Too Busy to Not Have Governance in Place

By Scott D. Haglund

Small Talk, December 2022

In the midst of busyness, it is easy to put things aside that you find time-consuming without any apparent benefit. This is particularly true if you have a smaller operation with limited resources, but can also show up in larger organizations as well just due to lack of interest. In actuarial projects, it seems like documentation and governance would fit this description—work that entails a moderate amount of effort with the perception of limited benefit. However, I believe that in a busy environment, as well as in smaller operations, documentation and governance are critical to ensure that work products are as reliable as they can be (and may be required).

Why Have a Governance Program in Place?

There are a number of reasons why a program should be in place, some of which could be required for your organization.

Actuarial Best Practice. In all situations, governance and documentation are a best practice for all actuaries. These practices are laid out in a number of publications, a few of which are mentioned here:

• ASOP 56 on modeling
• Although not adopted, the draft ASOP on setting assumptions
• Model governance practice note
• Model governance checklist
• Principles-based reserves assumptions resource manual

The intent of these publications is to assist you with what should be occurring within your organization, providing guidance on what the program should contain.

Required. Based on your valuation practices, having a defined program may be required based on the requirements of VM-G. A written program is needed to ensure that the integrity of the modeling is intact, and can be communicated to others within the organization.

Helps Maintain Quality and Consistency. With limited resources, it is critical to have your process written down for future reference. If you have very few people that can review the work, the documentation will make their review time more effective and more complete. Without the written record, the person reviewing won’t necessarily know what they should be seeing within the model. If you don’t have someone that can review the work, it will provide you with a roadmap of what you’ve done in the past and provides a checklist of what you should do again. If you use an external party to do the review, the written documents will allow for a less costly review than would occur otherwise. Without the written work, the external party will need to create it for themselves, at an additional cost to your firm.

What Should the Program Contain?

A great resource for this is the model governance checklist provided above. That document provides questions you need to ask yourself about governance and what the work should contain. The categories it reviews are:

• Governance Standards: general questions on your framework
• Modeling Process: describe risks being modeled, model documentation
• Assumptions Setting: describe assumptions used and approvals obtained
• Input Data / Tables / Mapping: describe data being used and controls in place
• Access Controls: who can access the models and the data inputs
• System / Model Changes: how you are ensuring that the model being used is the one intended
• Model Selection / Versioning: ensuring all inputs and the model version is accurate
• Consolidation of Results: Are reports standardized? Are all products accounted for?
• Reporting: review reports to ensure all significant items are included
• Analysis / Validation: Are results reasonable? Have all sensitivity tests been run?

The checklist document provides a host of questions that should spur on your creation of a governance document. Although the list has a number of items, you still need to ensure all risks have been accounted for, given your organization’s situation.

The principles-based reserves assumptions resource manual provides additional guidance on assumption management. It lists eight considerations for your process:

• Identify assumptions
• Select timing for creation
• Analyze experience
• Determine margins
• Review reasonableness
• Document results
• Implement decisions
• Monitor results

If you haven’t worked through this process for your assumption setting process, this is a great resource on what you should have in place. The effort placed into documenting assumptions will greatly assist future development, and will ensure the appropriate rigor has gone into what the models are using.

By documenting your processes and models, you will see a better work product and will find that it is easier to complete these tasks in the future. Although it takes time now, it will greatly save you time in the years to come.

Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries, the editors, or the respective authors’ employers.

Scott D. Haglund, FSA, MAAA, FMLI, is vice president and director of actuarial services, life, at Federated Insurance. He can be reached at sdhaglund@fedins.com.