Tag Archives: Neil Cantle

Big data challenging how insurers think about business

The insurance industry has a long history of using data to make decisions around risk. However, as more and more data on risk becomes available, insurers will encounter numerous business challenges. In the Milliman Impact article “Harnessing the transformative power of big data,” consultants Neil Cantle, James Dodge, and Derek Newton offer perspective on big data and its implications for insurers’ business models, data governance, and skills moving forward.

Innovation and technology creates a new market for players and new challenges for insurers

Innovation is changing the insurance industry landscape. To remain viable, traditional insurance companies must transform their business models to meet new data and consumer expectations. The Milliman Impact article “Disruption or innovation: A digital future for insurers” explores some technological advances that are opening up the market to new players and challenging insurers to augment their approaches.

EU’s new conduct risk agenda gains traction

Strengthening consumer protection has become a priority for insurance regulators in Europe. The Milliman Impact article “A level playing field: Conduct risk in Europe” examines the issues insurance companies and regulators must address to improve conduct risk under Solvency II.

Here’s an excerpt:

Globally, regulators are increasingly focused on consumer protection and mis-selling issues. “The UK and the US are ahead of the game when it comes to risk-based reporting and building regulation around the concept of consumer detriment, but many other markets, especially in Asia, are also looking to address these issues. They want to be seen as good places to do business and so are aligning their regulatory approaches with those of the more developed markets,” highlights Neil Cantle, principal at Milliman. …

…The need for senior management leadership will be key. The FSB identified the ‘tone from the top’ as a key indicator of the risk culture in major financial institutions in its initial report on conduct risk strategies in April 2014, and this has been embraced by the International Association of Insurance Supervisors and by EIOPA.

In particular, EIOPA has warned that the failure of many institutions and regulators to make the connection between conduct and prudential regulation has been a source of weakness in the past. It makes it clear in its Strategy towards a comprehensive risk-based and preventive framework for conduct of business supervision (published in January 2016) that “the interlinkages between conduct risk and the financial soundness of insurance undertakings and the stability of the financial system as a whole” will be a key focus as this agenda develops.

“In essence, it is about much more than the sales processes of individual insurance companies and intermediaries or even the potential reputational damage to the insurance industry. It is about ensuring financial stability and preventing any cross-contamination from poor conduct, whether that be product design, inappropriate sales incentives, poorly trained staff or inadequate monitoring,” outlines [Oliver Gillespie, principal at Milliman].

Chief risk officers identify threats and opportunities

Modern organizations are complex and having a chief risk officer (CRO) to look across the organization and its environment is hugely valuable. The CRO is uniquely positioned to scan across unfolding trends, both within the organization and outside it, and work with colleagues to determine whether there are opportunities or threats. In this video, Milliman’s Neil Cantle explains the management of risk and the role of a chief risk officer.

Decentralized governance enhances risk management

Assessing organizational culture is an integral aspect of a company’s risk management framework. Most companies, though, contain diverse groups of experts who interact with one another daily, and each group has its own distinct subculture. According to Milliman consultant Neil Cantle, companies that adapt decentralized control structures, allowing experts to make local decisions based on the company’s risk tolerance, can become more resilient and successful.

Neil’s Raconteur article “Achieving resilience by harnessing people power” provides more perspective. Here’s an excerpt:

[Companies] are complex ecosystems where people go about their daily tasks, interacting with countless others inside and outside the company. In the real world, people are faced with situations every day that don’t quite match the process manual, and they will use their initiative and try to find a way through to a successful outcome. Their judgments will reflect their values, so the question is whether those values are consistent with the culture your board wants to see? …

…In a world such as this, the notion of control, therefore, requires modification. We can no longer deliver the outcome we want with certainty, but can only choose our next action. Of course, we would like to select an action that will help take the company towards a successful outcome, but we simply don’t know for sure which one that is. We have to retain flexibility and learning as core skills, with the certain knowledge that things around us will not always go to plan.

In fact, in situations of complexity, where the environment is dynamic and changing, a model of centralised control is far from optimal and often leads to unintended outcomes. The more appropriate approach to guiding progress here turns out to be empowering local experts to make localised decisions, with the proviso that they are aware of what is happening in the wider overall context.

Organising in this way, we need to empower our experts to make local decisions in the best interests of the whole, and are much more concerned about whether their attitudes and behaviours are consistent with what we would like. We are trusting them “to do the right thing” rather than directly controlling what they do. There will be some things we are so keen to avoid that we will implement very strict controls, making it hard to do the wrong thing, but we are largely going to be using our values to guide behaviours.

For more perspective on organizational culture and risk management, read “Cultural compass,” also written by Neil.

How can insurers enhance risk culture and governance control?

An insurance company’s overall culture consists of a set of subcultures. Experts within those subcultures make decisions differently. In his Best’s Review article “Culture Compass,” Milliman’s Neil Cantle explains why insurers need to approach modern business governance with less rigidity. He also describes how understanding culture can help a company empower its experts to make local decisions in harmony with established risk appetite and corporate values. This process produces an overall risk culture essential to the company’s governance framework.

We need to recognize that there is more than one valid perspective to be heard when deciding a course of action. Cultural Theory shows that four such views are always present: pragmatists believe that the world is uncertain and unpredictable; conservators believe the world is high risk; maximizers see the world as low risk and fundamentally self-correcting; and, managers know the world is risky, but believe it can be managed.

In conducting our work we want to ensure that each of these views is considered and debated, the surprising outcome being that the result of such a discussion is not a compromise, suboptimal for all, but rather will be a solution that actually works better for all parties. Creating a culture where this type of debate is acceptable is therefore an important, and often overlooked, part of the governance framework.

It turns out that culture is actually a much more important feature of our business than we might have thought—not just a nice-to-have after all, but actually an integral part of our control framework. When the board sets the risk appetite, it is establishing the tone for how business should be done. It must be clear what the objectives are and how you feel about the uncertainties associated with their delivery. By describing the types of risks that are to be actively sought, in return for a reward, those that are to be accepted and those that are to be avoided, the board is providing a set of guiding principles that staff can use when making its daily decisions about which actions to take next. In any situation, someone can ask: “Is this a risk we should be taking, and how much of it can we take?” Testing the likely consequences of the action against the risk appetite provides a way to move forward. The question also requires them to know what is going on more widely. Assuming the company has a finite appetite for risk, the answer to the “how much” part of the question requires you to know how much appetite has already been used elsewhere. This requires a culture that supports and promotes knowledge-sharing across department boundaries.