As actuaries, we need to solve the customer’s risk from a micro-level and manage the company’s risk from a macro-level. Through life insurance products, actuaries transform the uncertainty customers face into certainty. By pulling together a large amount of customer data, actuaries look for commonalities and individuality to grant life insurance companies the confidence to operate risks while making uncertainties predictable and manageable.
In recent years, the basic work of actuaries has become more complex and less understood. To adapt to the changes in the regulatory solvency requirements (from the original China Risk Oriented Solvency System [C-ROSS] to C-ROSS II Phase I and C-ROSS II Phase II) and accounting standards (from the statutory standards to the new China Accounting Standards [CAS] and the International Financial Reporting Standards 17 [IFRS 17] to be enacted), actuarial work has become more comprehensive, higher quality and more detailed with regard to technique. Being able to do in-depth vertical thinking and work is a strength and advantage for actuaries; but to some extent, it also may become an obstacle to self-realization and broader career development.
In team management, we often remind ourselves that actuarial techniques are our advantage, but we shouldn’t let being a technology geek become a disadvantage. This article attempts to explore the problem of increasing the horizontal integration of actuarial functions in life insurance companies. Through one working concept and two management practices, this article explores how the actuarial team at Taiping Life Insurance plays a role in company management by stepping outside of actuarial work and aligning with business objectives at a higher level.
One Working Concept: Bridge the Difference Between Actuaries and Sales
As actuaries, it is hard to avoid being asked: “Why are the products of other companies so cheap? Why is the commission so high at other companies?” In fact, these questions are not difficult for actuaries to answer—they can be explained at the technical level. But the answers are not readily accepted, because the nature of the problem is not in the difference between views and knowledge, but the game of positions and interests. It is not important whether we can reach a consensus in the end; what matters is how to achieve the equilibrium for people with different levels of comprehension of the issue(s) at hand. To this end, we chose a working mode that is approachable and compatible with our sales team, called “forefront integration.”
The selection of this working mode was passive at the beginning. While Taiping Life Insurance’s general manager views the role of actuaries in the management of the company’s business as important, they also believe the business and actuarial ends should not oppose each other. They should have a “1 + 1 > 2” effect, which requires that “sales understand actuaries and actuaries understand sales.” In fact, although the company has a high-quality sales team, it is unrealistic for the sales staff to master actuarial knowledge and way of thinking.
As risk control experts, actuaries can cultivate market sensitivity and use their own skills to help the company and business teams achieve business objectives on the premise of managing risks and helping the company maintain a good financial situation. Therefore, the essence of “sales understand actuaries and actuaries understand sales” is that actuaries need to understand the sales team.
Under the working concept of forefront integration, our actuaries have listened to the opinions of the business departments starting at the product prototype discussion stage. When the business departments put forward ideas, actuaries tell them where the boundaries are. By participating in discussions around business planning, sales pace and promotional strategy, actuaries can understand the sales logic, make a more forward-looking analysis on risks and take necessary risk control measures in advance, rather than relying on experience analysis to find problems afterward. By starting from discussing business models with the business departments, actuaries go from being the estimator of the compensation system to the designer, balancing the objectives of cost boundary, long-term guidance and incentives, as well as the fairness and differentiation among business lines.
Actuaries benefit greatly from the mode of forefront integration in their daily work. On the one hand, the relationship between front-end sales and back-end risk control has changed from an opposing game to a win-win cooperative effort. Actuaries and business teams have established a working atmosphere of mutual trust and realized a virtuous circle flow. Actuaries are no longer constantly pestered about the bottom line; on the contrary, business departments understand the actuary’s position and often come to consult on how to reasonably balance business and value objectives. This approach reduces internal friction and improves work efficiency.
On the other hand, forefront integration also provides actuaries with a broader career stage. In recent years, a number of employees in the actuarial department at Taiping Life Insurance have moved over to the business team. They successfully crossed the horizontal boundary, found a stage in a broader space and realized their own value.
Two Management Practices: Enabling Company Management Improvement
When communicating with business departments, sometimes it is inevitable for actuaries to feel frustrated. Sometimes, a technically perfect proposal is totally unfeasible from the view of the business team. Therefore, in the continuous conflict between actuarial techniques and objective business reality, we also realize that actuarial techniques and specialty cannot solve all problems.
1. From Value Evaluation to Strategic Transformation
Our company’s two strategic transformations are based on the reform of our value assessment system. In this process, the role of actuaries can be very simple—that is, the calculator of indicators. However, actuaries obviously can do more. In fact, we are the designers of the whole value assessment system, the masterminds behind strategic planning and the promoters of strategic transformation.
The first reform at Taiping Life Insurance was in 2015 when we ceased the onefold business key performance indicator (KPI) called standard premium, which had been used since the company was established, unbinding the assessment of premium and value. From the perspective of actuarial techniques, we were concerned about the effectiveness and materiality of new indicators in the new value assessment system. However, the fact was that the first introduced professional concept of new business value (NBV) was computationally complex, and it was more realistic to make business lines and branches accept and use it as soon as possible.
In the conflict between actuarial technology and objective business reality, we designed an assessment system of “regular premium + marginal NBV + fixed expense budget.” The system introduced the concept of “marginal value tier,” which defined the marginal value rate of all products with the two-dimensional matrix of five premium period intervals and seven long-term product tiers and one short-term product tier. With the 36 figures in the matrix, this new system avoided the need to understand complicated calculations and hundreds of numbers. The most significant advantage of the whole system was its simplicity. Business lines and branches accepted it quickly, and Taiping Life Insurance achieved the expected management goal.
However, marginal value is not a comprehensive indicator in measuring business value. As the business pressure and the financial inputs have grown in recent years, the problems of marginal value assessment and cost-budget management were exposed.
Under the value-oriented strategic transformation, we carried out the second reform in 2020. This reform, from the perspective of actuarial techniques, was simply updating the indicators. Replacing marginal value with the full-cost value, actuaries focused on the consistency of assessment value and disclosure value. However, the biggest challenge we faced was the acceptance of business lines and branches: For them, what mattered was the ease of getting higher financial budgets, achieving targets and earning bonuses under the new assessment system. Business lines and branches also emphasized the process, management and the divisibility of indicators. Value indicators were one of many assessment indicators, and business lines also were concerned about the relationship between the overall structure and a particular assessment system.
By understanding the demands of business lines and branches, the needs of process management and the overall and partial concerns of the assessment system, we promoted the reform better. In addition to updating the assessment indicators, we dynamically guided the management dimension; on process management, we realized the differentiation in the management of head-office business lines and branches; we also overcame management challenges (including the balance between business lines, differentiation among branches, optimization of budget management, etc.) and matched the management measures and other assessment indicators as supplementary to the value assessment.
It can be said that the reform was not only the upgrading of an assessment indicator or system, but also the construction of a complete set of management logic. In this process, the actuarial department broke through the traditional function of value evaluation and realized the function of value management within the company.
2. From Experience Analysis to the Construction of Profit Autonomy in Branches
From 2019 to 2020, the actuarial team at Taiping Life Insurance led the design and implementation of the construction of “profit autonomy in branches.” If the value assessment system solved the problem of vertical management for business lines, then this project solved the demand for horizontal differentiation among branches. Through the implementation of this project, the branches gradually transformed from pure sales centers to centers concerned about profits, which improved their ability to operate independently.
At the beginning of the project implementation, we extended the traditional experience analysis to the branch level by generating multidimensional calculations and analyses in the claims, branch expenses and even the profit and value over the past few years. A few weeks later, an enormous amount of data had been generated, so we began to consider how to build the link between the data and differential management of branches, as well as construct profit autonomy capability in the branches.
First, based on the results of extended experience analysis, we clarified the bottom-line expenses. Second, we defined the flow rules of expenses, restricted by the bottom line and reflecting the long-term management orientation of the company. Hence, to some extent, we realized the downflow of resources to the branches. Finally, on the basis of the downflow of resources, we established the monitoring and assessment system for profit autonomy in branches.
To consider the presentation of profit in branches, we performed the “three eliminations and two focuses” process. This means we excluded investment elements, expense allocation of the head office and factors that cannot be changed by short-term management of branches. Instead, we focused on the affected material profits of branches (i.e., mortality, morbidity and expense surplus) in the aspects that mattered in the short term. As a result, we constructed the assessment system of loss ratio and expense ratio.
After we established the bottom-line standard of expenses, flow rules of expenses and the monitoring and assessment system based on a large number of data analyses, there was one more challenge to overcome—dealing with the differences in historical development backgrounds and current status among branches. After thorough discussion, we think that in terms of management objectives, we should encourage branches to proceed from their own objective status—the indication is that this improves those with poor experience and maintains those with good experience. Therefore, we changed the absolute improvement indicator into the relative improvement indicator, presented as a two-dimensional quantitative indicator that reflects historical status and the extent of relative improvement. By this system, we solved the problems of differentiation and relative fairness among branches.
The prototype for profit autonomy in branches was created, and the implementation in 2020 achieved the expected results. It will continue to be improved in the future. Through this project, the traditional experience analysis function of an actuarial department transformed from simple analysis to management applications.
The two management practice cases presented in this article are both examples of how we achieved the horizontal expansion of actuarial functions within the company based on basic actuarial evaluation work. The models or indicators used in practice may not be perfect or absolutely accurate, but they achieved specific management objectives in the end.
In enterprise management, there is a concept called management accounting, which originated in the 20th century and has become an important branch of accounting by serving the needs of enterprise internal management. Management accounting helps enterprises make optimal decisions, improve business management and raise economic efficiency. Its function is to analyze the past, control the present and plan for the future. It is a tool to realize the integration of strategy, business and finance.
We think it is not enough to only have management accounting in life insurance companies; there also should be a management actuary. There are two fundamental functions of actuaries: pricing and evaluation, which both require high precision. But the so-called management actuary should use actuarial thinking to solve the problems of company management, where techniques are the foundation and a business mindset is at the core of the role.
As actuaries, it is our honor to participate in many management activities at our company, Taiping Life Insurance, while refining our use of actuarial techniques. In the constant conflict and compromise between actuarial techniques and business objectives, we have learned to accept imprecision. Management purpose determines precision, and management orientation is more important. We also have understood the importance of expression. We cannot expect to solve practical problems solely by actuarial techniques; our audience determines the method of expression, which makes thinking and presenting on the perspectives of parties with different interests important.
Having vertical depth in the techniques we use enables us to process challenging tasks, while our horizontal width in thinking across different business lines and branches enables management to be effective. Actuaries should not only focus on the vertical depth of the actuarial function within their organizations, but also expand the horizontal width. With the conflict between technique and reality, actuaries can explore new angles and interpret new models while making sure the actuarial function plays a vital role in company management.
Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries or the respective authors’ employers.
Copyright © 2021 by the Society of Actuaries, Schaumburg, Illinois.