 By Tom Murray, Head of Product Strategy, Exaxe, www.exaxe.com
Visit any actuarial department and you will be struck by a very singular fact; the people that spend all their time assessing the future and creating models for it are almost always using systems and procedures that date from very far back in the past.
Why is this? Why are those who are most focused on what will happen to businesses under various future scenarios so reluctant to use present day technology to help them. By and large, they insist on using out-dated methods to reach their conclusions.
Is it the paucity of tools available? Are software suppliers unable to provide robust technology to meet the needs of the actuarial profession? Or is it that those who spend their time peering into the future have greater trust in older technologies? Either way, it is a fact that the majority of modelling is carried out using either spread-sheets or bespoke software created in house by the actuaries themselves in a number of older computer languages viz. Fortran, Pascal et al.
Easy answer causes more problems
The use of spread sheets or bespoke software can seem like the easy answer for the head of an actuarial department; No complex implementation project is required and neither will there be any retraining of staff, which are already competent in the technologies. It seems to be the safest method to deal with a key, high profile function.
However, there are a number of problems with both spreadsheets and bespoke programmes. They tend to proliferate, are not designed for re-use, and they tend to be comprehensible only to the individual who created them. Hardly surprising as the creator is focused on getting an answer, not on building a user-friendly product, but this approach has unfortunate side effects. The department becomes hostage to the original creator of the spreadsheet or programme. When he or she retires, or moves on to a different job, everyone else is afraid to touch the system or update it.
As a result, more spreadsheets and programmes are created when changes are required rather than amending the original one. Soon you have an unwieldy mess of interlinked spreadsheets or programmes, or sometimes both, which are completely un-auditable and are almost impossible to verify. Surely this is a major risk to take with a core business function?
Time for change
The obvious answer is to move to using tools for modelling which are designed for use by many users and not only have widespread functionality but are fully auditable and designed to be intuitive. This would usher in a completely new era of accountability for the actuarial profession and would help to make them audit friendly for the Solvency II era.
With increasing levels of regulation, particularly around the area of corporate solvency, there is an urgent need for models, which can be adapted quickly, and efficiently in order to provide the business with the information it needs. The old approach of extending networks of interlinked spreadsheets and individual programmes that are not built to be re-used has to end.
Actuaries need to embrace the tools that are currently available. A constant refrain is that these tools are not flexible enough, but without customer demand that will always be the case. If more actuaries were using these tools the suppliers will be encouraged to meet the demand for improvements and actuaries will end up with tools that are fit for purpose.
This would free up actuaries to concentrate on the jobs they should be doing; i.e. the risk and capital modelling that is essential not only to meet regulatory requirements but also to optimise the business’s position in the market by ensuring accurate amount of capital reserves.
Role of software suppliers
Software suppliers cannot shirk the blame for the low adoption rate of automated tools for modelling. If actuaries feel that the tools don’t meet their needs, then either the software suppliers are failing to understand actuarial modelling requirements or suppliers are not explaining their product benefits clearly.
Suppliers need to address this by engaging with a wider range of actuaries so that the automated solutions are flexible enough for the whole industry, rather than aimed at a specific firm. They need to take into account the pressures on actuaries trying to model the future for banks of life policies on different back-office systems with wide variations in data quality and granularity.
They also need to demonstrate the benefits of using automated systems so that they are appreciated, particularly in the area of audit and compliance assessments, an area in which the automated tools are well placed to improve on the capabilities of bespoke solutions.
Actuaries are used to thinking in terms of the future and understand the nature of software. It should be easy for suppliers to engage with them to produce systems that will provide all the control that businesses and regulators are looking for while at the same time giving the actuaries the flexibility and control that they need to have. As I said, it should be easy, so why isn’t it?!
Tom is Head of Product Strategy at Exaxe with primary responsibility of overseeing product direction. Tom has extensive experience of managing web based insurance software from conceptual design through to commercial release and beyond. Tom has been leading the development of the Exaxe onlineinsurance architecture since August 1999.
If you would like to read more of Tom’s articles on life and pensions, please visit the Exaxe blog:
http://www.exaxe.com/blog
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