Professionalism Counts, January 2024

Proposed Revisions to ASOP No. 7: The ASB Seeks Your Input on Cash Flow Analysis

The Actuarial Standards Board (ASB) recently released an exposure draft of a proposed revision to Actuarial Standard of Practice (ASOP) No. 7, tentatively titled, Analysis of Life, Health, or Property/Casualty Insurance Cash Flow Risk. In a Q&A, ASOP No. 7 Task Force and ASB Life Committee Chairperson Matt Monson discussed some of the proposed changes.

The proposed revisions would broaden the scope of the ASOP. What activities would fall under ASOP No. 7 that didn't previously?

Matt Monson: The scope was changed in two ways. First, cash flow analysis performed for noninsurance entities are now within scope. The current standard defines an “insurer” and is tailored to actuaries performing analysis of insurer cash flows. The revised standard replaces “insurer” with “organization” and would apply to actuaries performing services involving life or health cash flow risk for any entity that accepts, self-insures, or retains risks, including—but not limited to—insurance companies. The task force’s goal for the new standard was to provide consistent guidance for cash flow analysis, regardless of entity type.

Second, the revised standard would apply to actuaries who provide services involving property/casualty cash flow risks specific to investments. The current standard applies only to property/casualty services that involve analyses of both invested assets and liabilities for insurers.

The exposure draft includes guidance on when to perform a cash flow analysis. Why was it important to include this guidance?

MM: Cash flow analysis is an evaluation of cash flow risks, often centered around determining amounts and timing of future cash flows. In the 20 years since the standard was last revised, models and methods of cash flow analysis have evolved rapidly, and regulations often require increasingly sophisticated cash flow analyses. For many actuaries, cash flow analysis can seem to be everywhere, all the time. The task force felt that beginning section 3 with guidance on when to perform cash flow analysis was important. When deciding whether and how to apply the standard’s guidance to multi-month appraisals, 20-second elevator pitches, and everything in-between, this section helps answer the question, “Is this a cash flow analysis?”

The exposure draft also adds guidance for cash flow analysis for assets, liabilities, or both assets and liabilities. What does the actuary need to know about this proposed change?

MM: The new language adds clarity for actuaries whose work involves cash flow analysis of one side of an entity’s balance sheet, such as pricing relatively simple insurance liabilities or analyzing an investment strategy in isolation. We thought that guidance should consistently and explicitly apply to asset-only, liability-only, and more traditional asset-liability cash flow analyses. Since this is not specifically addressed in the current ASOP No. 7, some actuaries may believe in good faith that the current ASOP’s guidance does not apply if their work involves only one side of the balance sheet. However, the proposed ASOP makes it clear that a cash flow analysis involving only assets or only liabilities is in scope. The task force also took the opportunity to provide guidance for actuaries who need to decide whether to include assets, liabilities, or both assets and liabilities in a cash flow analysis.

Unusually, the ASB is seeking specific feedback from each practice area affected by the standard—life, health, and property/casualty. Why did the ASB take this step?

MM: While the ASB’s Life Committee may have taken the lead in revising ASOP No. 7, it applies to life, health, and property/casualty actuaries, and actuaries from all three practice areas participated in the revision. Let me say in all humbleness and appreciation for my health and property/casualty colleagues—you live in mysterious and fascinating worlds! Important issues or limitations, even basic ground rules for cash flow analysis, differ across practice areas. Setting the appropriate scope for the revised ASOP No. 7 is critical, as actuaries from each practice area view ASOP No. 7’s application differently. The ASB is interested in feedback from actuaries in each affected practice area and asked specific questions that, hopefully, prompt specific comments.

~ ~ ~ ~ ~

Please consider submitting comments on ASOP No. 7; the comment deadline is June 1. The draft and instructions for submitting comments may be found on the ASB website.