Three Stages of Actuarial Modernization

Some observations, thoughts and practices

Benjamin Chen

Photo: iStock.com/metamorworks

Chinese Version

Insurance companies are naturally big data companies and digital enterprises. The discussions around needs, design and pricing, sales transactions and the evaluation of operations around insurance products are all driven by data as the key “raw material.” In this process, the professional’s main job is to deal with data, and one of the most central ways is by using actuarial science. It can be said that the actuarial function is the information center of the insurance company. It is the brain of the organization, the birthplace of product ideas and the command center of operations.

However, compared with public internet and technology companies, the actuarial function within insurance companies needs to be enhanced further with regard to digitalization and informatization. In recent years, the industry has more requirements and expectations for “timely feedback,” “agile adjustment” and other labels related to digitalization and informatization changes. This also means that the actuarial function of insurance companies needs to keep pace with the times and improve its levels of digitalization and informatization.

Digitalization and informatization are necessary and advanced stages of modernization. Other industries are rapidly developing these advances and demonstrating the convenience they bring in many aspects of work and life. In such an environment, actuarial science—considered a profession very close to numbers, equations and algorithms to find solutions via quantifying information and digital approximations—should be committed to innovation breakthroughs in digitalization and informatization.

To better understand the current level of actuarial modernization and explore future development goals, we can describe and analyze history from technological innovation to digitalization and informatization in three stages.

Stage 1: Modernization of the Means of Production—Focus on the Improvement of the “Single Combatant” Capability

Before new machines, materials and automation processes were introduced to production, the productivity of all industries was limited by the physical abilities and experiences of craftspeople. With the introduction of new technologies, materials, processes, machinery and automation, the individual worker’s capability was expanded, significantly increasing their productivity. It transitioned from the era of small craftspeople to professional production.

For the actuarial science field, the corresponding event of this era can be considered the insurance business’s introduction to electronic worksheets or similar electronic measurement tools. Further, this can be divided into two subphases.

  1. Subphase 1: Electronic worksheet software such as Excel was essential in the first subphase, and its contribution to actuarial science was akin to the bicycle’s invention. Before the advent of the bike, the energy efficiency ratio of human locomotion was much lower than many animals. After riding a bicycle, the energy efficiency ratio surpassed that of the most athletic animals by a wide margin. Electronic worksheets achieve the same degree of help and enhancements in actuarial measurement. Previously, the efficiency of measurement work relied heavily on the intellectual limits of professionals and personal skills, and the limits of personal computing power could not surpass electronic worksheets. To date, electronic worksheets are still the primary tool many insurance companies use for product pricing, supporting actuaries in designing products with an acceptable degree of risk and forecasting future profits.
  2. Subphase 2: On the valuation side, when faced with large volumes of policy data that needed to be calculated on an individual or group basis, electronic worksheets, as pervasive office software, quickly were stretched to their limits in terms of computing. Then a more balanced solution emerged. Specialized actuarial valuation software opened up the second subphase. It is based on the “get what you see” scripted calculation of electronic worksheets, efficiently compiling the calculation process into a program that a computer can process more quickly. The core function of most current actuarial valuation software can be seen as a technical enhancement of the calculation efficiency of electronic worksheets.

With the help of modern electronic tools, for the first time, insurers could handle complex actuarial rules and obtain the results of valuation and projections with a higher degree of accuracy and certainty under modern actuarial rules. This was once an impossible task for humans alone. In other words, modern electronic tools helped the actuarial function push individual intelligence, physical ability, experience and skill limits.

Stage 2: Modernization of Production Management and Organization—Based on the Birth of the Assembly Line

Dividing a complex task into several standard back-to-back processes facilitates assignment and collaboration. It increases the proficiency of professionals at each stage of the operation and the stability of the final output. With the help of the assembly line, many goods were produced on a large scale, eliminating shortages and ushering in the era of mass supply.

In the actuarial science field, practitioners deal with data rather than specific physical production materials. Therefore, if an assembly line were to be set up, it should not be physical but rather digital and online. Within an insurance company, this is like an office automation system dedicated to products and actuarial matters. Company personnel have become accustomed to signing in, applying for various collaborations, filing accounts and reimbursements and completing appraisals in the system.

The system helps actuarial practitioners turn the entire life cycle of insurance products—from presale design and pricing, reporting and launch to post-sale evaluation, management and risk recall—into a series of standardized operations. This happens through a series of data and document management interfaces, permission and process engines, visual and intuitive interfaces, and a worksheet-like online operation experience in some of the inputs. The standardized operations are linked in an assembly line and interact mechanically and automatically according to predefined protocols. This helps actuarial professionals in each segment spend less time monitoring the operation while devoting more of their energy to front-end customer demand analysis and product optimization along with back-end risk management, capital efficiency improvement and other areas that require more actuarial wisdom. Through the continuous enrichment of product design and pricing tools on the assembly line, as well as automatically generated and monitored management information reports, we can understand the effect of new perspectives and ideas on company operations in real time.

As in other industries, the assembly line undoubtedly will promote the rationalization of the organizational system and the scientification of management methods in the production process, which eventually will lead to the optimization of resource allocation and the reduction or elimination of many constraints in the insurance product supply.  It also will enrich consumers’ choices significantly and usher in the era of an ample supply of insurance products.

Overall, most companies are currently in the early stage of the second subphase and still need to actively and rationally plan their path and make efforts to realize their vision of the development results they can achieve in the second subphase. However, while planning and building, we may as well follow the evolutionary path and laws borrowed from other industries and look far into the future to sketch a blueprint for the next stage of insurance and actuarial science development.

Stage 3: Digitalization and Informatization

The most essential information needed for production is demand information. Enterprises transform their ability to acquire, analyze and apply the information into a part—sometimes the most important part—of productivity. By digitally describing the demand situation, the organization and conduct of each modular production part are scientifically, rationally and automatically adjusted. This breaks the only standard production process locked in the traditional assembly line and realizes demand-oriented flexible production, thus officially bringing the market and the industry into the demand-driven era.

From the consumer point of view, this phase also is accompanied by the popularization of product design capabilities and production technology, as well as the increase in the autonomy of the generation process. The average consumer can more easily access the production capabilities of highly matched products based on their actual needs, leading to more desirable commodity transactions. Insurance products, especially life insurance products, are focused on people. Each person, with different habits, work needs, upbringing, ability to pay and resources available, naturally has different insurance needs. Ideally, insurance products should meet the unique needs of thousands of people.

So, how do we make it easier for the consumers in the marketplace, as well as the salespeople and service personnel who have the most frequent contact with consumers, to access the actuarial power of the products they need? The answer may be “encapsulation,” a term used in information technology. It is like building a handheld calculator where the circuit board for fast calculations is encapsulated in a plastic case, leaving only the keys for input and the display screen for output. In this way, countless vegetable vendors and grocery store owners enjoy the resources of fast arithmetic.

The first stage of the process of actuarial functions also benefited from this kind of packaging. The ability to parse, compile and execute formulas is encapsulated in electronic worksheets or valuation software, making it easy to enter formulas and get results directly from greater arithmetic power. It also may be the time to give back to the market and society by encapsulating some of the actuarial power for use by direct stakeholders in the insurance industry.

Encapsulating the end-to-end automation of the assembly line from liability design to pricing results in an interactive application that allows the market and consumers to understand how the coverage they desire ultimately will form part of the insurance product. By encapsulating parameter settings with corresponding sensitivity analysis processes and results into a “product sandbox,” actuarial, planning, channel and marketing departments can view a single screen to more efficiently discuss the product design implications of key metrics and the differences in benefit distribution among customers, companies and channels.

At the same time, actuaries, who are critical to business development, proactively can try to change their position from owners and implementers of key technologies and capabilities to designers and developers of insurance tools that encapsulate specialized technologies and make them accessible and easy to use by the general public. In addition, traditional outsiders who do not possess core technologies but have relevant personal interest also can be invited to influence the product design and operation process. This way their demands can be reflected and their knowledge and experience can be exchanged and shared widely. This will promote high-quality development of insurance companies and products and drive improvement across the whole insurance market.

In the near future, the core competitiveness of insurance companies, just like other industries, will change from product development and evaluation technology, which can be clearly touched and measured, to more intangible information response efficiency and agile production capacity. Driven by digitalization and informatization, the era of a large demand for insurance products tailored to the unique needs of thousands of people is coming gradually, and it surely will come in the process of innovating actuarial functions.

Benjamin Chen, FSA, is the founder and CEO of DeepLight Technology Ltd. in Shanghai.

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 © 2022 by the Society of Actuaries, Schaumburg, Illinois.