Latest actuarial survey results show significant concerns about input controls
Modelling Design Partners and SolveXia recently conducted a survey, in collaboration with the Actuarial Post, to better understand the challenges faced by actuarial departments. The results revealed that the most pertinent challenge that is associated with actuarial processes is vulnerability to input error. Not surprisingly, the majority of respondents also indicated continued concern about regulatory requirements. Most worryingly, though, is that a significant dependence on spreadsheets for major calculations was noted.
Spreadsheets are pervasive in many industries, due to their flexibility and perceived reliability. Actuarial departments are no exception: 90% of respondents indicated that their departments use spreadsheets. Despite their ease of use, spreadsheets are notoriously difficult to audit and control. Frequent manual manipulation of data and equations is often required, which leaves spreadsheets vulnerable to human error. The London Whale incident and the Reinhart-Rogoff fiasco are both extreme examples of such errors – one in investment banking, and the other in international economics. In both cases, highly qualified mathematicians, and world-renowned economists accidentally copied incorrect equations in spreadsheets, which led to disastrous errors.
The insurance industry uses the same investment instruments as investment banks, within asset-liability hedging strategies. In our survey, almost 70% of respondents indicated that spreadsheets are used to perform major calculations in actuarial departments. Undetected errors in these spreadsheets may lead to insurance executives not correctly estimating the risks within their portfolios, thereby increasing the risk of extreme losses in relatively ordinary market conditions.
Nonetheless, the survey results also show that an increasing number of actuarial departments use process automation. Process automation platforms, such as SolveXia, allow actuaries to have the flexibility of spreadsheets, while reducing the risk of error caused by manual input and also adding transparency and auditability.
Is process automation the solution to overcome these issues relating to risk and cost?
Demographics
The opinions of 94 respondents in the actuarial industry were gathered, including 14 at executive and board level, 18 in senior management, 31 in middle management, 21 analysts, and 10 in other roles, such as contractors and consultants. The majority of respondents are fellows of the Institute and Faculty of Actuaries, and more than half work in life insurance.
Industry challenges
Regulatory compliance is still a significant issue for actuarial departments, with almost 70% of respondents indicating that compliance is a challenge. Only one out of ten respondents believes that they have already handled compliance.
The uncertainties of the potential “ICA plus” requirements are reflected in this survey, with a quarter of respondents indicating that they don’t know what these regulations will entail. However, most respondents think that ICA plus will be less of a burden than other regulations.
Almost a quarter of respondents indicated that running actuarial processes take more than 20 days a month, and nearly 20% spend 11 to 20 days a month. Although expected, these results confirm the shocking amount of time spent every month on performing actuarial runs. Documenting these processes and creating audit trails for them takes the majority of respondents less than 4 days a month. It is tempting to question whether the documentation and audit processes take less than 4 days because these actuarial departments don’t have any more time left to perform such tasks.
Automation as a solution
The use of spreadsheets is ubiquitous in the actuarial industry and 90% of respondents indicated that spreadsheets are used by their companies. The survey indicates that spreadsheets are mostly used for sense checks and storage of assumptions (80% and 75% respectively), but almost 70% still use spreadsheets to perform major calculations, and over 40% use spreadsheets to edit or transform policy data.
The use of spreadsheets for major calculations has been criticised, specifically due to the difficulty of auditing them. The challenges associated with spreadsheets have been epitomised by incidents such as the London Whale saga – not only were spreadsheet calculations run manually, with rows of cells manually copied; but data entry was also performed manually in spreadsheets, and a small mistake of dividing by the sum instead of the average, resulted in extremely large losses.
Most respondents in the survey were more satisfied than dissatisfied with almost all aspects of actuarial run processes, with one notable exception. Input error vulnerability is seen as a specific weakness in actuarial processes, with half of respondents indicating that they are either moderately or very dissatisfied with this aspect of actuarial runs.
Most respondents indicated that they were satisfied with their computer hardware and software reliability, confirming that the recent industry-wide investments in hardware and software upgrades are starting to improve the overall reliability of actuarial runs. However, almost half of respondents were dissatisfied with the number of people required to perform these runs during actuarial processes, indicating that although the investment in technology has improved reliability, the existing software requires large numbers of individuals to operate.
Hosted platforms
Hosted solutions are not yet widely used in the actuarial industry, with less than a quarter of respondents indicating that their company uses any kind of hosted software. Almost half of all respondents are still very concerned about data security on hosted systems. Even with this concern, it seems that the good track record of hosted software has started to allay these fears, with more than half of respondents indicating that they would consider using hosted solutions for actuarial processes in future.
Most companies would like to reduce the number of people required to perform actuarial process runs. We therefore predict that hosted solutions will soon play a significant role in reducing the cost and increasing the efficiency of actuarial processes.
This survey report can be downloaded in PDF format:
Actuarial Process Survey Results – MDP
Further details about the survey results may be requested by email: consulting@modellingdesign.com
