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Behind the Curtain: Empowering Actuaries to Improve Risk Management

Technology can provide the means for actuaries to deliver better, more timely risk assessments, improved awareness, greater understanding, and actionable risk information to the organization. With the recent financial turbulence, delivering these types of improvements is of critical importance.

By Van Beach, senior consultant, Towers Perrin

There is little doubt that improved risk management will be a top priority for insurance carriers in 2009. How does this impact the CIO's strategic agenda? Even today, I'd generally be shocked if a CIO's response was a strategic IT spend for support of their actuarial department. However, as companies look to improve risk management, I think 2009 will be the year many realize that IT investments in this area can provide immediate impact to a company's ability to understand and manage their risks.Most CIO's don't know how the magic happens behind the black curtain of the actuarial department and, given this area does not need to tightly integrate with the core insurance systems, it has been left to choose systems and build processes independent of IT guidance and support. In the life and annuities arena, this disconnect has roots with the introduction of desktop actuarial systems in the mid-1980's. These systems enabled actuaries to create and analyze financial models, price insurance products, meet regulatory requirements, etc. with little dependence on IT. Firing on all cylinders, the actuaries were off...

Over the course of the next 20 years, the demands upon these financial models have grown exponentially. Now, these models are used to produce a wide array of risk management calculations, require coordination across a wider user base, utilize an ever-increasing amount of data, and have become more complicated and computation intensive. Over time, the volume and complexities of these process demands have caused a drift in actuarial focus from analyzing risk to managing an increasingly manual and burdensome production of risk numbers. The actuarial department, as the risk engine for insurance companies, is now in need of a tune-up.

I think 2009 will see a significant number of companies get under the hood of actuarial departments, with IT as the lead mechanic.

With technology solutions to improve actuarial processes, actuaries can refocus on understanding and managing risk and become the high-performance engine needed to power today's risk-aware organization. Five key areas where strategic IT investment can improve risk management:

1. Ensure quality data: Like all analytical processes, the starting point is data and actuaries require a lot of it. In addition to inforce data, the volume and variety of assumption data required for the financial models presents a unique challenge.

2. Improve control and quality of the actuarial process: Version control, audit logs, security, etc. are needed to provide the confidence in results needed for actionable information.

3. Reduce the actuarial process burden: Automation of data manipulations and model runs, creation of repeatable process flows, etc. will enable actuaries to spend more time on risk analysis and less time on production.

4. Provide power: To understand risks, particularly those tied to future financial conditions, thousands of potential scenarios need to be considered. With greater access to computation power, the timeliness and quality of risk analysis improves.

5. Increase access to risk metrics: As process flows and computational resources improve, actuaries can focus on providing timely, appropriate risk information to a wider audience.

Technology can provide the means for actuaries to deliver better, more timely risk assessments, improved awareness, greater understanding, and actionable risk information to the organization. With the recent financial turbulence, delivering these types of improvements is of critical importance. For a 2009 IT strategy for risk management, there's no better place to start than under the hood with their company's risk engine -- the actuarial departmentTechnology can provide the means for actuaries to deliver better, more timely risk assessments, improved awareness, greater understanding, and actionable risk information to the organization. With the recent financial turbulence, delivering these types of improvements is of critical importance.

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