The actuarial function is at the core of an insurer’s strategic operating model - actuaries, and the systems they utilize, are central to measuring and reporting on customer and financial value. Armed with the right technology, actuaries can provide game-changing strategic insights to drive insurers forward.
What does the future of actuarial technology look like? The answer to this question informs strategic technology investment decisions made by executives and the tools used by their operational teams. It determines whether the actuarial function of the future will be viewed as a cost center or driver of value. It influences whether life insurers will be able to attract talent when competing against more technically advanced companies in other industries.
Effective actuarial technology investment can also ultimately separate winning insurers from the rest. How does actuarial technology create the path for winning life insurers to follow? Our view is that success for life insurers will come in 3 broad phases - Consolidation, Differentiation and Acceleration. Note that the timing of each phase isn’t defined - insurers are moving at different speeds depending on their financial and market position. Even within an insurer, some functions may be operating in a different phase to others. This article considers the factors influencing these three phases, what each phase means from an actuarial technology perspective, and suggests key questions decision-makers should be asking when considering actuarial technology investment at each phase.
The factors driving actuarial technology investment
It is no secret that new premium growth in established markets has been slow for a number of years. Merger and acquisition activity is high and will likely remain so for some time. Insurers continue to exit troublesome books of business and simplify their business models. Return on capital is a primary driver of executive decision-making and impacts almost every function across the value chain. Insurers are trying to respond to major regulatory changes whilst also dealing with a skills shortage in the actuarial workforce. This creates pressure for actuarial teams to do more with less. We describe this as the ‘consolidation’ phase.
From an actuarial technology standpoint, leading insurers are focusing on investment that reduces total cost of ownership and shifts expensive resources from churning out low value tasks to developing high value insights. Efficiency and automation is a major focus and is often the driver for an investment decision. Managing regulatory changes (e.g. LDTI, IFRS17) is a priority for actuarial leaders and the industries’ dependency on legacy actuarial technology means that managing these changes requires disproportionate levels of capital. The result is that, at a time when the actuarial profession is struggling to attract and retain talent against competing professions such as data science and software engineering1, it is increasingly being viewed as a cost center within the life insurer.
“The actuarial function of today can be at risk of being more of a cost center rather than a strategic unit in large part due to limitations of legacy software. This hinders the ability to provide much needed strategic insights in a timely, compliant and cost effective manner. The pressure to modernize has never been greater.” Troy Thompson Chief Actuary, Ethos Life
In light of these market dynamics and internal challenges, those that are making decisions about actuarial technology investment should consider the following key questions:
- What is the total cost of ownership of the actuarial technology investment (internal resources, external consulting fees, license fees, compute, future change requests, external integrations)? Does the proposed technology investment substantially reduce this total cost of ownership?
- Does the technology investment enable our actuaries to do more with less? Does it enable our actuaries to spend time on strategic activities which add value rather than manual data transformations and handle-turning?
- Does the technology enable end to end workflow automation or is it focused on specific components of a workflow? If the latter, does the technology create unintended inefficiencies - i.e. adversely impact other components of the end to end workflow?
- Does the actuarial technology investment create vendor lock-in? Is there a limited set of actuaries in the hiring pool that understand and can operate the technology?
- Does the actuarial technology investment unlock additional strategic value or is it purely a compliance and reporting function?
“Across our economy, economic value is accruing to individuals and platforms that are closest to consumers, and the insurance sector is no different.” Alex D’Amico, McKinsey2
For life insurers, differentiation will largely be enabled by understanding customer behavior and value better than the competition. The majority of life insurers have commenced data and analytics modernization efforts with the understanding that this is table-stakes for future success.
Leading life insurers are leveraging a granular understanding of customer behavior to pivot distribution and pricing strategies, accelerate underwriting and improve claims and wellness management. Put simply, they are differentiating themselves from competition because they can understand and measure customer value in a significantly more effective way.
Integrating all this newly available customer analytics with legacy actuarial technology is a major challenge. Within legacy actuarial calculation systems, value is measured at the policy level and can’t account for external factors such as changing customer and market behavior. The result is a bifurcation between actuarial teams and data science/analytics teams - the latter being seen as the driver of differentiation and value whilst the former primarily manages compliance and reporting. For insurers this is problematic as the actuaries are generally best placed to connect the dots between the data and implementable strategy. Not allowing those actuaries to perform their best work due to technological limitations is holding them back from the potential that could be realized with different tools in place.
To resolve this, leading insurers are investing in actuarial technology that bridges this gap - ensuring actuarial models can integrate with customer analytics by running in the same environment as data science models. Change within life insurance isn’t typically fast and we often see a ‘walk before run’ mentality - i.e. the more actuarial work that can be automated under the consolidation phase, the more time that exists to plan and embed a successful strategy for differentiation.
In light of these concerns, decision-makers should be asking the following key questions to inform actuarial technology investment during the Differentiation phase:
- Does the actuarial technology provide a granular view into customer behavior and value?
- Can the data science models that provide customer behavior analytics seamlessly integrate with my actuarial models?
- Is the technology API native and ready to easily integrate with other core systems such as PAS and accounting systems?
- Does the technology allow for integration with large external third-party behavioral and health data sets?
- Does the technology allow for users to generate timely, actionable insights from the various integrations between data, data scientists, and product experts (actuaries)?
- Does the technology automate everything that can be automated so that capital can be directed towards work that creates value rather than simply meeting regulatory obligations3
“Among the world’s largest companies, economic profit is distributed unequally along a power curve, with the top 10 percent of firms capturing 80 percent of positive economic profit.” McKinsey4
McKinsey describes this as the ‘superstar’ phenomenon and notes that it is present across practically all industries, including insurance. The question is what attributes will define superstar life insurers? Our view is that the Acceleration phase for life insurers will be defined by hyper-personalization - successful insurers will differentiate based on their unique understanding of the customer and be able to capitalize on this differentiation by responding to customer and market needs in real-time. Superstars will need to:
- Attain a granular and dynamic understanding of customer behavior and value, and be able to leverage these insights to meet changing customer insurance needs
- Shift from delivering insurance ‘products’ to ‘services’, based on dynamically changing customer needs
- As a result of (b), be able to measure and improve portfolio value at the customer level as opposed to the product level
- Be in a position to quickly and nimbly pivot to meet changing market and regulatory conditions
- Develop forward-looking analytics and recommendations to identify and avoid problems before they arise
This phase is called “Acceleration” because positive experience from one technological investment will unlock additional opportunities in other areas, creating a positive feedback cycle of compounding success.
Key questions decision-makers should be asking to inform actuarial technology investment to Accelerate:
- Does the actuarial technology support a granular, dynamic (real-time) view into customer behavior and value?
- Does the actuarial technology support real-time decision making - i.e. can the insurer translate the above insights into real-time decision support for end to end policyholder lifecycle management?
- Does the technology seamlessly integrate with external Big Data sources?
- Does the technology automate >90% of compliance and reporting processes?
- Does the technology allow the company to be proactive instead of reactive?
As life insurance becomes more personalized, dynamic and service-orientated, the calculation of value and risk becomes more complex and the strategic role of the actuary becomes more important than ever. With the right technology, the actuarial function can return to being a driver of value for the insurer rather than a cost center. Successful life insurers are capitalizing on this opportunity and investing with foresight into actuarial technology that enables success now and into the future….consolidate - differentiate - accelerate.