output such that the actuary could reach significantly different conclusions with respect to the actuarial work product as a result of these variances.
3.7 Appropriate Use of the Model and Its Results
Having taken into account the considerations described in sections 3.2–3.6 above, the actuary should use professional judgment to determine whether it is appropriate to use the model results to develop the actuarial work product. The actuary should also use professional judgment to determine whether it is appropriate to make any adjustments to the model output.
3.8 Documentation
This standard requires documentation whether or not a legal or regulatory requirement exists. The actuary should maintain appropriate documentation on the considerations given to choosing the model and the use of the model output in the actuarial work product. The actuary should document how the guidance in sections 3.2–3.7 has been applied. If the model has proprietary aspects or contains proprietary information, the actuary should document the steps taken to comply with this standard in light of the proprietary aspects or information.
In accordance with ASOP No. 41, Actuarial Communications, the actuary need not retain the documentation personally. For example, when an actuary is a member of a group that uses a model in preparing an actuarial work product and the specialized knowledge of that model is within the collective expertise of the group preparing that work product, such documentation could be maintained by the experts who used the model or in the files of the actuary who delivered the work product.
3.9 Reliance on Data or Other Information Supplied by Others
When relying on data or other information supplied by others, the actuary should refer to ASOP No. 23, Data Quality, for guidance.
Section 4. Communications and Disclosures
4.1 Communications and Disclosures
When issuing communications under this standard, the actuary should refer to ASOP No. 23 and ASOP No. 41.
In addition, where the actuary disclaims responsibility for the model and its results by stating reliance on other sources, the actuary should disclose the following items:
a. an identification of the model used;
b. any modifications to the model, as described in section 3.2.5;
c. any adjustments made to the model output, as described in section 3.7;
d. any significant unresolved concerns the actuary may have about the model or the model output; and
e. the significance of the use of the model on the results.
4.2 Prescribed Statement of Actuarial Opinion
This ASOP does not require a prescribed statement of actuarial opinion (PSAO) as described in the Qualification Standards for Prescribed Statements of Actuarial Opinion, promulgated by the American Academy of Actuaries. However, law, regulation, or accounting requirements may also apply to an actuarial communication prepared under this standard, and as a result, such actuarial communication may be a PSAO.
4.3 Deviation from Standard
The actuary must be prepared to justify to the actuarial profession’s disciplinary bodies, or to explain to a principal, another actuary, or other intended users of the actuary’s work, the use of any procedures that depart materially from those set forth in this standard. If a conflict exists between this standard and applicable law or regulation, compliance with applicable law or regulation is not considered to be a deviation from this standard.
Appendix 1 – Background and Current Practices
Note: This appendix is provided for informational purposes, but is not part of the standard of practice.
Background
Actuaries have always used models. Most of the models used by actuaries are developed using expertise that is common to actuaries, and their use by actuaries is addressed by existing standards of practice and statements of principles.
However, actuaries have also used models that contain components that are outside the actuary’s expertise. The following are a few examples of models that may contain components that are outside the expertise of many of the actuaries who use them:
- Natural Catastrophe Models
Actuaries widely use computer simulation models for their analyses of hurricane or earthquake exposures and for calculating expected losses due to hurricane or earthquake perils. The accuracy of these models heavily depends on the accuracy of meteorological, seismological, or engineering assumptions.
- Terrorism Models in Property and Other Insurance Lines
“Terrorism” models produce estimated claims due to physical, chemical, and biological terrorist acts. They include input and opinions from experts in the fields of chemistry, medicine, biology, counter-intelligence, computer science, and structural engineering.
- Cost Analysis Models in Health Insurance
Health actuaries often use others’ work products, such as computer applications and models. The health actuary may augment his or her own actuarial judgment by using predictive models that combine clinical, statistical, and artificial intelligence expertise. Such models are being used more frequently in areas such as prospective pricing, underwriting, and claims analysis.
- Behavioral Models
The developing field of “behavioral finance” has implications for policyholder behavior in various life, annuity, health, and property/casualty insurance contracts, including policy surrender assumptions, investment choices, mortgage repayment patterns, and incidence rates for alternative deductible levels. Property/casualty insurers increasingly use credit-scoring models to price auto or homeowner insurance rather than just a pure “frequency times severity” model. Actuaries may use “psychographics” (the use of demographics to study and measure attitudes, values, lifestyles, and opinions) to determine an individual’s investment strategy and risk tolerance based on their background and past experiences.
- Interest Rate and Equity Return Models
Mathematicians, economists, statisticians, and other professionals attempting to quantify the causes of financial events are developing complex financial formulas and models to project interest rates, equity returns, credit spreads, or default charges. Financial models are used to develop fair value of insurance liabilities, evaluate risk management strategies (for example, hedging or reinsurance) and price new investment products. One example is the regime switching lognormal stochastic process that primarily models returns on equities (see “A Regime Switching Model of Long-Term Stock Returns” by Mary Hardy, North American Actuarial Journal, April 2001), but can be expanded to other economic applications where several regimes (or “states”) exist in historical data.
- Credit Risk Models
Many insurance company investment departments use commercial software packages to evaluate and model the credit risks of a portfolio of fixed-income investments. These models can be based on a discounted contractual cash flow model or on a risk neutral model. The discounted contractual cash flow model uses data relating to credit ratings from rating agencies, transition matrices of changes in ratings over time, probabilities of default by rating category, correlations of defaults in different sectors, and assumptions as to the amount of loss given default. Sometimes actuaries are called on to develop internal models of credit exposure under various scenarios.
- Option Pricing Models
Derivative investment instruments achieve several asset liability management and other investment and risk management objectives. Market prices of certain equity and interest-rate derivatives are often analyzed using different models. Valuation of more complicated options such as American-style swap options, options embedded in callable and putable bonds, and structured notes require more complicated models such as term structure models. If the underlying security is a mortgage- or asset-backed security, prepayment models will need to be incorporated into the valuation. If the underlying security is a convertible bond, an integrated model for term structures and equity markets will need to be used. These models depend on a variety of implicit and explicit assumptions regarding the workings of the markets, the ability to replicate the derivative in the market, and the nature of the probability distribution that best represents the risks of the derivatives.
- Pension Forecast Models
Stochastic and deterministic models forecast pension plan assets, liabilities, benefits, contributions, expense, and other financial variables for short and long time horizons. Forecasts are used to analyze strategic investment policy, contribution policy, expense policy, and benefit policy. While some actuaries are heavily involved in the development and use of pension forecast models, these models may also incorporate the skills of economists and financial analysts.
Enterprise Risk Management
Enterprise risk management involves assessing the risks of an enterprise, developing ways to mitigate these risks, and determining the capital necessary to provide adequate financial protection for the risks retained. All of the above models, as well as others, could be used in the enterprise risk management process.
In enterprise risk management work, actuaries are often called upon to integrate the results of the above types of models with calculations from actuarial asset liability management and other models to develop an integrated measurement of company risk. Knowledge of the assumptions and limitations of each of these types of models is important to perform that integration properly.
Summary
Because models sometimes contain components that incorporate specialized knowledge outside the actuary’s expertise, this raises the question as to what is required of an actuary before he or she makes use of model output in an actuarial work product. This proposed standard addresses such requirements. Although the original ASOP No. 38, adopted by the ASB in June 2000, arose from the need to provide accurate actuarial analysis of hurricane and earthquake exposures, the standard applies to any model that incorporates specialized knowledge outside the actuary’s expertise.
Current Practices
The use of output from models is an evolving area of actuarial theory and practice. To date, current practices have been governed by the original ASOP No. 38, Using Models Outside the Actuary’s Area of Expertise (Property and Casualty), and the Code of Professional Conduct.
Appendix 2 – Comments on the First Exposure Draft and Responses
The first exposure draft of this proposed revision of ASOP No. 38, then titled Using Models Outside the Actuary’s Area of Expertise (All Practice Areas), was issued in October 2003 with a comment deadline of March 31, 2004. Twenty-six 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 Task Force to Revise ASOP No. 38 carefully considered all comments received, and the General Committee and the ASB reviewed (and modified, where appropriate) the proposed changes to the proposed ASOP. Summarized below are the significant issues and questions contained in the comment letters and the responses to each. The term “reviewers” includes the task force, the General Committee, and the ASB. Unless otherwise noted, the section numbers and titles used below refer to those in the first exposure draft.
Click here to view Appendix 2 in its entirety.
PDF Version: Download Here
Last Revised: March 2006
Document Status: Past Exposure Draft