Lately, the insurance industry has begun to adopt cloud-based computing systems to conduct complex actuarial modeling. This Wired article spotlights Milliman’s cloud-based solution Integrate and highlights its impact on the Phoenix Group’s actuarial modeling performance.
In 2013, Phoenix completed an ambitious three-year project to modernize and consolidate its disparate computing systems with an integrated cloud-based platform. The improvements have been dramatic, according to Phoenix. More than 900 manual processes have been reduced to 44, and the time it takes the company to produce quarterly data has been cut from four months to just three days. The project paid for itself after 18 months.
“The actuarial transformation project has allowed us to streamline our systems so that we can reduce the amount of manual processing,” says Nick Watkins, head of actuarial reporting at Phoenix Group. “And then the power of cloud computing has allowed us to produce the number of additional results we need in a much shorter timeline and only when we need it.”
The computing platform, known as Integrate, is built around a financial modeling system developed by Milliman, a global firm that provides consulting and technology for actuarial reporting and risk management. The cloud component, managed by Microsoft Windows Azure, has proven to be a crucial improvement for Phoenix.
Milliman’s Pat Renzi is also quoted in the article discussing the advantages that Integrate provides insurers over legacy actuarial modeling platforms.
The cloud allows every actuary in the company simultaneous, real-time access to risk models. Rather than, say, 50 actuaries making manual changes on desktop PCs to discrete portions of a risk model and then struggling to reassemble the pieces, now all the actuaries work in the cloud simultaneously on the same model. Any changes that need to be confirmed by other actuaries can be accessed through a browser, permanently eliminating the clunky practice of sending spreadsheet files over email.
“The cloud gives a perfect opportunity to build that complete engine that does allow people to collaborate,” says Pat Renzi, global practice leader at Milliman. “With older, legacy systems, you have these processes where you get some data from here and somebody does some stuff to it and jams it into some other program, and then five people take data out of that. So there’s a lack of confidence in the numbers they’re actually reporting.”
To learn more about Integrate, click here.
Milliman won the “Service Provider of the Year” award at the inaugural Middle East Insurance Industry Awards (MIIA). The award, presented by the Middle East Insurance Review, was given to Milliman for “helping the MENA insurance industry enhance its stability and growth by offering services to insurers in an exemplary manner.” The award was announced November 17 in Dubai.
For an entire recap of the event, click here.
Healthcare organizations pursuing a merger and acquisition (M&A) transaction should seek an actuarial analysis to estimate their medical malpractice exposure. When seeking guidance from an actuary, executives need to consider several details that go into estimates like loss-development assessments, frequency and severity trends, and the accuracy of utilization data. Milliman actuary Richard Frese discusses these three details in his recent HFM magazine article entitled “Actuarial considerations of medical malpractice evaluations in M&As.” Here’s an excerpt:
A Loss-Development Assessment
An actuary applies mathematical models to estimate unknown losses or future losses based on prior history. Unknown losses are referred to as incurred but not reported (IBNR) losses. IBNR losses include claims that have not yet been reported, further loss development on known claims, claims that will reopen, and claims that may be in the pipeline but have not yet reached the status of a full suit. The sum of the known case reserves and the IBNR equals the liability on the balance sheet. The actuary tries to use as much of the hospital’s or health system’s history as is credible in developing a loss-development analysis. When there is not full credibility, an actuary blends in an industry standard or may use only this standard. When assessing future loss development, the actuary makes judgments. Even a slight variation in one of the actuary’s selections can have a significant impact on a loss estimate, particularly the tail factor, which explains the longer development of a tail factor in medical malpractice. Loss development will vary significantly between jurisdictions. Healthcare leaders should try to understand the actuaries’ thought processes and challenge the actuaries when the analysis does not line up with their assumptions. In an M&A transaction, it may be appropriate for an acquiring organization to assume the loss development of the acquired entity will follow the loss development of the acquirer. In this instance, leaders for the entity being acquired should be asked to value the reserves and payments so that the methodologies are consistent. Management may also request a scenario that assumes loss development of the acquired entity follows its own historical pattern. Loss control also becomes a question during an M&A transaction. The acquired organization may lose the motivation to engage in safe practice and defend claims. If the acquired entity has claims-made coverage, the acquirer may require that all claims be reported to the current insurance program.
Frequency and Severity Trends
The costs of claims usually rise over time, but the rate at which they occur can vary. When forecasting losses, actuaries examine both frequency and severity trends. Trends may be estimated based on the hospital’s or health system’s own data, if credible, or may need to be supplemented with industry information. A change in trends will affect future loss estimates. Considering that pro forma financial statements may require a projection of the next three years, it is important that the trends examined be appropriate so that the funding is adequate, not deficient or excessive. An actuary also may apply a trend for exposure when projecting future losses (commonly measured in occupied-bed equivalents), but such a projection often is based exclusively on the hospital’s or health system’s own growth or decrease in utilization and/or physicians.
Accuracy of Utilization Data
An actuary assumes that losses are proportional to the hospital’s or health system’s utilization—as measured by the number of inpatients beds, procedures, and physicians, for example. An organization’s leaders should ensure that metrics are detailed and accurately represent the operations of the hospital or health system. Some data may reflect increases over time, while other data may illustrate reductions that have occurred, so it is important to capture all available statistics. The definition of utilization metrics may vary by hospital. An organization’s leaders should discuss with the actuary what constitutes a record of each metric. This conversation is critical because an actuary will convert the statistics into occupied-bed equivalents and will need to ensure the proper weight or conversion factor is applied. In addition, some actuaries apply an industry cost per occupied bed to the number of occupied beds to arrive at an estimate of losses. This estimation will be skewed if the bed conversion factors that are applied are incorrect.
Insurers have been cautious about re-entering the homeowners flood insurance market due to high risks related to floods. In his Best Review’s article “High water mark,” Milliman’s Matt Chamberlain discusses the reasons behind the industry’s trepidation. He also provides perspective on how geographic information systems (GIS) can help insurers develop granular rating plans. Here is an excerpt:
There are several reasons why flood has been considered an uninsurable risk. First, flood is a localized peril; a distance of a few hundred feet, or less, can make a large difference in risk. This produces an information asymmetry, because the insured has a clear understanding of the local topography, while the insurer does not. The insured knows how far the house is from water, and whether it is on the top of a hill or if it is in a depression.
Insurers, on the other hand, typically use large rating territories for homeowners insurance, in some cases larger than a county. If these territories were to be used for flood insurance, it would create the potential for adverse selection. Insureds that were at highest risk of a flood would be most likely to want the coverage, and if insurance companies do not have a means of distinguishing higher-risk from lower-risk policies, anti-selection would result….
Geographic Information Systems, when coupled with the new flood catastrophe models to provide a very granular rating plan, may help insurance companies overcome these risks. Territories can be based on “hydrological units,” or watersheds, so that areas that water is not likely to flow between are not grouped together. Within a territory, appropriate rating factors are distance-to-coast (relating to storm surge risk), distance-to-river/stream (relating to river flood risk), and elevation (because all else being equal, there is lower flood risk at higher elevations).
Using all of these rating factors produces a rating plan that is able to distinguish different levels of risk even among points that are near each other. This produces true risk-based pricing that is likely to be sustainable in the long run. The top map at right shows this approach and compares it to the traditional method of rating flood insurance used by the NFIP, shown at bottom.
The video below presents an example of how GIS can improve pricing strategy.
Insurance and reinsurance companies have charted a new approach to capital management. The financial crisis has shown that undertakings cannot assume that capital will be readily available as and when it is needed and, even if it is available, it may not be accessible at the right price. Solvency II will change the way insurance and reinsurance undertakings determine their regulatory capital requirements, as well as introduce new rules with regard to what forms of capital can be used to meet those requirements. As a result, Solvency II will bring about both challenges and opportunities for undertakings. This paper aims to address some of the key issues for insurers and reinsurers with regard to capital management in a Solvency II world.
The Monetary Authority of Singapore (MAS) has proposed enhancements to its existing risk-based capital (RBC 1) framework. The updated framework, RBC 2, would impose more stringent capital requirements on insurers. A recent article by The Business Times (subscription required) cites Milliman’s Richard Holloway, managing director of Milliman’s South-East Asia and India life insurance consulting team, discussing an analysis estimating the total capital requirements insurers would need to fulfill the terms proposed under RBC 2:
An analysis of the top six insurers, by actuarial services provider Milliman, estimated that proposed changes would lead to increases in the total capital requirements as at end December 2012 of 128 per cent and 170 per cent, for the participating and non-participating funds, respectively.
Equity charges are to rise to at least 40 per cent for most equity classes under RBC 2, from 16 per cent now.
RBC 2 introduces explicit credit spread and interest rate mismatch risk requirements to replace the existing specific and general debt risk requirements.
“Under RBC 1, the debt specific risk charge for an investment grade bond with more than 24 months to maturity is 1.6 per cent”, explains [Mr. Holloway], “but under RBC 2, the credit risk charges will be applied by considering the impact of increases in credit spreads, which vary by the credit rating of the bond. This approach leads to the risk charges increasing with the duration of the bond. For example, we estimate an equivalent risk charge for an A-rated 10-year bond would be 13.8 per cent (compared with the 1.6 per cent for RBC 1).”
He does note, however, that this can be reduced if the matching adjustment – which allows insurers to adjust the liability discount curve if they hold assets with matching cash flows – can be applied.
This paper provides more details on the specific proposals announced in April. The proposals take into account the feedback received from the industry following the first RBC 2 consultation review in June 2012.
Milliman today announced that the firm has been selected by Royal London, a UK-based mutual insurance company, to lead a transformation of the insurer’s actuarial systems and processes.
“At Royal London we want to be in a position to react quickly to market changes and new opportunities for further growth,” says Shaun Cooper, Group Chief Actuary for Royal London. “This requires robust actuarial and financial reporting tools and processes. We sought a provider who offered us a complete solution which would meet our current and future needs. Milliman’s consulting expertise, in concert with its Integrate™ platform, gives us the capabilities we need to access information faster and with a greater degree of confidence to make strategic decisions.”
Integrate is a revolutionary financial projection solution for the life insurance industry. Milliman reports its Integrate customers are gaining unprecedented speed and control in financial reporting amidst changing market dynamics and the demand of new regulations.
“Being selected by Royal London for this project is a testament to our leadership position in next-generation financial reporting systems and processes,” says Milliman Principal Neil Cantle. “We believe our combined consulting expertise and enterprise-grade solutions enable substantial improvements in financial reporting, while providing a fast and scalable approach to sophisticated financial projections. Today, managing risk, maximising productivity, and unlocking the full potential of the actuarial staff is paramount, and Milliman’s solution delivers the much needed cost efficiency and scalability companies require to meet the increasing demand for more reliable and timely information.”
The actuarial profession had its start in Europe during the mid-17th century. The profession has grown substantially since that time. In this Asia Insurance Review article, Milliman consultants Sam Morgan and Neil Cantle provide a narrative on the evolution of the profession. They also discuss what actuaries can do moving forward to enhance their services.
Here is an excerpt from the article:
A key feature of those early [mathematical] applications of the emerging “actuarial science” was to help insurance companies to plan for the amounts they should charge and the capital that they should hold to cover potential claims. Before such methods became more common during the 18th century, companies who had not adopted this scientific approach found themselves embarrassingly short of money when they needed it.
So a key driver for actuarial input was the need to understand uncertainty. This is not unique to insurance though.
Society has evolved to become highly complex – it is incredibly interconnected and the businesses operating within it reflect that complexity too. Modern businesses are struggling to find robust ways of understanding the drivers of uncertainties in their key goals and knowing how they should constrain (or optimise) them in order to stand a really good chance of delivering the intended outcome, even under stressed conditions. There is a need for rigorous methods to be applied to uncertainty in general, beyond insurance risks….
Making sense of uncertainty the key
Methods which can help everyone to make sense of that uncertainty are hugely important in this. It is also the case that not every eventuality can be foreseen and so pretending that you can truly “manage” the risk is naïve. It is therefore essential to consider how “worst case” scenarios might play out so that consideration can be given to possible actions that would help the [organization] to survive in some form.
It therefore seems that there is a key role for highly analytical professionals who are not only adept at using technical methods to reveal the nature of uncertainties and then developing useful models but who can also help a wide audience to understand them. Actuaries arguably brought some of the early rigour to risk management and that is arguably what they can do next too.
Milliman was selected as the actuarial firm of the year at the 2014 US Captive Services Awards. The award, presented by Captive Review, is given to the firm demonstrating the highest level of service meeting their clients’ needs over the last 12 months.
“The expertise shared by our consultants within the captive insurance industry has been invaluable to our clients,” says Bob Meyer, Milliman’s Property & Casualty Practice Director. “Milliman continually strives to provide the best solutions that address the challenges facing captive insurers and regulators. This award is a recognition of our firm’s efforts.”
Milliman fosters an entrepreneurial culture throughout the entire organization that encourages our consultants to consistently endeavor for excellence and to pursue new cutting edge solutions to meet the evolving needs of our captive insurance clients. To learn more about Milliman’s captive insurance services, visit www.milliman.com/captives.
As previewed at last month’s Casualty Loss Reserve Seminar in San Diego, Milliman, Inc., a premier global consulting and actuarial firm, announced today that it has released version 2.4 of Arius, its state-of-the-art loss reserving system for property & casualty insurers. This latest release offers significant enhancements in the areas of advanced reporting and sophisticated analysis.
Ken Scalf, Property & Casualty Software Products Manager noted, “Being in the business, we understand that actuaries are under increasing pressure to provide a wide range of information regarding the company’s losses and reserves, satisfying a variety of stakeholders in the business, and often under very tight timeframes. Our latest release demonstrates Milliman’s continued commitment to developing the best available solutions to enhance the efficiency of our clients’ work.”
With this release, Arius adds a number of capabilities, including the following:
• New cash flow reports that help derive discounted reserves for Solvency II and IFRS reporting, while also supporting planning and other regulatory requirements.
• Additional features that automatically interpolate and prorate results when performing analyses at interim periods, eliminating the manual adjustments required when using other reserving systems.
• Enhancements to the application programming interface (API) to directly connect Arius data and exhibits to Excel, allowing analysts to use the most appropriate tools for each part of their work, while at the same time reducing spreadsheet risk.
• The ability to import key external and industry data onto the system’s exhibits to aid in benchmarking and other comparative analyses.
For more information about Arius, click here.