Breaking New Ground

“As we have heard from leaders in many industries, the pace of change will never be slower than it is today,” says Milliman’s Pat Renzi. This insight is as true for actuaries as it is for other business professionals. This article takes a prospective look at where the actuarial profession might be heading over the next five years.

Past and Present

Actuarial veteran Tom Grondin, FSA, CERA, of Canada, recommends, “Start with the past and present, for if we can’t describe and understand the factors that brought the profession to where it is today, then our ability to influence the future is limited or random at best.” So, like the Roman god, Janus, to look forward, one must first look backward—with the caveats this article is not a survey and the opinions in this article do not represent those of the interviewees’ associated companies.

Ambrogio Conte, an innovation and operations manager of an Italian insurer, recounts that in the past 30 years, life insurance shifted from traditional products to investment-linked products, registering a change in the company polarization from the realm of the actuarial team to the kings of investments during the “irrational euphoria age,” and now with a current focus on commercial and marketing units supported by fortified risk management. Conte adds, “Now we are in the digital age and actuaries could become commodities that can possibly be outsourced, exporting the pure actuarial department function.”

Conte’s observation of the marginalization of some traditional actuarial functions is not unique. PwC’s 2018 Actuarial Modernization Survey reports that actuaries at more than half of responding companies spend more than half of their time managing data.¹

Martin Snow, FSA, MAAA, chief delivery officer at Atidot, remarks: “The actuarial profession today is perceived differently than it was 30 years ago. Then, we were recognized as the profession that understood the entire life insurance business, and actuaries filled executive leadership roles. While some actuaries continue to fill these roles, the profession today is generally viewed as needing to strengthen its soft skills.”

“Company structures are becoming more transversally networked and flat,” adds Conte. “This matrix network plays a discriminant role not only for the largest insurers and technology companies, but even traditional companies are moving to this model.”

The C-suite has become more multidisciplinary, and communication issues emerged as actuarial influence diluted. Uli Stengele, FSA, MAAA, of Nationwide, points out, “There are many more [people] in the actuary’s audience now.”

One driver to these organizational changes stems from the international acquisitions and consolidations among insurers and with some banks, as well as the financial crisis a decade ago. This organizational flattening created opportunities and increased communication challenges for actuaries.

Stengele continues: “Historically, actuaries naturally managed risk. As risk management has become more prominent in the financial services industry, actuaries have often taken on expanded leadership roles, utilizing their skill set to broadly cover risk management responsibilities.”

The Demand for Actuaries

The supply of actuaries appears to be lower than the demand. The Actuarial Association of Europe (AAE) reported in June 2016 that the number of qualified actuaries, on average, per life insurance company is 7.3, and 1.3 actuaries per non-life company.² This may be too low.

Grondin confesses: “I myself have hired many nonactuaries in positions suited for actuaries due to lack of supply. Don’t get me wrong—I was very happy with the hires. It showed me that it is not the credentials that are important but the skills—namely the ability to solve complex problems. The diversity in thinking also has compounding benefits.”

Other nontraditional actuaries could follow. Under Solvency II, as found in the EU Directive,³ insurance companies are not required to hire traditional actuaries. Roles are described by fit and proper characteristics, and traditional actuarial roles could be filled by economists, data scientists and engineers.

The AAE report states that one in three chief actuaries is not an actuary, and 5 percent of actuarial function holders are not actuaries.⁴ This infusion drops to 1 percent for the appointed actuary role; however, Solvency II does not require insurers to continue having this role.

“Pushed by fragmented regulations and pressure to reduce costs, the networked organizational structure increased integration among actuarial, finance and risk departments,” elaborates Conte. “In the past, there was one siloed actuarial department. Now, no more silos but many smaller functions [exist] with fragmentation as a new narrative. Blending investments and risk—and creating new unit-linked and hybrid products—the traditional actuarial-specific methods are not so crucial.”

Actuaries can move into nonactuarial roles within an insurance company. “While I have not held a traditional actuarial role in four years, I think that having an actuarial understanding of the financials helps me in my job every day,” says Aegon Asia’s Eriphile Philippides.

Revisiting Risk Management

“Actuaries are very nimble, leveraging product and risk knowledge to move between measures and risks,” observes Stengele, who also believes actuaries are natural risk managers.

The AAE agrees. The AAE report mentioned previously states that the risk and actuarial functions in about four of five member countries can be combined.⁵ The AAE report conclusion also notes: “It is acknowledged by the AAE that the risk management system requires a wide range of expertise. However, the multidisciplinary education, and especially the modeling capabilities of the actuary, enables the actuary to provide relevant and useful input to many areas of the risk management process.”⁶

The Changing Actuarial Profession

As previously stated, communication challenges arose from organizational changes where part of the challenge appears to be institutionalized. AIG’s Steve Malerich, FSA, MAAA, explains that the actuarial profession changes slowly: “Once we find a solution to a problem, we tend to stop looking for better solutions—the Einstellung effect. If someone finds an alternative after a solution becomes established practice, we wait for everyone else to accept the new solution before we accept it. And with everybody waiting for everybody else, nobody accepts it.”

He continues: “For example, a 1992 article in The Financial Reporter established ‘the change in the k-factor times the accumulated value of gross profits’ as the way to measure the effect of assumption changes on the deferred acquisition cost asset of universal life. Though accurate, that formula has no explanatory power. In communications, it puts an esoteric actuarial formula in between cause and effect. Yet, this remains a common practice when ‘explaining’ GAAP income. And with targeted improvements bringing the same dynamics to traditional contract reserve calculations, some are preparing to ‘explain’ results using the same ineffective tool.”

As illustrated in Malerich’s anecdotes, the profession’s reticence to change alludes to an underlying institutional obstacle. Aegon Blue Square Re’s Chris Madsen, ASA, MAAA, explains, “The professional educational system with its ‘natural selection process of exams’ does not necessarily prepare actuaries for the future and does not lend itself well to agile forward thinking.”

Data and the Digital Age

Some parts of the traditional actuarial function are shrinking. “Insurers are trying to find ways to automate most of their mundane tasks and use technology to improve model efficiency/advancement. Running entire processes, or even valuation processes, with a few simple clicks will free up resources, help reduce staffing costs, reduce operational risks and speed up the reporting cycle,” notes Milliman India’s Varun Bhatt.

Nevertheless, some actuaries are now working outside of insurance. The same AAE report states that 40 percent of qualified actuaries are not working in insurance.⁷ By way of an example, actuaries can build credible business models in this digital age.

40 percent of qualified actuaries are not working in insurance.

PwC’s Steve Bochanski, FSA, MAAA, CERA, one of the authors of this article, successfully used an actuarial cash-flow projection model with transition matrices to simulate digital crowdsourcing membership for an innovative recycling rewards scheme, called WASTED, in the Netherlands. Bochanski concludes, “Applying actuarial techniques in the area of demographic modeling, such as for social services or urban planning, as well as broader strategic business modeling in virtually any domain, is a promising growth channel for the actuarial profession.”⁸

“Today, there are many actuaries in long-held positions, and they believe that resources are not fungible—that’s often not true,” explains Stengele. “While learning curves often are quite steep, good documentation and infrastructure can be very helpful in applying actuarial skill sets to a large and changing number of issues.”

Health IQ’s Ryan Hinchey, FSA, explains, “Data sets that are becoming available are too large for spreadsheets and [contain] other characteristics that are not suitable for traditional actuarial techniques.”

“I expect major changes in how insurance (and external) data will be used,” predicts Marco Groot Wassink, CFO at Legal & General Insurance in the United Kingdom. He warns, “Actuaries will struggle to stay relevant in this part of our work and its commercial application unless we become proper data scientists.”

Nevertheless, those traditional actuarial-specific methods remain useful in markets with poor or scarce data. Allan Wong, FSA, of RGA in Hong Kong, reports: “Since moving back to Asia and working on products for Southeast Asia, I’m struck by the need for judgment and the real lack of data for some markets. I think we forget sometimes in the West that there are emerging markets for which old-school first principles assumption development is still the most important thing.”

Relevant Skills, Old and New

“Successful actuary qualities are natural curiosity and inquisitiveness, with a solid understanding of the basics,” notes Stengele.

Wong adds that business acumen is also important. “I think adapting to new software, data and machine learning are all part of our future, but the space where actuaries will excel and where we’ve always excelled is where the facts cannot be known with certainty, so someone still needs to make a business decision,” he says.

“Improving actuarial communication and leadership skills need to be two of the profession’s most important priorities,” stresses Snow. “These changes will once again enable greater consideration of actuaries for executive and other leadership roles. After making these changes, we need to get the message out to boards of directors and executive leadership teams.”

For those actuaries who have developed their nonactuarial communication skills, Philippides concludes: “Where actuaries bring value to the organization is by translating their understanding into insights in [layperson] terms that will help executives make informed decisions. I don’t see why this will change. Sure, big data and artificial intelligence will enable insurers to have more complex models, but in my opinion, our true value lies in analysis and providing meaningful insights.”

Madsen muses: “Actuaries who are stochastic modelers, specializing in specific products or structures, are hard to find and they are great resources. Unfortunately, actuaries tend to deal with traditional analysis that works in a stable environment, and not with statistically significant analysis that works in shifting regimes. With regime shifts, the time horizon for traditional techniques is too slow to react, resulting in losses through anti-selection and, maybe, without enough time to recover.”

Product Innovation and Business Opportunities

Hinchey’s comment of tying behaviors to products appears to be revolutionary. “New products focus on partnering with policyholders to align incentives and help them live longer, healthier lives,” he adds.

In property and casualty insurance, there’s the Progressive insurance company’s “Snapshot” that monitors driving behavior using a GPS device, and some insurers use the driver’s cell phone to monitor acceleration, stopping, braking, fast turns and time-of-day—all of which can be tied to premium discounts. Madsen notes, “Products may change to floating discount based on behavior, which we see in some life insurance products now.”

Vitality in South Africa with Hancock in the United States, and Brazil’s WinSocial, are linking policies to wearable devices where policyholders earn credits for good behaviors. Madsen elaborates that one consequence of this innovation is the reshaping of insurance companies from indemnifying institutions into policyholder personal risk and health managers. In this model, the insurer actively participates in the policyholder’s safety and well-being. Madsen extrapolates that organizationally this could potentially lead to a renaissance of the “mutual company” structure, but implemented through new tools.

The Actuarial Association of Europe reports that 1 in 3 chief actuaries is not an actuary.

Solvency II has also changed how insurers view their existing businesses. Under Solvency II, not all business lines continue to make sense. Since the financial crisis and Solvency II, insurers are repairing their balance sheets. In this process, U.S. companies may not appear as attractive, and insurers may look to focus their lines of business. Actuaries are well-positioned to develop an understanding of the different regulations, capital models and accounting regimes, making themselves prime candidates to help insurers shed businesses and determine where those businesses should go.

Does All This Mean More Schooling?

It depends. “The best thing about my role is the blend of skills involved,” says startup Bestow’s Dan Stevens, FSA. “I’m having to draw on a much wider variety of experience gained over the past 22 years. The nontraditional functions capitalize more on the skills I developed on my own rather than those I developed through the formalized actuarial training.”

Where the answer to “Does all this mean more schooling?” is “yes,” some universities have been moving to close this gap. “The University of Minnesota has made incremental changes to its actuarial curriculum since 2011,” explain Breanne Richins, FSA, and Aileen Lyle, MAAA, FCAS, both instructors in the actuarial program at the university. “We are putting actuarial students in front of the class, working collaboratively in small teams, creating intensive report and summary writings, and developing and presenting recommendations.”

As we grow in numbers, we must also build upon our skills as leaders to capitalize on more opportunities provided by our increased visibility.

Laurie Derechin, executive director of the Minnesota Center for Financial and Actuarial Mathematics (MCFAM), says, “Adding these softer skills to the actuarial curriculum was actually borrowed from one of [University of Minnesota’s] Biomedical Engineering Design courses, where students work in teams on design projects and present completed work at a ‘design show.’”

In MCFAM’s Master of Financial Mathematics (MFM), there is both an interdisciplinary cross-fertilization and an injection of stochastic mathematics and programming skills in the curriculum. Business professionals in the Twin Cities also participate in the MFM. Derechin notes: “Some actuaries working in our large insurance hub have complemented their actuarial skills by doing the MFM part time. Those actuaries with both an FSA and an MFM have taken on roles where they lead hedging strategy development and financial engineering. They are uniquely equipped having studied both sides of the business.”

Final Thoughts

“I think there is a lot more room for growth in actuaries expanding to other professions,” emphasizes Grondin. “Actuaries, being as unique and few in number as they are, can benefit many teams, companies and industries by adding a little of our own diversification to the mix.”

“I hope actuaries emerge as powerful voices to assess how we manage the significant societal risks that new technologies and innovations may create,” concludes Renzi. “I believe that as technology and data change the way we live and work, the skills of actuaries can be used to really lead the way and provide the necessary cautions and protections.”

Copyright © 2019 by the Society of Actuaries, Schaumburg, Illinois.