Case study AXIS Replication Case Study

Identify insurance product types to be replicated:

• Term
• Whole life
• Par
• Long-term care
• Variable annuities
• Fixed annuities

Identify calculations to be replicated:

• Seriatim cash flow projections
• Seriatim reserve calculation
  • Gross premium valuation
  • CRVM
  • One-year and two-year FPT
  • FAS60
  • AG33
  • AG34
  • AG43 Standard Scenario

Determine calculations to be validated through separate testing: 

• Cohort-level calculations building on seriatim calculations

Discuss options for validation of model assumptions:

• Option 1: Assume that the AXIS seriatim/cell assumptions have been set up correctly
  • Low maintenance and allows for automated flow of assumptions from AXIS model into replication model
  • Assumption validation to be done as a separate exercise, typically by junior internal staff
• Option 2: Apply assumptions independently of AXIS model
  • Requires more maintenance for model updates

• End-state solution typically validates targeted assumptions where practical

Determine testing sample policy set:

• Typically, one policy per model cell
  • Covers all product/policy combinations

Replication model development:

• Start with AXIS replication tool template model that contains calculations that apply for most products
  • Policy movement
    • Mortality
    • Lapses
    • Premiums
    • Death Benefits
• Customize tool for client’s specific block of business
• Execute processes for populating back-end databases with AXIS policy and assumption data
• Develop AXIS replication tool to allow client to project cash flows and reserves for any policy and scenario on demand
• Develop process to run reconciliation for selected subset of sample policies/scenarios

Navigate and respond to challenges:

• Some reserve calculations require several projections (e.g. AG43 standard scenario)
  • Develop an automated process to combine required elements from projections
• Some products require substantial computational complexity, e.g. disability products require tracking each incurral month cohort
  • Develop an automated process to process disability policies while maintaining efficient calculation time and workbook size
  • Develop AXIS replication tool with Excel best practices to minimize calculation runtime and facilitate model maintenance

Deliver AXIS replication tool:

• Deliver a complete AXIS replication tool (Excel spreadsheet and backend databases) that allow client to independently validate cash flow and reserve calculations for all policies
• Provide an automated process to run a reconciliation process for a selected set of sample policies

Deliver user guides and model documentation, including:

• In-model documentation with comment descriptions of all model calculations
• Detailed user guides for model usage and maintenance

Provide training and change management support:

• Train staff so that the model can be maintained in-house

Results included the following:

• Required elements of the model validation plan were satisfied by ensuring that AXIS model calculations are accurate.
• Transparency of AXIS calculations was greatly improved, such that all model calculations can be drilled down within the replication tool back to source assumptions.
• The replication exercise increased understanding of AXIS calculation methodology, an outcome that was particularly helpful for new AXIS users.
• Increased transparency allows for easier fulfillment of internal and external audit requests, including very quick provision of sample policy calculation details.
• AXIS model setup issues were identified and remediations recommended.