Getting better value from Actuarial Function opinions

Our viewpoint

One of the complaints we hear most frequently at our Chief Actuary roundtables is “The most frustrating thing is the compliance aspect of the Chief Actuary role – I’d rather spend time adding value”.

In my recent presentation to the IFoA Spring Conference, I set out three principles that should underlie every stage of the actuarial function opinions: 

  1. Target value-add, not (just) compliance 
  2. Actuarial function activities should occur before decisions are made 
  3. Achieving best practice may be an iterative process 

Over this series of blogs, I will show how you can apply these principles to turn the actuarial opinion process from a frustration to a business value-add. I start with the technical provisions, which always seems to be the biggest slog and the least well-read part of the actuarial function report, and apply the first principle: Target value-add, not (just) compliance.  

Technical provisions: Target value-add, not (just) compliance 

Why are technical provisions (TPs) the least well-read part of the report? It is not just their unavoidable technical detail that puts directors off, but also the Board tends to look elsewhere for insight regarding reserves, for example, in the quarterly reserving pack.  

The key is to concentrate less on the final report, and to see the whole exercise as a process where the important insights emerge throughout. The AFR at the end of the process then simply becomes the place where you record the detail. The project plan should look something like this:

Typically, the TPs are an extension from GAAP reserving and planning should start even before you begin on the GAAP reserves. Reserving is an iterative process where you can make improvements year on year. As part of the TPs you should first be picking up the carefully crafted recommendations that you made last year. 

This could be, for example, to improve the data flows around the system, or to implement the reinsurance programme properly into the calculations like you've always promised yourself. Then you look at the key judgments that you have made and the challenges to the methodology you recorded last year. These should all be planned in to the beginning of the process before you start your annual reserving. 

The quiet period before you start the annual year-end all-hands-on-deck reserving is also a great time to do any deep dives. For example, this may be the time to look at case reserving adequacy using the wide lens that the reserving exercise gives on the claims process. Results from these deep dives can then feed into your GAAP reserving and on into the TPs, and not become another drain on resources while you are trying to concentrate on producing first-cut reserves. 

When it comes to the TP report itself, I see this as two parts: 

  1. The value-add part - explaining the walk from GAAP reserves to Solvency II reserves, which is typically shown as a waterfall chart. In our experience, this walk is poorly understood by all but the actuaries and one or two finance people, but the Board needs to understand the sensitivities around individual items in the waterfall and when they could be potentially material. (For example, a few years ago motor insurers had a big shock to the value of PPOs in their reserves when bond yields fell and the Solvency II reserves increased substantially but there was little impact on the GAAP reserves.) 
  2. The compliance part - picking up the important points from your GAAP reserving and ensure that they are all documented within the TP report. Ideally, there should be nothing new here as any reserving insights will already have been flagged much earlier in the process. 

In summary, the way to add value to the TP process is: 

  • Plan carefully in advance to ensure there is time and opportunity for adding value. 
  • Separate the process from the reporting, to ensure that the Board gets maximum value from any insights that arise throughout the process, at the time that they arise.  
  • Treat the report as a record of these insights and recommendations that you can pick up next year to feedback into improving the process. 

Next time I will take a look at the underwriting opinion, and in particular comment on the business plan using the second principle: actuarial function activities should occur before decisions are made. 

For further valuable lessons on engaging with the Board, see also Jessica Clark’s blog How can you get more from your Actuarial Function Reports? and our interactive report ‘The Virtuous Cycle: How insurance actuaries and boards can work together more effectively’