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Evolution of Actuarial Organizations

Explore the catalysts for change in actuarial organizations and the increasing demands placed on them by internal and external stakeholders. Learn about the challenges faced by traditional actuarial organizational structures and the need for modernization. Explore different organizational models and their implications.

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Evolution of Actuarial Organizations

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  1. Evolution of Actuarial Organizations Matthew Clark FSA, MAAA, CERA Tony Johnson ASA, MAAA August 2013

  2. Agenda • Actuarial Organizations in Industry • Actuarial Profession

  3. CatalystsForChange 3

  4. Catalysts for Change in Actuarial Organizations • There are many catalysts for change in Actuarial Organizations today. Pressure from the market, leadership, and external audiences has driven the need to improve the Actuarial processes. • Evolution of Products • Increased Guarantees • Complexity of Benefits • Economic Environment • Low Interest Rate Environment • Volatility in the Markets • Regulatory Environment • Evolution of Accounting Standards • Capital Requirement Changes • Internal Audience Requests • Senior Management • Increased Attention From The Board of Directors • External Audience Requirements • Increased Scrutiny From Rating Agencies • Investors Want Further Insight Regulations and requests increase the complexity and strain on Actuarial Organizations.

  5. AudienceConsiderations • The Actuarial Organization is facing an increasing number of inquiries regarding financial results, risk management, and predictive capabilities. • Senior Management & Board of Directors • Economic Events are Impacting Results • Increased Need for Sensitivities • Predictive Capabilities Needed • Regulators • Changes in Regulations • Increased Focus on Risk Based Examinations • Expanding Requirements to Include Sensitivities • Rating Agencies & Investors • Request Sensitivities and Granular Results • Focus on Risk Based Analysis • Increased Level of Sophistication • Needs From the Actuarial Organization: • Stochastic Requirements • Sensitivity Analysis • Granular Splits of Analysis • Faster Turnaround Trend towards stochastic requirements requires evaluation of processes and Actuarial platforms.

  6. StrainontheActuarialProcess • The catalysts to change have resulted in added pressure on the Actuarial Processes. Internal and external audiences are asking for more information and decisions are being made faster. • Speed of Production • Accelerated Financial Reporting • Faster to Market Product Development • Agility to Respond to Requests • Increased Strain from New Requirements (e.g., Stochastic Processing) • Granularity of Results • Focused on More Detail/Granularity • Ability to Understand Results • Aggregating Results in a Stochastic Environment • Reconciliation/Accuracy • Ability to Reconcile Results Across Accounting Basis • Actual-to-Expected Analysis • Compare Impact of Economic Events Across Products (Stochastic) • Reconcile Asset and Liability Movements • Needs From the Actuarial Organization: • Increase Processing Speed • Increased Analysis/Insight • Reconciliation Across Models/Functions • Stochastic Capabilities Emerging expectations exceed the capabilities of the existing Actuarial Organizations.

  7. Modernization of Actuarial Organizations 7

  8. TraditionalActuarialOrganizationalStructures • The traditional Actuarial Organization structure is focused either across product or function. The governance and oversight is limited with decisions made at the product/function. • Characteristics of the Traditional Actuarial Organization: • Product Line or Function Focused • Dislocated Technology Solutions • Manual Processes • Significant Time Spent on Data Related Challenges • Limited IT/Actuarial Coordination • Limited Governance & Oversight • The Characteristics Above Create the Following Challenges: • Inconsistent Processes, Methodologies, and Assumptions • Challenges Reconciling Results Across Actuarial Functions and Products • Limited Confidence in the Actuarial Function Across the Organization • Challenges Coordinating Across Non-Actuarial Functions Inconsistent models, methods, and techniques will impact the ability to meet the emerging needs.

  9. Partially Decentralized Model Centralized Model ExamplesofCentralizedOrganizationStructures As shown below, there are two frameworks that may be considered for the operating model for these areas. Further analysis, discussion, and an understanding of the broader regional and home office operating model and expectations are required to determine which of the two models is appropriate for a given area. In the diagrams below, the owner may be a function or a Center of Excellence. • The decentralized model contains a corporate ownership structure, which is supported by replica structures at the regional level. In turn, the regional structures are supported by various regional functions. • Every region or country may not need to replicate the full ownership structure. The structure only needs to be created in those regions or countries that are material and / or require the structure to meet local regulatory requirements. Other regions may be integrated at the corporate level using a centralized model, as shown in the schematic above. • The centralized model creates a single ownership structure at the corporate level. Support is provided by various corporate functional areas, which in turn receive support from related regional functions. • The centralized model is appropriate for areas that are not required to meet local regulatory requirements at the regional or country level. Owner Corporate Corporate Owner Corporate ERM Inv. Act. ERM Corporate Investments Actuarial Owner Owner ERM Inv. Act. Regions ERM Regions ERM ERM ERM ERM ERM ERM ERM ERM ERM Investments Actuarial Regions Inv. Act. Inv. ERM Act. ERM Material Regions Non-Material Regions

  10. KeyConsiderations • When considering change, the focus is on People, Processes, Models, and Data. • People • Assess and Develop the Skillsets Needed to Meet Evolving Needs • Consider the Organizational Structure • Explicit Governance & Oversight Roles • Address Cultural Resistance to Change • Processes • Consider the Efficiency of the Actuarial Processes • Focus on Opportunities to Automate • Models • Update Models to Meet Evolving Needs • Consider Aligning Models Across Products and Functions • Data • Consider Standardizing Data • Identify Opportunities to Reduce Data Hurdles (Format, Cleanliness, etc…) • Develop Data Repository Need to Align and Automate Actuarial Processes with Strong Oversight & Governance

  11. Changes Impacting Actuaries 11

  12. ChangesinSocialStructure “More jobs available in the market compete with actuarial jobs, make scouting more difficult” “Aging population affects the nature of actuarial work” “Changes in longevity” (most frequently mentioned change) “Over supply of actuarial students for jobs available in domestic market” “Big changes proposed in public sector pensions” “Growing general unemployment” “Big gap arising between pension ‘haves’ and ‘have nots”

  13. ChangesinTechnology “Increased connectivity is allowing our members to be more mobile and take on work from nearby countries whilst keeping up with work commitments at home” “More complex outputs expected from actuaries given advances in software” “Mobile phone commerce is assisting introduction of micro insurance” “Many of our members are small business owners so keeping up with technology is difficult” “Change creates concern with data security and protection of confidential information” “Continuing pressure to upgrade skills and knowledge”

  14. Changes in Economy (factor with highest impact) “Our client base is very directly affected by the economy. When the economy drops, so does the pool of potential clients.” ”Lower interest rates have required review of actuarial liability adequacy standards.” “The economic recovery increased interest in actuarial mathematics” “The job market is directly affected by the economy,..a bad economy seriously reduces the number of actuaries that can be absorbed” “Challenges in new models to reflect new realities.” “Sluggish economy coupled with low interest rate environment..challenging especially in pricing for products with lifetime guarantee.”

  15. ChangesinEnvironment “Natural disasters in recent years affect the way we view and quantify risks, thereby affecting price and solvency standards.” “There is greater awareness of long-term environmental issues.” “Challenges in modeling effects of climate change.”

  16. ChangesinPoliticalStructure “Lack of commitment to sorting out the long term problems in pensions and long term care.” “The less said about politics the better!” “Wars and the level of physical insecurity ..has led to a loss of business confidence in the local economy..” “EU decides more and more of the legislation…members must work together with GroupeConsutatif and IAA…” “Extreme partisan approach. Keeps Washington from responding to economic pressures.”

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