Finance Transformation – the impact on actuaries and actuarial departments

in Financial Services, 04.12.2014

Many leading insurers are currently undertaking a Finance Transformation program. Whilst Finance Transformation is wide ranging and typically affects most functional areas of an insurer, actuaries can play a key role in shaping the future landscape. Additionally actuarial systems, processes, models and people, in short the entire operating model, are typically an area of key focus in any transformation program.

Why is so much finance transformation taking place at present?

The insurance industry is in the midst of a long period of, what often seems like, almost constant change. This has been driven by a number external factors, including:

  • Increased regulatory demands for information and a higher cost of compliance in general
  • A rapidly changing and increasingly globally competitive marketplace for insurance products, leading to a need for fast, reliable and value-enhancing financial information
  • Increasing demand for more sophisticated risk management from regulators, investors, analysts and Boards

Coupled with these, the internal actuarial environment has often not kept pace with the external demands and the current actuarial operating model for many insurers has been heavily influenced by the following internal factors:

  • Historical under investment in systems, leading to a reliance on Microsoft Excel and other, largely manual, workarounds
  • Dependence on the knowledge and skills of key individuals, familiar with these manual processes and systems
  • Inorganic (i.e. M&A driven) growth coupled with incomplete or partial integration of acquired businesses in terms of data, systems and processes.

What is the impact on actuarial?

This changed environment has led to numerous challenges across the operating model for actuarial:

  • People & Culture: In Switzerland and elsewhere, actuaries are often employed to perform manual low value-add tasks due to the inability of the companies to outsource, offshore or automate actuarial processes. This sometimes results in an inability to attract talented dynamic actuaries as well as in high cost resources not being able to focus on added-value analysis or management of the business and associated risks.
  • Process & Controls: Many CFOs consider the overall cost of financial reporting to be too high and unsustainable given the ever increasing demand for more. Actuarial processes are a significant contributor to this high cost and often too much time is spent “turning the handle”. Further in general processes in actuarial often lag behind other parts of financial reporting in terms of auditability and controls.
  • Data, Models & Systems: Current technology is often stretched and cannot support capacity requirements at peak period such as month or year end. In particular model run times are often prohibitively high and new cloud-based technology is not utilized.
  • Business Steering & Reporting: There is a sometime a challenge that actuaries are technicians – mathematicians without business context and focus on achieving theoretically precise results rather than materially accurate management information to support the business. This stereotype is sometimes reinforced in Switzerland with some actuarial departments being known as the “mathematics department”. Further, management in some companies is inclined to overlook actuarial information, as it is often not produced frequently or quickly enough to provide meaningful information to management or hidden in the midst of long reports.

Typical areas of actuarial involvement within finance transformation

There are many areas in which actuaries have a key role to play in any finance transformation program. Some of the key activities in which the actuarial skill set is highly valued include:

  • Standardization of models and merging of different version to provide a standardized platform.
  • Production of “lite models” to facilitate more timely risk management information, such as Daily Solvency Reporting.
  • Production of risk dashboards to provide up-to-date information to management on KPIs and KRIs.
  • Support in production of a common chart of accounts or common definitions of items across the often large number of reporting bases. A medium sized Swiss Insurer may well report on some or all of Local GAAP (OR), IFRS, SST, Solvency II, MCEV, Traditional or European Embedded Value, US GAAP, as well as various other local statutory accounts for subsidiaries outside Switzerland.
  • Redesigning performance management frameworks or implementation of Enterprise Risk Management (ERM) across a group.
  • Process redesign to facilitate parallel valuation. Currently most insurers have differing reporting timescales for different valuation bases. Additionally different teams often have responsibility for different bases i.e. typically IFRS is often accountant led whereas MCEV actuarial led, leading to process inefficiencies.

Conclusion

In an ever changing insurance market it is not surprising that many companies want to transform their finance and actuarial operating models. Further it should come as no surprise to learn that the larger companies are generally leading the charge towards this transformation. However Finance Transformation has elements for everyone. Can the smaller sized companies really limp on forever, “firefighting” the ever increasing regulatory and investor demands? Or do they need to “bite the bullet” and transform the way their actuarial departments operate?

 

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