Prophet Modeling (4): How did I setup my Takaful Library?

Hooray, I finally completed the Takaful Library! Working together with Ms. H, we finally setup the Takaful Library from scratch and created 32 “Products” (and another 19 “Same As” products). I am glad that the Valuation Team (headed by my ex-boss Mr. R) can now using a consolidated workspace to do the actuarial studies, especially asset share study and reserve & liabilities capital charges for new valuation basis and Risk-based Capital (RBC) submission.

After around 4 months of hard work, finally I can really sit down and “document” this exercise. I will share the experiences I have in this article and several subsequent articles later – hopefully they can help to provide some ideas to you…

The above flow chart summarizes the approach I used to complete the Takaful Library project for my Client:

Approach Papers
I started the project by preparing documentation (Excuse me, I think I heard someone just shouted “Oh no!!”…), which I generally called them as “approach papers” for convenience. There are few documents to be prepared a this stage:

1. Product documentation
   To document the product features and product specific rates that are required in the model.  I only documented those required in the product setup – I didn’t spend time to document items such as exclusions of a products.
    
2. Model approach
   To document how the model should be setup, such as movement of policy, cash flow, asset share, profit/surplus declaration and others. You also need to document the simplifications/assumptions used to setup the model – for example, I did not create a separate movement of policy for riders, i.e. assuming the policyholder will not terminate a rider while the base plan remains in force. Such assumptions need to be documented so that users and future Prophet Managers are aware of these assumptions (instead of wasting time to study the model all over again).
    
3. Reserve approach
   To document how the reserves (e.g. statutory reserves) & solvency are calculated. I did not combine the “reserve approach” and “model approach” in a single document because “reserve approach” is product specific and it requires more frequent updates.

These documents are similar to the BR (Business Requirements) of IT projects. However, I didn’t request my Client to sign-off the documents as we definitely need to further enhance the documents along developing the models (instead of wasting time on too many formalities).

Modeling
Although my focus was to develop the Takaful Library in Prophet, I still setup the similar model in spreadsheets – spreadsheet modeling is the basic form of actuarial modeling that every actuarial people should know.

The spreadsheet models are mainly used to check the results produced by Prophet. They helped me a lot in detecting errors which were difficult to identify by reading the variable definitions.

Of course, spreadsheet models were easier to be reviewed by my Client.

Review & Validation
As mentioned above, I used spreadsheet models to validate my Prophet results. In fact, I also reviewed the variable definitions one-by-one – I printed out the definitions on recycled papers (more than 200 pages!!) and went through every single definition. I admit that this was a very painful exercise.

The review & validation exercises were split into 2 stages: (1) single model point; (2) portfolio. The single model point run used spreadsheet models to validate the Prophet results (the differences due to different ways of rounding are extremely small); while portfolio run was done by my Client using the in force data for annual valuation exercise, mainly for reasonableness checking.

Apart from using a single deterministic scenario, ideally we should do sensitivity testing for single model point run & portfolio run as well – however, due to time & resources constraints, I only managed to do very limited sensitivity testing, mainly on movement of policy.

Sign-off
Of course, sign-off was the final stage of this project – my Client & I needed to sign-off not only on the Prophet Library & workspace, we also needed to sign-off documents. I have also prepared a “project closure document” to summarize what we have achieved in this project – this project was considered after we provided sign-off for this document.

I will share my experience learned from this project in more detailed in my coming articles. Feel free to provide your comments & suggestion.