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Actuarial Modeling

8 Signs You May Need A New Actuarial Modeling System – Part 2(8 min read)

Read Part 1 here

Quick summary – part 1 showed 4 signs you might need a new actuarial modeling system:

  • Your processes aren’t standardized
  • Your processes aren’t scalable
  • You spend too much time on audits
  • You need better model governance tools

So here are 4 more signs you might need to update your actuarial modeling system. And, as a bonus, we also offer a word of CAUTION around an element we occasionally see actuaries emphasize too highly.

Surely you’re not running valuations with this thing, are you?

5. Your business model is changing

Times of business change are good opportunities to look at upgrading your actuarial system. If your company has just gone through a merger or acquisition, or sold off a block of business, your modeling needs may be evolving. Or if you’re deciding to approach a new market, you might need some additional support. Let’s look at each of those situations separately.

Mergers & acquisitions

Often this is a good time for reviewing processes, systems, and, yes, people. You might be bringing together two different corporate cultures, styles, knowledge bases, and, of course, actuarial modeling systems.

If the future state is a combined workforce that will be responsible for parallel products, it may make sense to consolidate everything into one system. However, if you’re going to the trouble to evaluate the two that already exist, it would also be a good time to evaluate any new options on the market.

Because, after all, at least some people are going to have to learn the other ways of doing the work. Changing to something completely different may be a better option for all involved. You won’t know unless you investigate all your alternatives.

Selling (or reinsuring) major blocks of business

If you no longer have a requirement to manage the risks of a major block of business, do you need to maintain the capacity for managing those models?

If your original set-up was based on business that included multiple risk profiles, you probably had system capacity to cover all those. Whether they be pricing, AL/M, economic capital, or financial forecasts, if you no longer need to perform those functions, why should you pay for tools that do what you don’t need?

When you’ve eliminated a major set of responsibilities, it would make sense to also eliminate overhead in the form of unnecessary software tools.

Entering a new market

This is the opposite of the selling (or reinsuring) blocks. If company management has decided that a certain market segment is attractive enough to enter, then it also becomes incumbent on the actuary to ensure she has the tools she needs to do the job well. If you have to invent new processes or systems to handle analyses that you didn’t have capacity for before, it would serve you well to look for a new actuarial modeling system.

Implementing could ease your transition to the “new normal”.

Most of the time, vendors will consult with you on good ways to set up your modeling systems to take advantage of everything those new systems have to offer. Which means you can match your needs with your tools, and can get back to actually managing your risks.

As a point of order, you don’t have to wait until these deals are completed before you start reviewing your actuarial modeling capacity. If you know of events on the horizon, you could be proactive and inform the rest of the actuarial staff of inadequacies in your current setup. Or you could warn of bloat that may be eliminated, before the decision is finalized.

That also speeds the process and ensures that when those transactions happen, you can shorten downtime and accelerate the time to reaching your new steady state.

6. There are significant changes in personnel

Sometimes, the actuary running the models is the only one who knows anything about them. Maybe he’s been there for 30 years, built the thing, and is the only one allowed to actually touch it.

He knows the macros, he knows where all the references point to, he knows exactly what table to change if you need to recalculate the IRR of the new asset portfolio.

Everyone turns to him, because he can get an answer out of the model in a fraction of the time it would take to train someone else.

While this may be great for efficiency, what happens when that actuary retires? Who’s going to run those models then? You may be able to fumble through for a little while. But the threat of losing this kind of expertise could be the thing to initiate a conversion.

Alternatively, what happens if you focus every aspect of a specific product in the mind of one professional, and she decides to move halfway across the country for a different job?

Or what happens when someone is promoted, or tapped to head up a new project? They might still be at your company, but now they’ve got a new set of responsibilities. They can’t be bothered every three minutes to solve problems with the expense tables.

If you concentrate all of your knowledge into one professional, and that professional can no longer do their job, you may be forced to add new functionality sooner rather than later.

So if it looks like you’re going to lose someone (maybe retire in a year or two), or you just want to diversify your knowledge across the actuarial teams, it may make sense to look at a new system.

Then you can ensure your company’s institutional knowledge doesn’t vaporize if a key stakeholder disappears.

Finally, consider that when new leadership comes in at the top, whether that be at the Chief Actuary level or other responsible decision-maker, they bring a new perspective to the situation. They may look at your old ways of doing things and laugh at how long it takes, compared to standards they know from prior experience. “That’s just not going to work any longer,” is a familiar refrain in this situation.

When you have fresh eyes on old processes and standards, and might have to defend archaic or inefficient work, changing systems doesn’t look so intimidating after all.

7. You’ve failed an audit and need to rebuild your reputation

Not everything is positive in business. Sometimes, bad things happen, up to and including the occasional audit failure.

Not an audit. But a pretty big failure nonetheless.

While this isn’t something to be celebrated, it could be the incentive you need to convince decision-makers that it’s time for a change.

If you’ve been dinged on your audits for either not having appropriate controls, or not following them well enough, then it might make sense to consider a new system.

Because adding a new system is a good time to reset all your governance procedures too.

Many of the new systems offer more robust, more automated, and more scalable model governance systems than what was available in the past. (See #4 in part 1).

This is often due to having access to new technologies that just didn’t exist five or ten years ago. Those new technologies can help make model governance much easier. And everyone knows easier is more likely to be adopted.

As part of the “We’ll do better” response to the failed audit, then, a component could be moving to a new system that allows for correcting everything that was missing from the original process.

At that point it would be a very compelling story that no similar audit failure could ever happen again, because your system won’t allow it.

8. Your actuaries aren’t doing actuarial work

If your actuaries spend more time converting data to enter into your system than they do analyzing it…

If they move output data from the system into some other tool for analysis…

If they manually track changes to the system (the variables) and the assumptions (the table values) via external documents…

Then they’re not spending time on actuarial work.

They didn’t get a degree in network security, so why are you having them deal with your private cloud servers?

They don’t have extensive history with programming, so why are you having them search through C++ code to decipher the formula for dynamic lapses? [Yes, it’s happened within the last 8 years to an actuary on our team.]

They didn’t sign up for managing databases and software license permissions.

No, your actuaries signed up to solve interesting challenges using high-level thinking and advanced mathematics.

We did, too! And unfortunately found ourselves slogging through non-actuarial work. Mundane tasks that left us asking, at the end of the day, “Really? Is that why I came to work? To click buttons and wait for something to save?”

If your system is forcing actuaries to do work that’s beneath their credential…

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…then they’re wasting time. Which wastes money. And gets you worse results. Because you’re not getting the full value out of your actuaries. They’re not getting the satisfaction they want, and the respect for their hard work to earn their credentials.

Which means they could leave, and look for stimulating, easy-to-use systems in another company. Maybe even another industry. Data science is advancing by leaps and bounds these days, and they make it much easier for smart people to, you know, be smart people.

So give your actuaries the opportunity to be actuaries, by giving them the tools they need. It starts with a modern actuarial system, and only goes up from there. If your actuaries are not doing enough real, honest, actuarial work in the day, then it’s probably time for you to consider changing systems.

p.s. – CAUTION – It’s not just about the money

We would be remiss if we did not point out at least one CAUTION that you should consider when deciding if it’s time to look for a new system, and it’s this:

Deciding to search for a new system solely to save money is likely to result in failure.

Remember, whether you decide to switch or upgrade your current system, this process is going to be an investment in your future actuarial work. There will, of necessity, be some parallel development costs, simultaneous license fees, and maybe new hardware that needs to be added on. [Though not with cloud-based systems, obviously.]

All of those are going to cost money. So if you’re only trying to switch systems to save a few bucks, that’s going to be a non-starter.

Again, your reasons for considering a new system should be related to functionality, risk management, and process improvement. Yes, cost should be a factor. [We’ll discuss these and more in the next article.] But to assume that you’re going to magically lower the budget by a couple hundred thousand dollars immediately just by switching systems is naive.

In your steady state future you could save money. In fact, if you’re taking advantage of modern technology, you probably will. 

But it takes a while to get there. As easy as modern actuarial systems are to work with, we know there are no magic wands.

Oh, if there only were. We’d be so thin!

So there you have it. 8 signs it may be time to look for a new actuarial modeling system:

  • Your processes aren’t standardized
  • Your processes aren’t scalable
  • You spend too much time on audits
  • You need better model governance tools
  • Your business model is changing
  • You have significant changes in personnel
  • You’ve failed an audit
  • You spending too much time on non-actuarial work

Next: How to make the case for conversion (READ NOW)