Risk & Reward: 4 Essential Actuarial Controls


Life is a tradeoff of risk and reward. This is my first article that explores the life challenges evaluating risk and reward. I have consulted major insurers solving their actuarial SOX and Model Audit Rule requirements. Based on my experience, there are 4 essential controls needed to meet these external requirements. These controls not only meet external requirements, but meet actuarial, IT, and management goals. The example I will focus on is financial reporting. However, the principles apply to other actuarial practices.


Before starting, be organized. Use a dedicated binder to record documentation. The binder should be a collection of all review work performed for the given valuation period. Organize the binder so others will be able to review. Try to improve the binder each valuation period. There is always room for documentation improvement. Solicit help with organizing the binder, if possible.

“Getting the right answer” is no longer sufficient. Actuaries must prove their results are reasonable.

OK – here are the 4 essential (key) controls:

Control #1: Validate Inventory

Garbage in, garbage out. Financial reporting actuaries must ensure valuation records match administration records. The devil is in the details. Usually matching policy count is necessary but insufficient. More rigorous goals include matching face amounts for life insurance, account value for investment accounts. Challenges include filtering unnecessary “noise” such as inherent riders and other records that may exist in administration but not necessary for valuation. Other challenges include ICOS and RPU/ETI.

Control #2: Sample Policy Testing

Choose a small sample of policies and calculate using an independent source. Choose the sample wisely to ensure a cross section of major products and risk classifications. There are two main approaches:

  1. Pet Policy Approach

Once the policies are determined, recheck the same policies each period. This saves time because it is not necessary to pick new “pets” and it’s faster recalculating the same policies then starting with new policies.

  1. Choose a Fresh Sample

Choose new policies each valuation period. The advantage is sampling more policies increases the policies sampled. The disadvantage is that it takes more time than the Pet Policy Approach.

Regardless of which method is chosen, the key is that the calculations are independent of the system.

Control #3: Trending

Identify Key Performance Indicators, or KPI’s, and trend the results. The key is the actuary must document the expected range for the new data to be within BEFORE viewing results. Perhaps the goal for the Stat to GAAP reserve ratio is between 1.2 and 1.4. If the ratio is between these two ranges, no more work is needed. However, if the ratio is less than the lower bound or greater than the upper bound, then research the cause. Document all details in the binder including explanations as to why trends were outside of expected ranges.

Ranges should be “narrow” for stable business and larger for dynamic business. The goal is the ranges are narrow enough to “catch” potential errors but not too narrow to create several “false positives”.

Ideally, a peer or independent review tests the trending to ensure it is optimal. Use graphs as much as possible. Creating pivot charts is a good use of Excel.

Control #4: Verify Upload

Actuarial work is not completed when results are transferred to accountants. In order to prove there was smooth communication, review the final accounting reports to ensure they match expectation. Far too often, especially in large companies, errors are introduced in the handoff to accountants. So, take a few moments to ensure what was uploaded was correct and sign off on the review. This should also ensure that on-top adjustments are correct.

There may be other key controls needed, depending on your circumstance. There are many “important” controls that can be created. The difference between important and key controls is that key controls must be tested more rigorously. Determining financial controls and labeling as key and important is essential for financial reporting.

Dave started SALT Solutions, which is now Coaching Actuaries, in 1995 to reduce actuarial spreadsheet and processing risk.

Read more by Dave here!