Actuaries involved with evolving risk management frameworks

April 17th, 2015 No comments

The insurance industry’s approach to risk management evolved significantly after the global financial crisis. Regulatory frameworks like the NAIC’s Own Risk and Solvency Assessment (ORSA) have been established to analyze the financial risk and solvency of insurance companies. In this Best’s Review article (subscription required), Milliman’s Anthony Dardis and Matt Killough discuss how actuaries have participated in this process since the financial crisis.

Here is an excerpt:

Anthony Dardis, a Milliman consulting actuary who focuses on life insurance, has seen increased actuarial involvement in the risk (and other) functions of life insurance organizations since the financial crisis.

“Even in advance of the financial crisis, we were seeing a lot more actuaries getting involved in what was genuinely the risk management side of things. But when the financial crisis hit it really accelerated that development. Prior to the financial crisis, a number of companies were doing economic capital modeling. But before the crisis those analytics were not getting very widely used. Another big development that’s worth highlighting is that the financial crisis really indicated there was something of a broken link between product pricing and risk management.”

That problem surfaced among some variable annuity writers, “who weren’t capturing all their risks in their pricing and were genuinely undervaluing the options that were inherent in the product,” Dardis said. “The flip side of this is that other companies did have strong risk management and pricing approaches in place pre-crisis and came out of the crisis very well, and in some cases used the aftermath of the crisis to pick up market share and grow their companies. Generally, the industry has made great progress since the financial crisis in the management of variable annuities with complex guarantees, although there is still more to do in terms of having relevant risk metrics produced quickly and properly understood and acted on by senior management.”

In addition, Dardis said, “There’s been a much more general trend toward bringing together risk, actuarial, finance, (company) treasury and investments and an increased recognition that these disciplines are all interrelated. There had traditionally been a real disconnect between the investment side and the actuarial side and again we’ve seen a lot of very positive developments in that area over the past few years.”

The financial crisis has had less of an impact on actuarial practice in the property/casualty industry, said Matthew Killough, a Milliman consulting actuary who focuses on the property/casualty segment.

“In general, the risks faced by property and casualty companies tend to be driven more by their insurance business than their asset portfolios,” he said. “Consequently, the industry weathered the financial crisis pretty well, but it did bring greater focus and attention to risk management and capital modeling. However, I believe we are still in the early stages of those efforts, and don’t think the financial crisis had a huge impact on the practice of most casualty actuaries.”

Actuaries and the future of predictive modeling

April 10th, 2015 No comments

Scott-SheriI had the pleasure of recently participating in a panel discussion on predictive modeling at the 2015 Casualty Actuarial Society (CAS) Ratemaking and Product Management seminar in Dallas. Prior to the meeting, the CAS conducted a predictive modelling survey, and the panelists were there to discuss both the results and the emerging role that actuaries play in predictive modeling. And it’s an important role! I always try to include an actuary on a predictive modeling project, teaming actuarial expertise with subject matter experts as well as data scientists. This kind of collaboration makes for stronger models. Actuaries bring a unique business knowledge to the mix, while the data scientists will challenge norms. The result of this collaborative tension: Innovative and relevant business insights.

The CAS issued a press release earlier this week recapping the panel. You can read it here, or contact me for more information.

The case for case studies in ERM

April 7th, 2015 No comments

Michael-EshooFounded in 2011, the Milliman Risk Institute provides scientific-based thought leadership on all facets of enterprise risk management (ERM). Composed of senior risk executives, actuaries, and university professors, the Milliman Risk Institute Advisory Board meets semiannually to discuss ERM trends, research, and key topics.

In this blog series, members of the Milliman Risk Institute Advisory Board share their views on ERM research and development and how it can support business insights.

The most critical question for me regarding enterprise risk management (ERM) is how to most effectively operationalize it and embed it in within your culture – it has to be a natural extension of how you operate in order to recognize the most value. In these volatile times, you have to be risk-aware and willing to take risks to win. Risk management’s role as a function, is to enable this culture and mindset to lead to optimized decisions and results that would not have been possible otherwise.

Some of the most useful things for me in the ERM research that has emerged in the past decade or so and via the Milliman Risk Institute is the 360 degree reflection on case studies. I like them because they highlight specific problems that have arisen from a failed risk management system that allow you to reflect on yourself and your business. Risks can take many forms and have many different levels of realization, and studying specific examples allows you to be self-critical and challenge the conventional way of thinking. The types of risks that organizations have to be prepared for change every day. For example, with the boom of social media and connectivity, this decade has seen some of the largest changes in service delivery models and disruptive technologies that have changed a number of industries forever. Theory is great, but the proof is always in the pudding, and looking at real examples is how I like to evolve my learning and preparedness.

What’s useful about ERM practices is that they provide an opportunity to benchmark and reflect on risk process, on risk culture, and on the evolution of risk thinking in the industry. It’s good to see the theory and it’s even better to see the practice which allows you to think outside the box. The past provides the tools, but we all need to look forward to imagining where we can go and how to continually evolve.

Michael is a member of the Milliman Risk Institute Advisory Board. He is the chief financial officer of GE Power & Water’s global supply chain of power generation products.

Exploring ERM on granular levels

April 1st, 2015 No comments

Stephen-DArcyFounded in 2011, the Milliman Risk Institute provides scientific-based thought leadership on all facets of enterprise risk management (ERM). Composed of senior risk executives, actuaries, and university professors, the Milliman Risk Institute Advisory Board meets semiannually to discuss ERM trends, research, and key topics.

In this blog series, members of the Milliman Risk Institute Advisory Board share their views on ERM research and development and how it can support business insights.

As far as risk assessment is concerned, I am impressed with David Cooper who analyzed risk in military settings and asked, “How can you take all of the intangibles that you face in a combat situation and then come up with anything reasonable to do?” In extremely hazardous situations where the “fog of war” prevents any one individual from having all the information needed to make critical decisions, it may seem impossible to develop risk management tools to decide, “We’ll do this,” or, “We won’t do that. It crosses a line.” However, as David Cooper explained, the military has developed a set of operational guidelines that are used in critical combat circumstances.

If an experienced military expert can say, objectively and with confidence, “We have standard operating procedures. We know we’ve done this before. We know what the success rate is in this type of operation. And we understand the uncertainties,” and can base a decision on that, then any company should be able to apply sound risk management processes, too. Companies just can’t get away any longer with saying, “This is too complicated. We don’t have all the information we need. We don’t know what to do. Enterprise risk management is just too much for our company to incorporate into our decision making processes.” Companies just have to have the discipline to set up a framework for making decisions involving risk, and then modify the framework as circumstances suggest.

There’s so much still to learn about ERM. I’d like to understand the dynamics of a typical board of directors when the board is presented with a decision about risk. How do the individual dynamics affect the decision making?  Does it matter how long somebody has been on the board or how they feel about raising objections? How do these factors figure into the final decision? Is there groupthink bias in organizations, in which the tendency to seek cohesiveness because everybody wants to agree with everybody else overrides a full airing of differences of opinion because it’s easier going along even if you know something is wrong? It would be useful for skilled researchers to watch board level decision making in action so we can learn about the process from somebody who is really skilled at analyzing group dynamics and applying that to boards of directors making decisions about risks.

What ERM professionals are doing now is important, obviously, working in the trenches of getting the quantitative and qualitative metrics right, but in many ways that’s useless without understanding how the right decisions are being made by people. We don’t really understand how that gets done. What appeals to these decision makers? What gets them to push in the right direction? There just are still many different directions to go with ERM research.

Stephen is a member of the Milliman Risk Institute Advisory Board. He is Professor Emeritus of Finance at the University of Illinois.

Distracted driving accounts for 60% of teen crashes

March 30th, 2015 No comments

A new report by the AAA Foundation for Traffic Safety found that six out of 10 teen driver accidents resulted from being distracted. Here are some key findings from the report:

The most frequent potentially-distracting behaviors were conversing or otherwise interacting with passengers and cell phone use.

• Passengers were present in 36% of all crashes
o 84% of passengers were estimated to be ages 16-19; fewer than 5% were parents or other adults.
o Driver was conversing or otherwise interacting with passenger in 15% of crashes.

• The driver was engaged in cell phone use in 12% of crashes
o Visibly using a cell phone in 8% of all crashes;
o Cell phone use appeared likely (driver looking at or manipulating something out of view of the camera) in an additional 4%.

• Cell phone use varied significantly by crash type:
o Visible in 21% of road-departure crashes, not visible but likely in additional 13%
o Visible in 10% of rear-end crashes, not visible but likely in additional 8%
o Least prevalent in single-vehicle loss-of-control crashes (most of these involved adverse weather or surface conditions).

• Drivers operating or looking at cell phones looked away from the forward roadway excessively – spent an average of 4.1 seconds out of final 6 seconds before the crash looking away.
• The driver exhibited no reaction at all before impact in over half of rear-end crashes involving cell phone use.

Distracted driving has key implications for the auto insurance industry. In the article “Distracted driving: Text-mining accident descriptions,” Milliman’s Phil Borba discusses how text mining can help insurers capture cell phone use at the time of an accident. The article also identifies major considerations regarding the use of cell phones on auto insurance premiums and claim adjusting.

The cellphone (and use of electronic equipment generally) introduces a new aspect into the operation of a vehicle and one which poses a challenge for setting insurance rates. Generally, cell phones are seen as distractions to the operation of a vehicle and are likely to increase the frequency and possibly the severity of accidents. Furthermore, the nature of the equipment may have differing effects on the frequency and severity of accidents. Steering-wheel and voice-activated controls for built-in cell phones may be safer than plug-in after-market equipment, while external devices (e.g., hands-free headsets) may be the least safe model.

Insurance premiums notwithstanding, more responsible use of cellphones may occur through state laws prohibiting or limiting their irresponsible use. Similar to the case with powerful vehicles that can increase speed beyond safe limits, state laws may impose some control over the irresponsible use of cellphones. Violations of state laws can carry fines, and the points on one’s license can increase the driver’s insurance premium.

Drivers’ use of electronic communication devices will also influence claim adjusting—in particular, assigning responsibility and liability when a distraction has occurred. However, the most commonly used data-capture reports do not enable the report-taker to report if the driver was distracted, or the nature of the distraction. As an alternative, claim adjuster notes, and other text reports, can provide a great deal of information on the circumstances attendant to an accident. These text-format data sources provide a great deal of information that can be tapped for deciphering the activities preceding, during, and after an accident.

Watch this video to learn more about how text mining can enhance claim analytics.

Milliman Risk Talks: Model management (Part II)

March 27th, 2015 No comments

In this two-part Milliman Risk Talks episode, Mark Stephens, Vikas Shah, and Olivia Wang from the Risk Advisory Services practice discuss model risks and offer simple, actionable insights on improving model management frameworks. Part II takes a deeper dive into the different components of model management, with an emphasis on improving the validation and documentation process.

To watch our Milliman Risk Talks series, click here.
To learn more about Milliman Risk Advisory Services, click here.

ERM: The science of what’s next

March 24th, 2015 No comments

Robert-HoytFounded in 2011, the Milliman Risk Institute provides scientific-based thought leadership on all facets of enterprise risk management (ERM). Composed of senior risk executives, actuaries, and university professors, the Milliman Risk Institute Advisory Board meets semiannually to discuss ERM trends, research, and key topics.

In this blog series, members of the Milliman Risk Institute Advisory Board share their views on ERM research and development and how it can support business insights.

Although I serve on a couple of corporate boards, I come from the academic side, so my interest in enterprise risk management (ERM) may be somewhat different from others. What I find fascinating about the Milliman Risk Institute and its work is the opportunity it offers to hear how ERM and risk management practices are developing within the industry at large. I look for any topics within the research that can help give me an industry perspective. Now that ERM and the evolving role of risk management within organizations is actually taking place in practice, it is always fascinating to follow where the research leads us.

Having a sense for the wider landscape is valuable, and surveys can provide real insight into that. But what excites me even more are the increasing opportunities to dig into data. Much of the current research is focused heavily on data and the opportunities for learning from that data. I think that’s actually probably the next step, which is already beginning now with the Risk Institute and other similar efforts. I think a very exciting direction to proceed is in considering how we can really start to dig into all that data. As companies are increasingly challenging and evolving the role of risk management, we can learn a great deal from that data. The Risk Institute is in a key position to actually have access to that data.

Obviously, as an academic, I see that we have our own risks in higher education. There are many lessons to be learned from a lot of different industry data, but I think probably the most important effort for any company is to really press toward the edges of what might occur for the organization. In banking and insurance, that’s often talked about as stress testing or scenario testing. We’re reminded of these issues again and again, whether it’s the recent concerns about Ebola, which made such significant impacts on public health concerns and on the healthcare industry, or whether it’s the rocket that just exploded the other day from a private launch by Orbital Sciences.

We are continually reminded that, regardless of the specific economic sectors an industry occupies, there are always new and emerging issues out there that companies have to grapple with and really try to get a handle on. What are the implications of those unusual tail risks, stressed environment kinds of exposures, or losses? I think that’s an area by which many companies and organizations are still challenged.

Robert Hoyt is a member of the Milliman Risk Institute Advisory Board. He is the Department Head and Dudley L. Moore, Jr., Chair of Insurance, Risk Management and Insurance Program, at the Terry College of Business, University of Georgia. Robert is also the Department Heads of the Legal Studies Program, and the Real Estate Program at the Terry College of Business.

Milliman Risk Talks: Model management (Part I)

March 20th, 2015 No comments

In this two-part Milliman Risk Talks episode, Mark Stephens, Vikas Shah, and Olivia Wang from the Risk Advisory Services practice discuss model risks and offer simple, actionable insights on improving model management frameworks. Part I covers some challenges around managing models and recommends a few steps that companies should take when formalizing model governance and usage policies.

To watch our Milliman Risk Talks series, click here.

To learn more about Milliman Risk Advisory Services, click here.

The three facets of ERM programs

March 17th, 2015 No comments

Christina-KiteFounded in 2011, the Milliman Risk Institute provides scientific-based thought leadership on all facets of enterprise risk management (ERM). Composed of senior risk executives, actuaries, and university professors, the Milliman Risk Institute Advisory Board meets semiannually to discuss ERM trends, research, and key topics.

In this blog series, members of the Milliman Risk Institute Advisory Board share their views on ERM research and development and how it can support business insights.

Enterprise risk management (ERM) is still a relatively new field, which really started to come into its own only after the global financial crisis in 2008 and 2009. But three basic facets of ERM have remained critical constants since even before that. The first lies in integrating ERM with internal audit business resiliency. How do we really look at the interdependence across those particular functions within an organization? If ERM is pigeonholed into a compliance function, or a protection function, it’s all too easy to lose track of whether enough risk has been taken on—whether an entity actually creates more risk for itself by being too risk-averse. ERM more and more needs to be treated as a distinct discipline.

The second is found in the wider culture itself, how it is changing to become more aware of risk. Evidence of this shift could be seen in Sarbanes-Oxley and was there again in Dodd-Frank. This trend raises questions about what a risk culture looks like in the first place. If you step back from all this regulatory climate that we’ve now imposed, if you look at the financial crisis and the impact it’s had, how has the culture changed? It’s obviously not easy to quantify but it’s an interesting question to take on. How do you know when your ERM program is working? Is it that you have good reporting and compliance? Is it that you have fewer surprises? And how do you measure that impact, quantify it?

The third facet involves big data and predictive analytics. We now have information resources that we’ve never had before, we can slice and dice it a hundred new ways and the information is constantly streaming in to us in real time. Is it really helping us get better at managing risk, or is it diluting our ability to focus and really understand root causes? Can it really be used to improve an overall operation — and how can you know whether or not that is actually happening?

Goldman Sachs, for example, is the best I’ve ever seen at using big data and predictive analytics, whether it’s on the trading floor or in other areas—absorbing the mountains of data, understanding the implications, and using that as the basis for action, with tremendously impressive results. Cisco is another, automated from day one because it didn’t have the legacy. Even the Federal Reserve, with its more traditional, old school approach to information, has begun to consider and work with macro impacts, particularly in areas where it has access to information others don’t, such as about companies and trends in other countries.

The amount of information available now is incredible. Every meeting, I have an opportunity to know a lot more about who I am meeting with. I can start targeting people. It doesn’t have to be marketing groups, it can be personal. I’m going to a particular social gathering, I’m going to a particular event. I can, if I choose to, be much better at working the room than I ever could have before, because people are freely giving up unbelievable amounts of information on social media now. The implications for data mining and profiling are almost staggering.

Christina Kite is a member of the Milliman Risk Institute Advisory Board. She is Senior Vice President of Business Services and Director of Finance at BB&T.

Integrating ERM into a corporate culture

March 11th, 2015 No comments

David-CooperFounded in 2011, the Milliman Risk Institute provides scientific-based thought leadership on all facets of enterprise risk management (ERM). Composed of senior risk executives, actuaries, and university professors, the Milliman Risk Institute Advisory Board meets semiannually to discuss ERM trends, research, and key topics.

In this blog series, members of the Milliman Risk Institute Advisory Board share their views on ERM research and development and how it can support business insights.

When it comes to enterprise risk management (ERM), a company can have all of the people, processes, resources, and technology in place. But if the company doesn’t have the culture to support ERM—really, the leadership that drives it—then it just might fail, not only in meeting risk management goals, but in meeting any of its goals. The easiest way is to start ERM when the company starts, but of course it’s too late for that now for many companies.

So how can they be brought together? It’s not just top-down solutions we need—it’s also bottom-up. A culture of empowerment enables people at all levels of the company, especially those at the lowest levels, who are in positions to see and know, to effectively say, “Hey, wait a minute. Something is not right here.” General Motors (GM) provides a classic example. At one point it had to recall 29 million cars for faulty ignition switches. But we know now that that problem had actually been a known issue for over a decade. The real problem, the corporate culture problem, was that the technicians at GM—who we can certainly assume are talented and capable people—never felt empowered to speak up about it.

There’s another specific aspect of corporate culture that needs to be addressed in this, one that is still looked at closely only in academic studies. That is the issue of bias. ERM decisions still come down to judgment, and whenever we talk about judgment we also have to talk about bias. And we still don’t see many businesses really getting down into the weeds on how bias affects decision making. It’s a painful thing to confront in many cases because really it involves confronting our own weaknesses, constantly questioning things that we accept as certainties. Again, the complexities involved can be enormous. In the case of GM it’s not as simple as an authority bias, an assumption on the part of the technicians that their superiors had already noted and dealt with the problem. Nor is it purely conformity bias either—the idea that no one else is saying anything about a problem so I won’t either.

When a company starts to look at things in terms of risk, everything starts to look risky. That tends to shut people down. It’s the same way with bias. Companies have to be careful how they approach it. When you start to look at the issues closely it can become overwhelming and it can also shut people down, in terms of making decisions. At that point a company becomes truly risk-averse, which can spiral into its own self-reinforcing problems. Integrating ERM principles into a corporate culture thus has to be approached carefully and deliberately, with a willingness to try things and move on, using iterative strategies. A lot of the biases and risks we don’t necessarily see sitting there in our organizations. That’s why it’s so important to open up lines of communication all across it.

David Cooper is a member of the Milliman Risk Institute Advisory Board. David is a former Navy SEAL and President of the Karakoram Group.