In which I use the example of a valuation model gone awry from “Power Failure”, reviewed by Paul Conlin in an April 2023 Society of Actuaries podcast (linked in show notes). The book was about the failure of GE when it switched from being an electricity-related company to a financial services company. This episode is really about professionalism in modeling - and how all modeling professionals should have standards.
Episode Links
Society of Actuaries Podcast
https://soapodcasts.libsyn.com/2023/04
Dave Dillon discussed with Paul Conlin, FSA, MAAA, the recently-published book “Power Failure” by William Cohan, on the 2001-2018 unraveling of General Electric. One of the business events which led to the near-failure of GE was an under-reserving of Long Term Care reserves by 16 billion dollars, discovered in 2018 just as various other problems were emerging for the company. There are lessons for actuaries in the series of events which led to the LTC reserve “accident”.
Actuarial Standards of Practice
History of the Standard
The ASB first began work on a standard for modeling in the late 1990s. Motivated primarily to address the role catastrophe modeling of earthquakes and hurricanes played in casualty ratemaking, this work was focused on the use of specialized models where actuaries would have to rely on a model that was developed by professionals other than actuaries. As a result of this work, ASOP No. 38, Using Models Outside the Actuary’s Area of Expertise, was approved by the ASB in June of 2000 with the scope of the standard limited to the Property/Casualty area of practice. Historically, ASOP No. 38 had been the only ASOP that specifically addressed modeling.
Recently, the number and importance of modeling applications in actuarial science have increased, with the results of actuarial models sometimes being reflected in financial statements.
Recognizing this trend, the ASB asked the Life Committee in 2010 to begin work on an ASOP focused on modeling. The Life Committee formed a task force to address this issue and, in February of 2012, a discussion draft titled Modeling in Life Insurance and Annuities was released and nineteen comment letters were received. The transmittal letter also mentioned that the scope might be expanded to all practice areas and asked for comments on this idea.
Based upon the feedback received, and numerous other discussions on the topic of modeling, in December of 2012 the ASB created two multi-disciplinary task forces under the direction of the General Committee: i) a general Modeling Task Force, charged with developing an ASOP to address modeling applications in all practice areas, and ii) a Catastrophe Modeling Task Force to consider expanding ASOP No. 38 to all practice areas while focusing exclusively on using catastrophe models. The membership of these task forces has experience in all actuarial practice areas, including enterprise risk management.
First Exposure Draft
The first exposure draft was released in June 2013 with a comment deadline of September 30, 2013. Forty-eight comment letters were received and considered in making changes that were reflected in the second exposure draft.
Second Exposure Draft
A second exposure draft was released in November 2014 with a comment deadline of March 1, 2015. Thirty-seven comment letters were received and considered in making changes that were reflected in the third exposure draft.
Third Exposure Draft
A third exposure draft was released in June 2016 with a comment deadline of October 31, 2016. Twenty-eight comment letters were received and considered in making changes that were reflected in the fourth exposure draft.
Fourth Exposure Draft
A fourth exposure draft was released in December 2018 with a comment deadline of May 15, 2019. Twenty-six comment letters were received and considered in making changes that were reflected in this final ASOP. For a summary of the issues contained in these comment letters, please see appendix 2.
Spreadsheet Shenanigans 2: Electric Bugaloo -- Modeling