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EAAC: The model actuary: A numbers wizard and effective communicator

Source: Asia Insurance Review | Oct 2013

Actuaries play a crucial role in providing calculated analyses of risks in decision making. Thought leaders share with Asia Insurance Review that other than the ability to go “deep and wide” in their technical expertise, actuaries need to communicate better to add value and change perceptions.
By Benjamin Ang 
 
Probably the greatest challenge facing actuaries is that the perception outside of the profession is, actuaries are just pure technicians, said Mr Matthew Maguire, Actuary and Partner with NMG Consulting, responsible for the non-life actuarial practice. “The perception that they are excellent at the ‘numbers’ but don’t always translate well to the ‘real world’.”
 
Speaking about the general insurance industry specifically, Mr Pang-Hsiang Chye, Principal and Consulting Actuary, Non-life Practice Leader Asia, Milliman, said: “Our biggest challenge is to demonstrate the value added by the actuary in a general business environment as the introduction of the general insurance actuary has been mostly driven by regulation.” 
 
Mr Chye also noted that product design and pricing in the general insurance industry are driven by the market and non-actuaries. This is mostly because these are one-year contracts and the profitability of these contracts are much easier for non-actuaries to understand, he said.
 
“But over time, we have seen some general insurers, mostly the multinationals, come to appreciate the value of the actuary,” said Mr Chye. “Actuaries are now involved in pricing, monitoring the profitability of portfolios, and enterprise risk management, to name a few areas,” he said, although adding that the involvement still lags behind that of their life insurance counterparts.
 
Beyond technicalities
Saying that general insurance actuaries can go one step further, Mr Chye said they should translate their technical understanding into a strategy and implementation plan. Likewise, Mr Maguire said that to demonstrate value, it is important that actuaries focus beyond technicalities. “Too much of a focus on the technicalities will see actuaries being replaced by algorithms,” he said.
 
However, it is also true that it is becoming more difficult for an actuary to gain a broad understanding of the business through work experience alone. This is because actuaries are becoming more specialised as the level of detail required in analyses increases, said Mr Maguire. Hence, many of the recent changes to the qualification programme have emphasised the less technical skills to ensure that actuaries are able to transfer their considerable numeracy skills into a business situation, he added.
 
“For the actuaries who are able to move beyond the numbers and into an understanding of what those numbers mean, there is an enormous amount of value potential,” he said.
 
Going deeper and wider
“The actuarial function at its broadest, needs to have deep technical expertise in ever more arcane areas such as pricing investment guarantees and complex capital calculations,” said Mr Mark Saunders, Regional Managing Director, Asia Pacific Insurance Sector and Risk Consulting & Software Practice Leader, Towers Watson. 
 
This technical expertise must be combined with the ability to understand the complexities well enough to propose business strategies that would be appropriate given the business dynamics whilst providing broad strategic insights into risk and value creation opportunities, he said. “To do this effectively requires a very deep and wide understanding of business issues and practices.” 
 
This is leading to a range of different structures for actuarial functions. “We no longer see all actuaries reporting to a chief actuary doing basic financial reporting and capital calculations. Financial reporting actuaries may sit in a finance team; pricing and product actuaries may sit in the business units; actuaries will be working in the risk management function, and the ‘chief actuary’ may have responsibility for none of these groups!” said Mr Saunders.
 
Concurring that actuaries need to go deeper and wider, Mr Maguire said that it will be the ability to “go deep and wide at the same time” that will ensure the continued relevance of the actuary in the insurance industry. “To be able to understand an issue from the perspective of all the stakeholders, with an understanding of the technical details – that is the core skill of an actuary,” he said.
 
Assist in decision making
Mr Saunders said: “By bringing the ability to quantify and explain a broad range of risks, and defining an approach to managing the range of risks in a way that adds commensurate value to stakeholders, actuaries are able to help management and Boards make informed decisions.”
 
The role of actuaries is not to advise insurers to avoid risks, but to advise how best to manage risks, he added.
“Actuaries can apply logical, analytical thinking to consider what financial outcomes could occur or be managed, and help leaders make decisions based on a mixture of considered analysis and judgement to supplement intuition and instinct,” said Mr Saunders.
 
Hence, the theme for this year’s EAAC – “Redefining risk, creating value” where risk is not a downside. “A better understanding of the risks can also create value,” said Mr Maguire.
 
Effective communication skills
To better perform the role of adviser, actuaries’ technical skills must be complemented by effective communication skills to be able to help others fully understand the risk and opportunity dynamics to make well informed business decisions, said Mr Saunders. 
 
“We need to better communicate that calculated and well-managed risk-taking is good, and make sure we don’t reinforce the negative image some associate with us as being ‘risk avoiders’,” said Mr Saunders. 
 
Actuaries must also be more forward and pro-active in adopting points of view on issues. “Support these with robust, reasoned, rationale that are communicated clearly and avoid ‘it depends’ responses which merely infuriates many business leaders and acts to discredit our expertise,” he added.
 
Regulations – one size doesn’t fit all Solvency II may not be suitable for Asia
Asked about regulations such as Solvency II, Mr Matthew Maguire, Actuary and Partner with NMG Consulting, said: “The danger of legislating a risk-management system is that it needs to be broad enough to cover all the companies, yet detailed enough to avoid any ‘perversions’ that lead to companies ‘gaming the system’ by taking on more risks that haven’t been fully recognised in the regulations.”
 
This regulatory approach also leads to a significant increase in resource required by regulators as they will be required to “certify” each model, he added.
 
Good principle but hard to impose via regulations
“My personal opinion is that Solvency II is a very good principle for a company to follow, but nearly impossible to impose via regulations,” said Mr Maguire, adding: “This is why there have been so many delays in implementing it.”
 
On the delay, Mr Pang-Hsiang Chye, Principal and Consulting Actuary, Non-life Practice Leader Asia, Milliman, said: “Personally, I think it is a good thing.  Solvency II is a very large animal and I feel it may not be necessarily right for East Asia, especially for the smaller markets.”
The delay gives East Asia more time to observe what is happening in Europe and decide what is best for the region, he added. 
 
To each, its own
“Instead of Solvency II, I believe a better approach would be to have a more simple system as a regulatory minimum,” said Mr Maguire. 
 
Something like the RBC systems in Singapore and Malaysia, which may be slightly conservative, but with the option for better companies to develop their own models and justify to the regulator why they do not need to hold as much capital as these simpler industry-based models suggest, he said.
 
In fact, Mr Mark Saunders, Regional Managing Director, Asia Pacific Insurance Sector and Risk Consulting & Software Practice Leader, Towers Watson, said Solvency II “is somewhat irrelevant here in Asia – each market has its own regulatory capital basis and risk management requirements.” So what happens in Europe does not have a direct impact although, of course, it is observed with interest, he said. 
 
“Indeed the continued delays have meant that Solvency II has damaged its credibility with many Asian practitioners,” said Mr Saunders. Several jurisdictions are revising their prudential framework, but this is more to take account of the IAIS Insurance Core Principles than to follow Solvency II per se, he added.
 

 

Wish list

On what their wish list would be for insurance regulators and/or their clients, the insurance companies, this is what they have to say:

“Do the essentials and basics well, and deliver value to the consumer. This, plus ensuring there is good governance. Apart from that, it does not have to be that complicated.” 
Mr Pang-Hsiang Chye
Principal and Consulting Actuary, Non-life Practice Leader Asia, Milliman
 
“My wish is that the regulators continue to take a pragmatic view when applying the regulations. It is not possible for a model to completely define a company. It is better to recognise these limitations, simplify the models and supplement with judgement.
 
As for my wish for clients, it would be good if they can always strive to better understand their business. This can include better reserving, pricing or ERM analysis. A company that better understands its business will gain not only an edge over its competitors but also provide a greater service to the community.”
Mr Matthew Maguire
Actuary and Partner with NMG Consulting
 
“One perspective is that regulators put in place relatively simple yet risk-sensitive, and market-based capital standards, and then allow the industry to get back to business. 
 
However, while regulators have been improving prudential regulation of insurers, many are just beginning to pay more attention to distribution and financial conduct more widely. 
 
There is much regulators can still do to encourage the growth of insurance distribution possibilities to plug the significant protection and retirement gaps in many markets. The right balance between quantity and quality that protects consumers should be struck, whilst encouraging greater take-up of the protection and retirement solutions.”
Mr Mark Saunders
Regional Managing Director, Asia Pacific Insurance Sector and Risk Consulting & 
Software Practice Leader, Towers Watson 

 

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