New York — In the actuarial world, process inefficiencies, increased business complexity, regulatory demands and data volume are leaving little time for crucial analysis, driving a growing trend toward automation, according to a roundtable hosted by The Insurance and Actuarial Advisory Services (IAAS) practice of Ernst & Young LLP, (E&Y) New York.
E&Y’s fourth annual Actuarial Transformation Roundtable focused on business intelligence (BI) strategies for actuaries coping with new challenges surrounding financial reporting, planning, forecasting and risk management.
Unlike last year’s event that focused on business and IT alignment, at this year’s event, senior actuaries and IT executives from leading insurance organizations shared attitudes and progress with respect to enhancing current methodologies through the use of technology.
A survey conducted at the event revealed that three-quarters (75%) of actuarial participants spend 20% or less of their time on validation, reporting, analysis and explanation of results.
“Understanding and explaining results is fundamental for insurers, and it will be increasingly difficult to do so as companies get larger and the reporting requirements grow more complex,” explains Steve Goren, leader of the Ernst & Young IAAS Actuarial Transformation practice. “The bar has been raised, and actuaries are beginning to recognize the potential role business intelligence can play in their future success.”
There was broad agreement among participants at the Roundtable that management expects more transparency and accuracy in a post-Sarbanes-Oxley world.
Acknowledging that the goals are clear, they also agreed that current processes and systems do not offer the necessary support to achieve these objectives. Pointing to the sheer volume of data and accelerated close times, there was broad consensus that little time is left for analysis. As a result, the actuarial team is frequently left unable to answer crucial management questions in a timely manner.
Many attendees noted that this is creating a crisis in confidence that threatens to minimize the future role of actuaries. If the actuarial team cannot deliver on the needs of senior management, there will be a domino effect as senior management will have difficulty answering to the board and external constituencies, potentially creating a credibility spiral for the organization.
In fact, the survey revealed a perceived lack of management satisfaction, with more than half (58%) of participants saying their senior management was only “somewhat confident” or less that the results produced by actuarial are accurate and reliable. Additionally, more than 90% thought their senior management was “somewhat satisfied” or less with the analysis and explanation of a range of elements including valuation and reporting, planning and forecasting, risk management and ALM.
“We are seeing a growing demand for demystifying the actuarial black box,” explains Mike Hughes, Life Health Practice Leader, Ernst & Young IAAS. “Gone are the days when management accepted the information received at face value. Despite an explosion of increasingly complex data and a shrinking timetable for delivering results, there is an expectation that the actuarial department will not only be able to offer timely and accurate numbers, but be able to anticipate and explain results and provide recommended management actions where appropriate.”
Agreeing that current daily challenges are already stretching their departments to the limit, the group also discussed the added complexity being created by new product guarantees and options. Of even greater concern were the new requirements on the horizon, including the move toward fair value and principles-based reporting. Driven by principles-based approaches to reserves and capital in the United States, as well as IFRS and Solvency II in Europe, attendees acknowledged that the shift from deterministic to stochastic methods is underway. Many questioned their ability to succeed in this new environment without overhauling current actuarial systems and processes.
These new pressures have created more openness to change and while the majority of participants still admit to significant reliance on spreadsheets, they are actively examining alternatives. In fact, when asked the development status of their actuarial organization’s business intelligence environment, more than half (55%) say they are “implementing” and 36% say they are “planning” such an initiative.
Two roundtable participants, a senior actuary and a senior IT executive, presented case studies of their individual company’s efforts to create BI environments. The actuarial presenter noted that his company began by automating the reporting aspects of the GAAP valuation process, but the long-term objective of the initiative was to eliminate actuarial intervention in the reporting cycle.
Identifying the ultimate benefit as increasing analysis time from a half-day to two full days, he received an enthusiastic response from the other participants who reported striving for a similar goal as they look to automate. It also was agreed that with the right BI strategies and tools, companies will not only have more analysis time, but they will be able to do more with this time.
Building on the first case study, the second presenter offered technology-focused insight around developing a BI infrastructure. Highlighting the fact that the actuarial department is often unaware of existing BI tools within their organization that can be leveraged, she stressed how important it is to partner with IT in order to develop the right infrastructure.
While the group acknowledged that conceptually, the use of BI tools by actuaries may be fuzzy, but the key desired attributes are clear. Attendees noted the desire to obtain user-friendly tools that simplify analysis and provide automated and efficient standard reports. At the same time, these tools must also allow them to drill down as needed to quickly analyze results in order to answer senior management questions. Building an actuarial analysis repository that feeds off the valuation and modeling engines was discussed as the core of achieving this goal.
As companies look to implement BI infrastructures, the IT presenter stressed the need to break initiatives into smaller projects in order to identify near term achievable goals to satisfy management. The group strongly agreed that showing incremental value and early results is critical, particularly as securing funding for these initiatives is difficult.
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