Editor's Note: This post is the first of three on the topic of: Actuarial Analytics — Score Keeping, or Trusted Advice?
“Two people are flying in a hot air balloon and realize they are lost. They see a man on the ground, so they navigate the balloon to where they can speak to him. They yell to him, “Can you help us? We’re lost.” The man on the ground replies, “You’re in a hot air balloon, about two hundred feet off the ground.” One of the people in the balloon replies to the man on the ground, “You must be an actuary. You gave us information that is accurate, but completely useless.” The actuary on the ground yells to the people in the balloon, “You must be in marketing.” The people in the balloon respond, “Yes, how did you know?” The actuary says, “Well, you’re in the same position you were in before you talked to me, but now it’s my fault.”
At its core, insurance a business of assessing and pricing risk, and the companies that conduct the best analysis are the most likely to succeed. What regulates and keeps insurance companies alive is the actuarial function, which analyzes and forecasts risk, identifies new product opportunities, and tracks customer trends. Yet, many people do not view actuaries as true business partners, and think they have a limited understanding of the business, are ineffective communicators, and can rarely translate their knowledge into managerial insight. Coupled with the unenviable job of informing management about unanticipated, adverse swings in loss reserves, this can lead to a tense relationship between actuaries and other business functions. However, there is a great opportunity to more effectively utilize actuaries’ advanced analytics and modelling expertise, and thereby change actuaries’ role from scorekeeping to one in which they create a significant, information-driven competitive advantage for the organization. Superior actuarial analytics can:
• Enhance the quality of customer segmentation, product design, and market selection.
• Provide a healthy challenge to the planning cycle assumptions of usually optimistic underwriters by shining light into the” actual profitability of individual opportunities via incorporation of macro industry trend data and what it could mean for future claims.
• Help the claims function better contextualize and interpret short-term micro trends by creating models that integrate various macro and micro changes/variables, thereby enhancing the quality of decision-making and case strategies.
• As a result of a closer relationship with claims, improve the accuracy of reserve forecasting by leveraging a better understanding of trends in future claims and the nature of any claims management initiatives.
• Help continuously improve combined ratio performance by building data-rich, insightful predictive underwriting models to improve risk selection and risk pricing.
• Help senior leadership enhance financial reporting by effectively communicating and quantifying the root causes of changes in recommended loss reserves, and providing insight into reserve variability and the extent to which expected claims developments will require changes in reserves.
In our next post, we will address the five ways in which more focused actuarial analytics and insights can create a high-performing actuarial function.
[For more in PwC's Information as a Game Changer series of contributions, see Information as a Game Changer: Analytics for Improving Insurance Customer Retention .]
Paul Delbridge is partner on secondment; Mark Purowitz is partner, Financial Services Advisory; Punita Ganhi is director and market leader; and Caitlin Marcoux is senior associate with PwC’s insurance practice.