Actuarial 20/20 Canada: in focus

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1 Actuarial 20/20 Canada: in focus

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3 Table of contents 2 1 Canada: in focus 4 2 Actuarial teams: a vision for the future 6 3 Technological and data advancements 10 4 Operational and process efficiency 12 5 Cultural transformation 14 6 Conclusion 16 7 Contact us Actuarial 20/20 Canada: in focus 1

4 Canada: in focus What does actuarial transformation mean for Canadian life insurers? The life insurance landscape in Canada has changed dramatically over the last few decades. Where once there were numerous domestic and foreign life companies competing to serve Canadians, now the market has consolidated and is dominated by a handful of insurance companies. The actuarial functions of these large life insurance companies has grown and evolved over time, responding to changes in the marketplace and the increasingly challenging regulatory environment. Canada took a lead in the development of actuarial models to manage and monitor risks, whilst the introduction of the CALM valuation has required firms to invest heavily in systems and processes to meet the dual demands of regulators and financial reporting. In Canada, actuaries have gravitated towards a single actuarial modeling platform, the GGY AXIS system. Canadian actuaries currently operate in a mature life insurance environment, where growth is more constrained and finding operational efficiencies and bringing new insights to create business value are top priorities. New requirements are causing actuaries to review and rethink their current platform and capabilities, including: Faster close cycle Efficiency and cost savings Better analytical capability Reduced operational risk Changing Regulatory requirements, including ORSA New financial reporting standards, including IFRS 4 and IFRS 9 Actuarial department support of organizational strategy development and execution To support the 20/20 actuary of the future, key questions should be addressed. What does the actuarial function need to look like in the future to continue adding value and to stay cost-effective? As actuarial processes continue to move to automation with advanced IT solutions, how do actuaries stay relevant within their organization? How can insurance companies help their actuaries free up time to better serve their organization s strategic needs? An important first step is to set out the vision and aspirations of the actuarial department in 20/20 and to define the organization s target operating model and path to achieve this. The industry is on the cusp of a new era and Canadian actuaries should play a greater role as business partners whilst maintaining high standards of control and compliance. Insurance companies want actuaries to be more than stewards; instead they need actuaries to become strategic contributors for their organizations. It has become increasingly clear that actuarial functions need to standardize and improve key processes to streamline operations. Also, strong Centres of Excellence should be established to provide leadership to core actuarial functions such as actuarial model development, CALM valuations and experience studies for different lines of businesses and different geographical locations. With the development of economic capital internal models for ORSA, the prospect of a new MCCSR framework and the potentially huge implications of IFRS 4, Actuarial functions need to leverage the latest thinking in model architecture to ensure models are fit for purpose and future proof. It is imperative that effective model governance and validation principles are adopted to reduce risks and errors, and that new processes and controls are designed in parallel to ensure transparency and credibility of results. Actuarial functions need to redefine the roles and responsibilities of its actuaries so that they can better support their organizations in planning, decision-making, risk management and strategy. 2

5 What does actuarial transformation mean for Canadian P&C insurers? The P&C insurance industry in Canada is experiencing a period of unprecedented change, with significant M&A activity and consolidation, changing consumer demands, new products, and evolving capital and regulatory frameworks, including new internal capital models. At the same time, new advanced analytics and actuarial techniques are being developed and introduced in an increasingly competitive market. New and expanded data sources combined with more complex models are increasing the complexity and risk in actuarial processes. With increased demands on actuaries and accelerated pace of change, current actuarial approaches and processes must be revisited. Actuaries are being asked to improve quality, accuracy, and timeliness of current processes, and at the same time, provide enhanced service to organizational customers (e.g. Underwriting, Claims, Finance, and Strategy). The 20/20 actuary of the future needs to plan ahead and build robust actuarial processes, systems, and teams that can manage this increased complexity while making greater contributions as a strategic partner to the business. Now is the time to transform the actuarial function to be ready for this future state. Actuarial 20/20 Canada: in focus 3

6 Actuarial teams: a vision for the future Actuaries were once accepted as the guardians of financial strength and equity in the insurance industry. They used analytical techniques applied to data to determine premiums and set capital and reserves. Today, actuarial teams are still integral in financial services; however their role has become relatively more compliance focused. Their contribution to broader business and strategic decisions has diminished. Actuarial teams have moved towards reporting and maintaining of models rather than strategic insight generation. Furthermore, underinvestment in actuarial teams over time, combined with the resourcefulness of the actuaries, has resulted in a generation of actuaries who are not well equipped to meet the strategic needs of the organization. In the future, the 20/20 actuary will be a value adding business partner that communicates insight to their stakeholders, by using efficient models, data processes and technology. They will be supported by effective organizational structures and provide strategic leadership that will be a catalyst for change. The actuary will be involved in the traditional reserving, pricing and capital modelling areas, and other non-traditional areas related to risk management and business roles. This change can only occur through a transformation of actuarial people, systems and processes. In this point of view we assert that these transformations must encompass data systems across the organization, technology infrastructure, operational and organizational efficiency, team structure and culture and talent development. Our views are supported by a global survey and Deloitte s global actuarial discussions. There is much to be gained from this transformation. For Management teams in the organization, this is a unique opportunity to maximize existing capability that can generate significant value and provide a competitive advantage. For Chief Actuaries and the actuarial professional, it is a unique opportunity to make a significant impact and reconnect more effectively with the business as a trusted advisor on issues beyond the technical. Actuaries were once accepted as the guardians of financial strength and equity in the insurance industry. They used analytical techniques applied to data to determine premiums and set capital and reserves. 4

7 The Four Faces of the Chief Actuary shown below represents the different leadership roles that a Chief Actuary and their actuarial teams provide to their organization. Figure 1 The Four Faces of the Chief Actuary Catalyst Catalyse behaviours across the organization to execute strategic and business objectives while at the same time creating a risk and business intelligent culture. Leading edge Strategist Provide actuarial leadership in determining strategic business direction, and supporting other strategic activities vital to the future performance of the company. Steward Protect and preserve the critical frameworks of the organization and accurately report and communicate on financial position and condition to internal and external stakeholders. Execution Control Threshhold performance ACTUARIAL TEAM Performance Efficiency Operator Balance capabilities, talent, costs, and service levels to fulfill the actuarial core responsibilities efficiently. Currently, Chief Actuaries exercise stewardship and operational leadership exceptionally well. Whilst we see many Chief Actuaries having strong Steward and Operator characteristics, we would like to see Chief Actuaries playing a greater part as Catalysts and Strategists. Moving the Chief Actuary and the actuarial teams current proportion of time from the bottom of the Four Faces grid to the top can be achieved by: Freeing up Steward/Operator time by streamlining processes, adopting more efficient work steps and leveraging data and technology Utilizing freed up time for strategic activities by equipping the actuarial staff with enhanced tools and capabilities that further assist Management teams in running the company. The Chief Actuary must drive change and precipitate business strategy in their organizations. They will be catalysts for the change rather than recipients of it, continually challenging the status quo. To achieve this, the focus of our advice and contribution must evolve. It must evolve from the what to the so what to the so what next. This change is not a one-off change, but an ongoing continuum of adaptation for a leader to stay attuned to his or her stakeholders changing needs. Actuarial 20/20 Canada: in focus 5

8 Non-Profit Immediate Annuities Non-Profit Deferred Annuities Bulk Purchase Annuities Unit linked Conventional Conventional Pensions Pensions & & Savings &Savings Unitised Protection With-Profit Conventional Annuities With-Profit Core Assets Income Product Portfolio Foreign Exchange Equity Returns Expenses Cash Flow Inwards Direct Manual Sources Patterns Inwards RI Manual Sources Derivative Collateral Legal Entities Fund Information Credit Ratings & Spreads Yields Tax Manual data Claims Market Bench Mark Outwards Direct Unitised With-Profit Manual Sources Stocks External Assets Expenses U/W data Outwards RI Manual Sources Immediate Annuities Deferred Annuities Bulk Purchase Annuities Unit linked Pensions & Savings Conventional Pensions & Savings Conventional & Unitised Protection With Profit Annuities Conventional With profit Unitised With Profit Manual Sources Core Assets Derivatives Stocks Income Static Data Market Data Expenses /Tax CF/ Manual Inwards Direct Claims Expenses Inwards RI Outwards Direct Outwards RI Market Bench Mark Experience Analysis & Management Analysis Tools MPFs MPFs MPFs MPFs MPFs Core Assets Derivatives Stocks Income Expected Premiums Writing Patterns Earning Exposure Patterns Data X 1000 Adjustments Risk Calibrators Assumptions X 1500 MPFs Manual Analysis & Checks MPFs MPFs MPFs Economic Scenario Generator (Market data i/p) Manual Analysis & Checks Deterministic Model Stochastic Model Asset Valuation Core Assets Derivatives Stocks Income Expected Loss Ratios Investment Data Development Patterns U/W data Assumptions Investment Return Premiums and Claims Data Expense Data Risk Scenario Generator X 1000 Adjustments Planning Tools Pricing Tools Life Counterparty default Proxy Asset & Liability Models Risk& Capital Aggregation Reserving IFRS EEV Solvency I Capital Market Operational Solvency I Capital X 2000 Adjustments Solvency I Capital RBS RBS Business Planning Reserving IFRS EEV Opening Balance Sheet SCR ECR Planning Pricing Reserving IFRS Business Planning MCR Projections X 2000 Adjustments Local Statutory Own Funds Risk Appetite Pivot X 500 Excel Tables Spreadsheets Group Reporting Reports Plan vs Actual Analysis Reports Provide data to various teams X 3000 Spreadsheets X 500 Spreadsheets Reports Provide data to Gross Written Premium Net Written Premium Underwriting Results Operating Profit Profit Before Tax Embedded Value Capital Metrics Economic Added Value Cash Volume & Value of NB Price Monitoring Analysis of Change European Economic Value P & L Attribution Risk Appetite Local Statutory IFRS Balance Sheet Gross Written Premium Net Written Premium Underwriting Results Technological and data advancements Historic under investment in data capture and intermediate IT systems, combined with legacy issues from growth and acquisition have created technology and data strains on actuaries. In the face of this issue, actuaries have been resourceful (and territorial) in their behaviour, resulting in the development of shadow IT systems and data frameworks which met the actuaries needs. This shadow IT system has resulted in three complications: 1. Processes that often fall outside of company wide governance, or processes that have complex actuarial governance and control systems. 2. The development of a generation of actuaries that have been supporting these data and shadow IT activities, reducing the actuaries capacity to carry out more value adding tasks. The diagram below shows the current state of typical actuarial systems. In response to changes in products and processes, actuaries have typically added modules to deal with the changes. Over time, this has resulted in actuarial systems that are complex, difficult to maintain and that do not integrate well with the rest of the organization s architecture. The future actuaries will be plugged into integrated data and IT systems and enabled by analytical and business intelligence tools. They will benefit from enterprise wide controls, data disciplines and governance frameworks. This will result in actuaries spending less time on data cleansing, data processing and updating inefficient models. They will instead be spending more time on insights generation and business centred communication. 3. The development of less than optimal actuarial models that fit these shadow data and IT systems. Figure 2 Illustrative current actuarial systems architecture Key System Files elements: External system Data store Logical item Actor Data Flow Feedback Reports Policy Admin & Claims File Landing Area Adjustments KPIs Model Point Files Data Conversion System for Policy and Admin Model Input Generation System Detailed Liability Models Results Analysis Life Investment Management Asset Extracts Detailed Asset Models Results Manual Adjustments Static Data Data Conversion System for Investments Model Inputs Generation System Adjustments Loss Distribution Capital Calculation Inputs Complex Spread sheet Processing Reporting Platform Market Data Capital Calculation SII Capital Calculation Results and Adjustments Finance Data & Systems Accounting File Landing Area Accounting Hub (Staging, Transformation, Target Loading Component) General Ledger Reconciliation Accounting Data Warehouse Reporting Platform General Insurance Data & Systems Policy Admin & Claims File Landing Area Planning Inputs Planning Model 6 Data Conversion System for Policy and Admin Model Inputs Generation Systems Pricing Inputs Pricing Model Results Analysis Results Manual Adjustments Complex Spread sheet Processing Reporting Platform KPIs

9 What can the actuaries and the broader organization do to make this change happen? By leveraging best in class IT principles for actuarial teams such as specification, control, governance, documentation and sandbox environments, organizations can better utilize their actuarial teams. We will take this further and say that the entire organization must adopt a holistic view of data and systems, with the core principle being one source of truth. This then results in the actuarial teams working with IT and actuarial systems not being standalone but part of the overall organizational systems and architecture, backed by the ongoing support, governance and controls offered by these systems. The technological landscape of the future will have the following game changing features: Integrated data warehousing and data access Robust, effective and efficient reconciliations process Faster close process Ability to review and analyze data to create insight Technology aligned to outcome. It is crucial for the data and technology aspects to be tackled appropriately in order for the actuarial teams to achieve operational efficiency. Actuarial 20/20 Canada: in focus 7

10 As shown in the Figure 3, under an effective IT and data environment, the actuarial workflow (beginning from the core systems all the way to insight generation and communication) would exist within an environment that has: Best in class technology Consistent data and model governance frameworks Strong control systems. Figure 3 An effective IT and data environment Best in class technology Control systems Core enterprise systems Data warehouses Data manipulation and treatment Models and calculation engine Insight generation and communication Data and model governance frameworks 8

11 For the actuarial profession, this is an opportunity to foster the perception of commerciality and agility while keeping the existing reputation for high standards and technical excellence. Actuarial 20/20 Canada: in focus 9

12 Operational and process efficiency In mature growth constrained markets, operational efficiencies are critical. Resources are scarce and teams are being asked to do more with less. Actuarial teams are not immune, and must embrace operational and process efficiency or risk having it imposed on them. Figure 4 Operational and process efficiency considerations OPERATIONAL EFFICIENCY PROCESS EFFICIENCY Actuarial teams of the future will be increasingly multidisciplinary in nature. Many actuaries will work alongside other professionals to improve the flow of ideas between the different perspectives. However, processes and structures to help actuaries maintain access to senior actuaries and have professional support and mentoring are important. Organizations are increasingly off-shoring support functions. Management and Chief Actuaries need to consider the implications of this. We see fundamental impacts for junior actuaries coming into the profession and opportunities available to them. Where the detailed work is performed offshore, specific structures and processes must be in place to ensure junior actuaries get the hands on experience they need. This impacts the organization more broadly in areas such as succession planning. There is also a role for the profession to train the future generation of actuaries to think more strategically and utilize the results from outsourced functions to add value. Understand the optimal structure for the various actuarial teams. Formulate a strategy for centralizing, or otherwise offshoring, or outsourcing by considering the merits of each approach. Deciding on the right blend of automated and manual actuarial processes. Actuaries don t need to be involved in everything. Understanding the potential gains from decoupling the do/review/insight generation depending on seniority of the actuarial teams. 10

13 Figure 5 Future state integrated actuarial team Strategy Partnering Specialist Production Systems There are many dimensions to consider when looking at optimal team structures. Striking the right balance in each of these dimensions below can have a critical impact on efficiency: Providing leadership to actuarial teams as well as within the organization Structuring reserving and pricing teams Appropriately linking the different teams such as pricing, reserving, risk management, capital and reporting Integrating new teams from acquisitions Promoting collaboration between actuaries and with other teams through appropriate team structures, operating procedures and protocols Using rotation and cross skilling to maximize opportunities for learning and development Leveraging IT teams to perform data manipulations, cleaning, storage and reporting Creating teams with multiple skill sets that are outcome focused. Figure 5 shows an example future state version of an organization that teams actuaries with other skill sets and roles focused on achieving a specific outcome. Actuaries have a part to play in all of the boxes in Figure 5. Actuarial teams are not immune, and must embrace operational and process efficiency. Actuarial 20/20 Canada: in focus 11

14 Cultural transformation There is an important cultural change angle to actuarial transformations. Actuaries typically define what is good through achieving a good enough level of accuracy and technical sufficiency. Whilst these are important, the key question is what is good from a business perspective? Actuaries and Management need to agree on the expectations from each key C-suite stakeholder and apply the concept of proportionality : When is the work good enough given the size and complexity of the insurer or class of business? Furthermore, actuarial teams need to look at the so what of the actuarial messages they communicate and then to the spheres of influence: the so what next of their messaging. There is a need to focus the actuarial messaging and insights on what is important from a business and strategic context. Actuaries can add more value by expanding beyond building models and producing results. There are tangible financial benefits to this through better understanding of pricing, improved profits and return on capital. The challenge to transforming the actuarial function lies in achieving change with current and potentially constrained resources as shown below in Figure 6. Figure 6 Achieving an actuarial transformation with constrained resources The investment needed: Effort Manage through judicious use of technology What can be done incrementally Leveraging resources and data elsewhere. Increasing complexity and change driving ever increasing data manipulations, inefficiencies and need to transform Capacity to focus on insights and adding value Streamlined, robust, automated processes Transformation begins Transformation complete Time 12

15 Culturally, actuaries have been treading the ever-increasing data manipulations and work around path. This is because they operate in an environment of constant change with new products and regulations coming into the market. As a result, manual processes or actuarially owned systems are implemented to overcome this change. Over time, these processes have taken up a larger proportion of actuarial time, and have reduced time and resources available to focus on more value add tasks. Operational and process efficiency gains are necessary to shift the focus away from these manual processes to insights and value. The actuarial team together with management needs to utilize technology to generate the efficiencies. As the above cultural changes are undertaken, individual employee preferences will dictate how they evolve and adapt. Some actuaries will prefer to work with technology, running and maintaining processes and models. Other actuaries will prefer to take advantage of the process improvements to use the outputs and additional capacity to provide business insights, leadership and drive strategy. This process must be supported by cultural change as well as change management programs. These programs help the team transition from the current process and tools, change accountabilities, perceptions and interactions, and take other teams such as finance, underwriting, claims, marketing and operations on the journey. Actuaries and Management need to agree on the expectations from each C-suite stakeholder and apply the concept of proportionality. 13 Actuarial 20/20 Canada: in focus 13

16 Conclusion The actuarial profession is well known for their technical ability and knowledge of the insurance sector and its products. This has enabled the actuaries to make significant contributions to the areas that they work in. However, the environment that actuaries operate in has evolved over time. There is greater emphasis on sharing and utilizing insights gained from data and analytics across the entire organization. The pace of business is considerably quicker. Actuarial teams need to change to stay relevant. It is within the capability of the Chief Actuary, actuarial teams and the wider organization to respond to these changes. Through transformations that cover data, technology, operations, processes and cultural changes, actuarial teams can undergo sustainable constructive changes that will be value adding to their management teams and their organizations. It gives individual Chief Actuaries an opportunity to become regarded as catalysts for organizational change and as strategists influencing the organization s future direction. For organizations and management teams, this is an opportunity to create a competitive advantage through maximizing the potential and value added from their actuarial teams. For the actuarial profession, this is an opportunity to foster the perception of commerciality and agility while keeping the existing reputation for high standards and technical excellence. Actuarial teams need to change to stay relevant. It is within the capability of the Chief Actuary, actuarial teams and the wider organization to respond to these changes. 14

17 For organizations and management teams, this is an opportunity to create a competitive advantage through maximizing the potential and value added from their actuarial teams. Actuarial 20/20 Canada: in focus 15

18 Contact us Paul Downes Actuarial, Rewards & Analytics Leader Keith Walter Actuarial, Rewards and Analytics Leader Michel Giguere Actuarial, Rewards & Analytics Leader Quebec City Martin Raymond Actuarial, Rewards & Analytics Leader Montreal For more information please contact one of our team members or visit 16

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20 Acknowledgements Thank you to the Australian firm for their continued support in the creation of the Canadian edition of Actuarial 20/20. Deloitte, one of Canada s leading professional services firms, provides audit, tax, consulting, and financial advisory services. Deloitte LLP, an Ontario limited liability partnership, is the Canadian member firm of Deloitte Touche Tohmatsu Limited. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Deloitte LLP and affiliated entities. Designed and produced by the Deloitte Design Studio, Canada V