Editor’s note: Ron Kozlowski is director and consulting actuary, Americas PC Practice, Towers Watson. Jamie MacKay is senior consultant, Americas PC Practice, Towers Watson.

It is fairly common these days for property and casualty insurers to retain large or growing actuarial teams. Insurance executives are placing a greater importance on these teams to provide in-depth reserving analysis, and to collaborate with underwriting, pricing, reinsurance and capital-modeling teams.

But while these actuarial teams are getting bigger, in many cases they are counted on to deliver too many mundane tasks, such as data processing, creation of reports and meeting ever-growing regulatory needs.

Quite simply, for many companies, reserving processes have not kept pace with change and competing demands. Reserving actuaries are increasingly asked to perform their services for underwriting, pricing reinsurance and capital-modeling purposes, often with different data segmentations that require a finer level of analysis or a macro view. This increased need for analysis is often not well designed or organized to fit within the broader reserving framework.

We believe a thorough review of the reserving process and identifying tasks that can be streamlined can free up time for the reserving teams to focus on more insightful and value-added activities.

In our experience, the ability of reserving teams to provide quick, value-added analysis is often limited by inefficient processes, tight timelines and increasing business and regulatory demands. The need to complete more tasks in a shorter timeframe means there is little time left to carry out the more in-depth analysis of the key business lines that may be critical to the success of the organization.

When it comes to these inefficiencies, insurers have told us just about everything, from the “time taken to complete the reserve analysis is too long” and“expensive resources are often used up on menial tasks,”to  “the level of governance around the process is insufficient.” Insurers have also told us their reserving process is faced with “data systems not well integrated,” “inconsistent processes and inefficiencies among teams,” “lack of time to focus on business-critical areas” and “too much key-person dependence.”

We believe these routine tasks can be eased, if not totally eliminated. There will always be pressure on even a well-run reserving team, but there are ways to alleviate the pressure and create an environment that allows the actuary to focus on the most critical areas.

 

Industrialization fundamentals

In our view, the solution is industrialization—to be more precise, reserve-process industrialization. We define this as the “streamlining of the end-to-end reserving process, from data to management information, automating key tasks and introducing sound governance procedures.” Identification and implementation of efficiency improvements speed up the process and free up valuable resources, thus allowing more time for value-added analysis, the completion of more complicated or developing regulatory requirements and other essential tasks.

Before it gets underway, any worthwhile reserving-industrialization project will typically require companies to consider a few fundamental components. The first is a reserve process review that establishes and documents current practices and data availability. Many reserving processes have evolved as much by accident as by design in response to ad hoc requests for new analyses and enforced legislative updates. A review can be beneficial even if significant changes are not required.

Clearly, however, the principal objective of such a review is to identify areas for improvement that enable companies to determine priorities and automate certain parts of the regular reserving reviews. The next step is to work out how you are going to achieve what you have set out in your scoping document. The most effective approach is to map out your future-state reserving process as a flowchart (see figure), identifying, for example, how new data and systems can be incorporated into the process.

This map should reflect the specific aims of the future-state process. We would normally expect these to include:

  • Improved governance and controls around the reserving process.
  • Integration of systems and databases.
  • Faster, more efficient analysis of standard reserving tasks.
  • A more consistent analysis approach.
  • Better use of resources, with reduced key-person reliance.
  • More time for value-added analysis.
  • Speedy production of more consistent outputs and management information packs.

The review should define where the intervention of actuarial teams can add the most value. In our experience, industrialization is typically focused on automating data uploads, calculating actual versus expected projections, applying standard analysis and generating reports throughout the process — all within a well-governed environment.

The application of standard modeling approaches and parameters works particularly well for some of the “vanilla” classes of business, where claim experience is more predictable. Simple diagnostic checks can be put in place to ensure these classes are developing within expectations, and they should free the reserving team to assess more material or volatile danger classes where, in some cases, overexposure to certain risks could threaten the business as a whole.

 

Implementation and business understanding

Documentation and feedback are also essential elements of the process that can be supported by the right software. Regardless of approach, the longer-term management, recording and improvement of reserving activities need to be robust enough to stand up to the increasing scrutiny of regulators and auditors, which need to better understand the interaction of systems and models within a business. The output from these kinds of analyses could be used to link more seamlessly to other functions of the business, such as finance, accounting, business planning, underwriting, pricing and internal capital modeling, assuming sufficient thought has been given to the interaction of IT systems.

Reserve process industrialization offers great promise for CFOs and chief actuaries determined to improve efficiencies and expense reductions. It offers the potential to automate more parts of the reserving process, and improve controls and governance around core compliance work. It provides automated, robust, timely, auditable, accessible, repeatable and unambiguous analysis that fosters deeper insights and better decisions. It also frees up time in the process to carry out more in-depth analyses, which may prevent unexpected trends from developing into material issues that impact the company’s performance. Industrialization can also help create a level of analysis that can be used confidently as a base for sound strategic business decisions.

While reserving units may have grown considerably over the years, we should ask ourselves if they have grown efficiently by taking advantage of technology’s benefits. We need to make sure that actuaries are not spending time on mundane tasks, but rather providing greater insights and interacting with the underwriting, pricing, reinsurance and capital modeling teams.