Transformational Thinking in Actuarial Services
Insurance Experts' Forum, March 6, 2014
The ticker tape, invented by Thomas Edison at the age of 22, should have been a sign to all other industries. Investors would do anything to keep information and money flowing…including keeping their technology up to date. One would think that an insurer’s desire to reduce risk and hold onto reserves would also steer them down the road toward cutting-edge information technologies.
Sadly, this is not the case. Some of the tools still in use by actuaries haven’t changed over the last 30 years. Keeping up isn’t the issue. Catching up is needed. Insurers need transformational thinking and a technological reformation to avoid an actuarial meltdown. (For a deeper explanation of transformational thinking and legacy thinking, see my first blog.)
There are significant trends putting pressure on insurers’ Actuarial Services, including:
• Consumers are more informed and demanding. Insurers are having to launch new products and services that meet the demands and in shorter cycles.
• Poor investment returns in the developed countries are causing exits from certain lines of business, and divestitures.
• Competition has moved to emerging economies in pursuit of growth.
• New players are entering the industry and the lines of demarcation among insurers, reinsurers, capital markets and banking are blurring.
• Regulatory compliance requirements are more strict and intrusive.
• New and more powerful technology solutions are being rapidly introduced, and insurers want to leverage them.
• Geopolitical, environmental and social risks continue to increase, along with financial crises such as those found in the Eurozone.
Challenges in Insurance Actuarial Services Function
The aforementioned trends are impacting actuarial activities, such as:
• Product and services pricing and related risk management
• Insurance rates calculation and developing rating plans
• Estimating loss reserves
• Providing periodic and on-demand predictive modeling and analyses services
• Conducting sensitivity analyses to ensure the financial stability of the company
• Meeting regulatory reporting requirements in partnership with Finance and Accounting
One of the greatest impacts lies in enterprise risk management. With the entrance of so many fast-changing variables, quantifying and communicating the risks becomes more difficult at the time when it is the most important. Actuarial services must be prepared to inform senior executives about key risks to the company. They need to provide information on risks associated with new products and services, new acquisitions and divestitures. They must assess the impacts of entry into new markets, new lines of business and new distribution channels. They need to see and recommend actions to improve earnings consistency and keep an ongoing profile of the company’s assets and liabilities. Actuarial services can also provide information on how reinsurance programs are to be structured. In all areas, actuarial functions should be driving toward maximizing returns on capital.
Insurers must apply transformational thinking to the Actuarial Services function to enable actuaries to meet these industry challenges. In most cases, actuarial departments are still utilizing spreadsheets, extracting and loading data themselves, cleansing data from multiple systems with varying levels of accuracy, and spending more time aggregating data versus analyzing, and having little time to make the results digestible to the various stakeholders they serve. The initial steps in transformational thinking for Actuarial Services begin by rejecting the legacy thinking that can’t lead to transformation.
Reject these legacy notions
Remove the notion that it is okay for actuaries to spend a major portion of their time on data gathering, extracting, loading and cleansing, as well as working with antiquated systems and tools that have been in place for decades. Understand that actuaries cannot keep up with increasing and more intrusive regulatory compliance requirements without new systems and tools.
Accept these transformational thoughts
The technologies of today can offer transformative changes to the actuarial function, so that the accuracy and reliability of the information is improved. Accepting that there is a better way is a good first step. Start by accepting the necessity of an information and data strategy. An actuarial process and systems strategy must be developed in conjunction or the data strategy loses its value.
Lead with these efforts
Launching a transformation program to move Actuarial Services to a new target operating model will involve a well-rounded plan involving these aspects:
People – Create a new organization structure that includes roles that focus on enterprise risk management and regulatory compliance analyses and reporting. Be sure to include roles that focus on modeling and analyses in support of new products and services, and new distribution channels. Prepare for the future by instituting a career progression plan that’s based on learning and development and includes entry level positions for promising Gen Y recruits.
Information and Data – Define all the information and data needs of the department and partner with Operations and IT in a company-wide information and data strategy. Help actuaries move their data from spreadsheets to data warehouse and data marts in partnership with IT. Actuaries should develop the capability to provide differentiating, fee-for-information services to clients incorporating geo-satellite and other visualization techniques.
Location – Multi-national insurers must have actuaries in regional offices and other locations close to underwriters, product managers and marketers and not just in the home office. Actuarial data and analyses should be available to all locations.
Processes – Define the processes for the department and assign process owners to drive standardization and efficiencies. Create processes that enable new products and services to be developed faster. Automate processes as much as possible. Move all data gathering, extraction, loading, cleansing and storage roles to IT.
Systems – Work with IT to move modeling and analytics to private clouds to have CPU and storage on-demand capabilities. This will enable data loading from multiple prior years for trending, and facilitate access to three or more versions of the risk models from vendors so that pricing comparisons are expedited.
Partners – Engage third parties to provide data management support services and risk management services as well as tools for predictive and prescriptive modeling and analyses, and data visualization.
Because the actuarial department is at the core of an insurance enterprise, a transformed actuarial department is an essential step toward total organizational transformation. If your organization is considering how to marry process and technology improvements in areas such as actuarial functions, it should seriously consider involving a partner to involve in plan development.
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