Introduction

The working environment of an actuary has experienced significant change in recent years. A move to remote and hybrid working coupled with constantly developing technologies and increased regulatory demands means actuaries face a very different environment from what could have been envisaged even five years ago. This article discusses how these changes may present both opportunities and challenges for actuarial departments and possible actions that can be taken by Heads of Actuarial Function, Chief Actuaries, Chief Financial Officers and others to capture the opportunities and manage the challenges.

Regulation

Over the past decade, (re)insurers have experienced a notable surge in regulatory requirements, placing extra demands on actuarial departments. This uptick has not only expanded the role and responsibilities of actuaries within the business but has also prompted more active engagement with regulators such as the Central Bank of Ireland (CBI).

Actuaries will often play a pivotal role in implementing new regulations, understanding the resulting financial impacts and explaining them to senior management. However, getting to grips with new regulations may stress existing teams’ capacity and knowledge. This can result in attention being diverted from crucial tasks like analysing valuation results or progressing other projects. Indeed, the CBI pointed to actuarial resources working on International Financial Reporting Standard (IFRS) 17 as a possible reason for an increase in errors in the reserving process in recent valuations.¹

Regulatory changes may expand the role and responsibilities of actuaries within a business. For instance, they may need to collaborate with teams they haven't worked closely with before, as seen with the introduction of CBI guidelines on climate change risk in March 2023. Actuaries are now tasked with evaluating the effects of possible climate scenarios on the (re)insurer's strategy and business model across different timeframes. This requires active collaboration with various departments within the company to assess the overall impact of climate change on the organisation. In addition, IFRS 17 is changing the dynamic between actuarial reporting and financial reporting teams. Whereas previously engagement between the two areas may have been limited to the provision of reserves for the balance sheet, the introduction of IFRS 17 necessitates closer collaboration to ensure that the complex requirements in the standard are met and that there is consistency across all financial statements produced.

The introduction of new regulations may also require actuaries to enhance their skill sets, especially when it comes to addressing new or emerging risks. Take, for instance, the proposed updates to the Solvency II regulations, which notably spotlight sustainability risks. This is an area where some actuaries may lack prior experience. As actuaries develop and monitor plans to address the financial risks arising from sustainability factors, they must ensure they understand the risks to do so effectively.

Given the frequent updates and expansions of regulations, actuarial departments should position themselves from the standpoint of structure, resource and skillset to deal with these challenges. This may be the establishment of dedicated project teams or identifying “project” resources in business as usual (BAU) teams that have the necessary skill sets. Where there are shortfalls in resources or skills, firms may need to consider alternative options to ensure they can deal with these challenges whilst delivering BAU requirements.

Data

One of the key roles of an actuary is obtaining data, analysing it, suggesting a course of action and explaining the recommendation in a clear and concise manner. The wealth of data available to actuaries and the power of tools to analyse this data presents both opportunities and challenges.

Access to real-time data enables companies to identify emerging trends. These trends can then be integrated into the pricing process to ensure competitive pricing. Up-to-date data can also be used to enhance the accuracy of experience analysis, improve assumptions and optimise capital requirements. Evolving data collection methods directly impact actuarial work. One area where this is evident is in the development and implementation of innovative products and pricing strategies. In the UK, for example, one life insurer has a product that tracks the health activities and eating habits of policyholders, offering lower premiums and reduced underwriting in return. This approach results in more comprehensive coverage for policyholders, enabling them to afford higher levels of protection at reduced premiums. Studies conducted by the company show that policyholders who choose this option have a 41% lower mortality rate and a lower lapse rate.

The availability of up-to-date data can significantly strengthen risk management practices and enhance the ability to anticipate and mitigate emerging threats effectively. In particular, it enables actuaries to ensure that the Own Risk and Solvency Assessment (ORSA) incorporates all relevant and appropriate stress factors, creating a realistic and current risk profile of the company. For instance, as more data on the impact the COVID-19 virus had on mortality and morbidity in the short and long term becomes available, companies may refine the stresses in their pandemic scenario to account for this.

Specifically, data on emerging risks, where companies may lack historical experience, is vital for accurately setting stress levels in the ORSA and assessing potential impacts. For example, companies will need to keep abreast of the latest climate risk data, where information is constantly being updated as the understanding of the evolving climate position deepens. This will help companies ensure they are adequately assessing the risks posed to the company and able to implement mitigating strategies where required.

However, there is a big difference between having access to significant volumes of data and effectively harnessing its potential. A crucial factor in successfully utilising the data available lies in ensuring actuaries have the necessary skills and tools required to analyse the data effectively, and the space to store it. Business intelligence (BI) tools such as Power BI and Qlik can be used to condense vast datasets. It’s essential for actuaries to master the mechanics of these tools to extract valuable insights from the data. Moreover, these tools facilitate the presentation of data-driven conclusions in formats easily comprehensible to stakeholders. Additionally, they are useful in identifying data anomalies or areas where data integrity may be compromised.

While the evolution of data presents numerous opportunities for actuaries, it also raises accompanying risks that need to be managed. With the surge in data volumes in recent years, actuaries must implement robust controls to ensure data quality while detecting errors promptly. As data analytics tools become increasingly prevalent, the importance of data controls and quality is further underscored. Analysing unverified data poses the risk of erroneous conclusions and subsequent poor decisions. Additionally, actuaries must prioritise clear communication of data insights to stakeholders and ensure proficiency in tool usage to prevent misinterpretations. Furthermore, as data usage expands, compliance with relevant data regulations like the General Data Protection Regulation (GDPR) is imperative.

Data has always been at the heart of actuarial work. Today, more than ever, it's vital for actuaries to stay abreast of the latest developments in the realm of data science. This may entail honing skills on new tools, refining existing models to cater to new data fields or sources or even creating new processes. Actuarial leaders need to consider the appropriate team structure, resourcing options and training solutions to develop their teams’ data science capabilities. By embracing these changes, actuaries can harness the potential of expansive, up-to-date datasets to refine the pricing, reserving and risk management processes.

Technology

The increasing adoption of new technologies is driving significant changes in actuaries’ work practices, productivity and capabilities.

In recent years, the widespread adoption of software like Microsoft Teams and cloud computing have facilitated an increase in productivity across the actuarial industry, due to increased collaboration among teams, departments and companies. From our own experience, the move to using cloud computing has meant that it is significantly easier to collaborate with other Milliman offices. This has allowed us to work seamlessly with offices from different time zones, which has reduced operational risk and allowed for significant efficiencies and time savings.

A notable advantage brought about by advancements in new and emerging technologies is automation, which streamlines manual processes. Automation ranges from simple enhancements, such as reducing the number of spreadsheets required to produce results, to comprehensive redesigns of regular procedures. Internally, we've experienced firsthand the benefits of transitioning from legacy processes in Excel to automated processes in Milliman Mind with full audit control. This shift not only expedites the production of results, crucial during periods of tight deadlines, but also mitigates operational risks stemming from manual errors, producing a demonstrable audit trail of controls. By automating manual tasks, actuaries can allocate more time to in-depth analysis and interpreting results. This translates to added value for their organisations through informed decision-making and early error detection. In addition, staff engagement is much higher when actuaries are analysing and interpreting results rather than shuffling spreadsheets. However, creating a framework with adequate controls to facilitate a smooth transition to automated processes and an ability to resource these projects can prove challenging. For more information on process improvements please see these briefing notes on process improvements and operational excellence.

Generative artificial intelligence (AI) technologies can also be utilised to improve efficiency in actuarial work. ChatGPT, for instance, is widely utilised for drafting emails, papers and even debugging and writing code. Microsoft Copilot is another game-changer, streamlining various tasks for actuaries. From summarising meeting minutes and generating action items to assisting with report writing and presentation design, these technologies are poised to save actuaries significant time and effort.

Similar to having the skills to utilise big data, as described above, actuaries will also need to enhance their knowledge of the impact that new technologies implemented across the company could have on their work. In particular, as insurtechs continue to penetrate the insurance market, actuaries will need to understand how the risk profile of these companies differs from more traditional insurance companies. For example, a well-known US insurtech has technology that allows claims to be validated and paid in as little as three minutes. Actuaries will need to consider the impact on the reserves of the increased likelihood of fraud, the increased risk of moral hazard if customers believe the validation of claims is less stringent than the traditional process and the risk of inaccurate claims assessment. They will also need to ensure that the appropriate and more niche risks arising from this claims process are captured in the ORSA. For example, the increased risk of adverse selection where the mix of business is composed of higher-risk individuals who anticipate larger claims and are attracted to the simplified claims process.

AI empowers actuaries to refine modelling by leveraging machine learning and predictive analytics. This enables the development of advanced models for more accurate forecasting, particularly in pricing. By integrating machine learning algorithms and predictive analytics into their modelling frameworks, actuaries can also enhance the precision and granularity of risk assessments. These sophisticated models excel at capturing the complexities of risk factors, thereby providing organisations with more reliable predictions of future outcomes.

Actuarial departments should ensure they are adequately prepared to leverage the opportunities for enhanced efficiency offered by new technologies, so as not to lag behind their competitors. Many companies still rely on outdated legacy models, written in obsolete coding languages unfamiliar to current staff. While generative AI offers a solution to modernise these models, not all departments possess the necessary capacity, skills or inclination to undertake such transformations. Furthermore, the expanded use of technology, particularly AI, introduces heightened risks for companies. Increased reliance on technology may expose organisations to infrastructure vulnerabilities, while reliance on AI-generated content carries the risk of producing inaccurate outputs or perpetuating biases inherent in the training data. Implementing robust controls and best practices concerning new technology is paramount for companies to harness opportunities effectively while mitigating associated risks.

Numerous opportunities arise from embracing new technologies to bolster the efficiency of actuarial processes, thereby freeing up time for value-added activities such as analysis. However, actuaries must ensure they allocate sufficient resources to develop these new processes to reap long-term benefits. Failing to engage with AI while competitors do could leave companies at a significant disadvantage in the rapidly evolving landscape of the industry.

Staffing

The past number of years has seen a dramatic shift in how companies resource their actuarial departments, most notably through the introduction of remote and hybrid working as a result of the COVID-19 pandemic. As mentioned in the previous section, the adoption of software like Microsoft Teams and cloud computing has facilitated this shift. The working day for many employees is no longer as defined and structured as it was pre-pandemic, with the physical office no longer the focal point it once was. A recent study by BNP Paribas Real Estate showed that marginal space per employee ratio has fallen from 10.2 square metres per employee between 2012 and 2019 to 3.2 square metres per employee since 2020,² reflecting the influence of hybrid working on office demand.

Embracing a hybrid or remote working environment may help to increase staff contentment due to the increased flexibility and reduced commuting times. Indeed, recent industry surveys point towards a preference for hybrid working, with employees believing that it allows them to be most efficient. However, there appears to be a growing feeling from c-suite levels that companies would benefit from higher contact hours in-office. Finding the balance between management’s preference for more in-office time and employees’ preference for greater flexibility through working from home is key to ensuring the hybrid working environment is successful.

The move to hybrid working, however, brings new challenges. Previously, a key part of junior actuaries’ development was learning by osmosis, being onsite and being exposed to colleagues solving problems and working together. Management needs to ensure that a learning culture is in place in the hybrid working model so that opportunities to learn and develop are provided to try to replace that experience gained from being in the office full-time. A possible solution that we have seen in the industry is a growing trend of companies coordinating the days when staff are in office to increase interaction amongst employees.

Companies are also still discovering how to retain the same levels of engagement and buy-in from staff when they are not in in the office every day. Ensuring that staff feel connected to the company and their colleagues can prove challenging. That lack of connectedness can have a knock-on effect on staff retention levels, particularly when previous barriers to changing jobs such as commuting time or proximity to the office are of less significance. In addition, staff are keen to get new experiences, with a desire to move team more often than previously. This uncertainty around staff retention poses a risk to actuarial departments, with already tight resources being diverted from BAU to recruitment and training due to higher staff turnover or rotations. Since the pandemic, there has been an increased focus on work-life balance. Companies that are not able to meet the work-life balance required by employees may struggle to retain existing talent and attract future staff.

Remote or hybrid working also allows companies to consider different resourcing models. The resource pool available to a hiring manager is no longer defined by the ability to commute to the office every day – in theory it’s global. Hiring managers can recruit expertise in whatever jurisdiction it’s available or recruit in lower-cost regions if this is a challenge.

Remote working materially increases the resourcing models open to actuarial teams. This can range from the traditional model of five days in the office to hybrid, remote, co-sourced or outsourced models. Each option has its benefits in terms of cost, productivity, resource availability and staff engagement. Resource availability continues to be a challenge, with significant lead times to fill vacancies. Management should consider the pros and cons of all models, adopting the appropriate model for specific functions rather than a one-size-fits-all approach. We will be taking a closer look at the potential benefits co-sourcing and outsourcing can have for a company in an upcoming article later this year.

Conclusion

As we have seen, actuarial departments are now operating in a very different environment from the beginning of the decade. The pace of change over the past five years has exploded, with leaders required to adapt to new regulations, new tools and technologies and new work practices.

To work as effectively as possible, it is crucial that companies dedicate skilled resources to leverage developments in data analytics and technology. This can allow actuaries to automate manual processes and extract as much value from their data as possible. Where companies are squeezed for resources or under pressure from regulatory deadlines, they may need to consider all resourcing models available to them. Remote working, Microsoft Teams and cloud computing have opened up resourcing possibilities, such as lower-cost locations in Asia or the ability to engage with specialist resources outside of the office commute zone. Emerging technologies open up the possibilities of a step change in productivity.

Most importantly organic change is unlikely to lead to an optimum target operating model (TOM). Actuarial leaders will need to manage the change curve, strategically optimising the TOM to avoid getting left behind in a rapidly changing world. In our next article, we will delve deeper into key TOM review principles that companies may benefit from using – so stay tuned!

¹ CBI (September 2023). Insurance Newsletter. Retrieved 18 July 2024 from https://www.centralbank.ie/docs/default-source/regulation/industry-market-sectors/insurance-reinsurance/solvency-ii/communications/insurance-quarterly-news/the-insurance-quarterly-september-2023.pdf?sfvrsn=45e49c1d_5.

² BNP Paribas Real Estate (2023). Q4: Dublin Office Market 2023. Retrieved 18 July 2024 from https://www.realestate.bnpparibas.ie/sites/ireland/files/2024-02/BNPPRE%20Q4%202023%20Dublin%20Office%20Report.pdf.