Optimizing the actuarial modeling environment

Similar documents
Meeting the challenges of the changing actuarial role. Actuarial Transformation in property-casualty insurers

Article from The Modeling Platform. November 2017 Issue 6

The money in motion opportunity. Capturing the opportunities for increasing assets and enhancing relationships as investors move into retirement

Revolutionizing tax functions with state-of-the-art technologies. Mutual fund tax services

Credit risk management. Why it matters and how insurers can enhance their capabilities

The Federal Reserve s proposed rule for enhanced prudential standards: what it means to insurers and what they should do now

Financial Services. January Risk Management. RESPA/TILA Impacts and implementation challenges

Managing operational tax risk through technology

Moderator: Eric L Clapprood FSA,CERA. Presenters: Dwayne Allen Husbands FSA,MAAA Youyou Tao FSA,CERA

Seed Investing Series:

Cayman fund structures: limited partnership vs. limited company

Implementing a gamification strategy. The importance of winning the game in insurance

Talent and accountability incentives governance Risk appetite and risk responsibilities

Operational excellence: one path or many?

Seed Investing Series

Global Regulation Solvency II & Equivalence. September 16, 2013

Blockchain innovation in wealth and asset management. Benefits and key challenges to adopting this technology

IPO destination guide. Find the right market strategy to maximize value for your IPO or secondary listing

The Digital Insurer. The Art of the Possible. 10/02/17 Avril Castagnetta, Senior Manager

IPO destination guide. Find the right market strategy to maximize value for your IPO or secondary listing

2014 EY US life insuranceannuity

Basel III s implications for commercial real estate

Achieving convergence of finance, risk and actuarial functions: beyond transformation

FIO recommendations on modernizing insurance regulation in the US

How do you see the opportunity in your obstacles? Key findings from the 2019 Global Private Equity Survey

US tax reform for financial services. Alternative funds could see significant changes under tax reform proposals

FROM 12 TO 21: OUR WAY FORWARD

The facts on FATCA. Prioritize, plan and prepare

Improve business results by first improving your vendor selection

Adapting to the omnichannel world. How life insurers can meet rising consumer expectations through an enhanced service experience

Reimagining customer relationships

UK Government opens consultations on Making Tax Digital

IPO destination guide. Find the right market strategy to maximize value for your IPO or secondary listing

Embrace the Solvency II internal model

Global Insurance CFO Survey 2014

TTC/EY Tax Reform Business Barometer

Robots join the team. Automation, transformation and the future of actuarial work for insurers

Seed Investing Series:

Reimagining customer relationships. Asia-Pacific

Challenges Faced by Wealthy, Multi- Generational Family Real Estate Enterprises

Why Legal Entity Management Matters

MODELLING INSURANCE BUSINESS IN PROPHET UNDER IFRS 17

The next step forward Can one actuarial system do it all?

NAVIGATING THE BUDGETING SOLUTION LANDSCAPE Enhanced Capabilities Must Match Specific Needs

Revenue recognition in the asset management industry

End of an IBOR era. Key transition challenges for the financial services industry

Unlocking the potential of Finance for insurers

Understanding ASPE. Section 1506, Accounting Changes

Implementing behavioral analytics to drive customer value: Insurers cannot afford to wait.

The future of underwriting

The why and how of simplified customer communications

Claims transformation. EY claims capability

Solvency II overview

Prepare for success. 5Insights for executives. Operational transfer pricing: Failure to implement can hinder performance

Global mining and metals tax survey. From backroom to boardroom. The CFO perspective at a glance

Are you ready to go public?

Four key capabilities for the future of underwriting. Findings from the EY-CPCU Society underwriting survey

Ninth Annual International Tax Reporting Conference. Boston 7 May 2014

Better-working insurance: moving blockchain from concept to reality

Alternative Investments Advisory Services. kpmg.com

IFRS 4 Phase II Operational impacts

EYGS UK tax strategy. Financial year ending 30 June 2017

How can your finance function become IPO ready?

Actuarial Transformation The Future Actuary

Is your growth strategy a big deal? Bolt-on deals outperform in latest EY life sciences research

Running Your Business for Growth

At the intersection of international tax and digital transformation. Framing 2017: a new digital tax discipline

Basel 2.5: US Market Risk Final Rule

Margin for non-cleared OTC derivatives. Navigating an uncertain regulatory landscape

The agent of the future

Mergers, acquisitions and capital-raising in mining and metals trends, 2014 outlook: changing gear. The CFO perspective at a glance

IFRS 9 Implementation

State income tax exposure for fund managers

Tax Management Consulting Leading tax departments through change

Value over volume The drivers of health care M&A in 2017

CFO Insights Realigning your portfolio for growth

Tangible property regulations. A discussion about taxpayer considerations

(Re)insurance Fast Forward. Régis DELAYAT Senior Digital Advisor to the Chairman February 28 th, 2018

Formalizing a Debt Management Strategy

Why Legal Entity Management Matters IV

European Solvency II Survey 2014

FASB provides preliminary views on insurance accounting

FRS 115 Revenue Recognition

Matching adjustment for equity release assets

Brexit for insurance. Mapping the road to Brexit

Aligning products and investments to investor goals. Taking a holistic view of client goals to deliver the best solution

Lessons From the Early Years of Mission-Related Investing at Knight Foundation. Knight Enterprise Fund knightfoundation.org 1

REGULATING FINANCIAL PLANNERS AND ADVISORS

Analytic measures of credit capacity can help bankcard lenders build strategies that go beyond compliance to deliver business advantage

The Importance of Operational Transfer Pricing

The global tax disputes environment

With the movement to principle-based reserve LET S NOT REINVENT THE WHEEL. By Brenda Perras

The value of a stand-alone rating engine

Finding the right fit. Public monetization options for upstream companies

Global experience and expert opinion: the intelligent connection Fraud Investigation & Dispute Services

Session 3B: Stress Testing from Macro-environment, to Scenario to Impacts and Decision. Moderator: Dariush A. Akhtari, FSA, MAAA, FCIA

Effective Corporate Budgeting

Fiduciary Insights. COMPREHENSIVE ASSET LIABILITY MANAGEMENT: A CALM Aproach to Investing Healthcare System Assets

Basel Infrastructure Survey 2012 kpmg.com

Financial Services. The Volcker Rule Covered funds, investment activity and affiliated transactions. A bank s guide to regulatory change

Transcription:

Optimizing the actuarial modeling environment Actuarial IT architecture considerations around loose and tight coupling By Tim Pauza, William Cember and Sanjo Yogiaveedu

Introduction Working with models is the quintessential activity for most actuaries. From projecting reserves to pricing, almost every core activity routinely performed by actuaries involves modeling balances and analyzing the results and outputs of models. Indeed, models provide the framework for analysis, allowing actuaries to better understand uncertain future events and, therefore, address the business needs of the organization. Typical actuarial modeling environments incorporate many technical components beyond the calculation engines that perform projections. Such components transform data, store assumptions or build reports. Collectively, they work together to enable actuaries to do their work such as producing and reporting actuarial reserves. The effectiveness of the actuarial function depends, to a large extent, on how those components are linked, or coupled, within the actuarial environment. For each specific actuarial task, the actuaries or their resident systems architect must decide how the component completing that task integrates with the other components. The actuarial IT architecture can be designed such that components function independently and can be switched out for another component completing the same task without affecting the rest of the environment. In contrast, actuaries can select tools that perform the functions of multiple components that are highly dependent upon each other, so if one component is to be replaced, a larger set of associated components and functions will also be impacted. The former architecture is generally referred to as loosely coupled, while the latter is called tightly coupled. This paper will evaluate and consider loose vs. tight coupling, describing the benefits and outlining scenarios for grouping and integrating components within actuarial modeling environments. Further, it will provide examples of loosely and tightly coupled components in action and highlight various critical success factors for those who desire to migrate to a more loosely-coupled architecture. Architecture and coupling According ANSI/IEEE Std 1471-2000, the definition of architecture is The fundamental organization of a system, embodied in its components, their relationships to each other and the environment, and the principles governing its design and evolution or, in other words, a conceptual blueprint that describes the various technical components and their relationships with each other. The blueprint serves as a communication tool for the actuary and IT team in designing and implementing technical components that can execute the actuarial process. The blueprint is designed with guiding principles in mind that are specific to the needs of the users of the system. An architect can strive to facilitate efficiency, automation, transparent flow of data, flexibility or many other design principles. The measure of success of a design is based on how well the components interact to satisfy design principles and meet the needs of the users. Components interact within the architecture by passing data from one component to another. These interactions between components are a key design element for any architecture and are commonly referred to as component coupling. Components can be loosely or tightly coupled, which refers to how independent the components are from each other or, in other words, how much each component depends upon definitions and functions of other components. 1 Optimizing the actuarial modeling environment

Coupling considerations: loose vs. tight In this paper the term coupling refers to the degree to which the components or applications depend on each other within an actuarial environment. The concept may be most easily understood by an analogy. Consider the cameras that are standard features in today s smartphones. The camera is tightly coupled with the smartphone. If you want a better camera or you scratch the lens and you want to fix it, you must buy a new phone. While many people have given up separate cameras for everyday use, professional photographers and passionate hobbyists still carry high-powered cameras (not to mention multiple lenses, filters, lights, tripods, etc.). These accessories are necessary, in the view of the pros and serious shutterbugs for shooting in different conditions or at different types of events. Similarly, many stereo systems include receiver, preamp, amplifier, input devices (turntable, CD player, etc.) and even speakers all contained within one box. The audiophiles among us shudder at the thought and prefer our components that stack to the ceiling allowing us to achieve a custom sound with loosely coupled or decoupled components. For some, solid state audio components are not acceptable because they do not afford the user the flexibility of further tuning the sound to their liking as one can do with high-quality tube-based equipment where vacuum tubes within a component can be decoupled in order to achieve additional sound refinement. It is clearly possible to take decoupling of an environment to quite an extreme! With those pictures in mind, let s return to the actuarial environment and the implications of coupling on architecture, design and the relationships between components. First, let s consider several areas in the actuarial process that can be a challenge to an effective architectural design: Where will assumptions be stored in an assumption repository (which feeds models) or directly inside the models? How will data transformation be handled? Will it take place before or after data is fed into the actuarial modeling environment? Who will own data cleansing and transformation actuarial or IT groups? How will change management be performed? Does the modeling software offer change controls, or will separate controls be necessary? An example for tight coupling where the technical components are more interdependent with each other. Changes or Removal of any component impacts the other components Assumption repository Data warehouse Calculation engine Scenario generator Analytics and reporting An example for loose coupling where the technical components are less interdependent with each other that allows users to easily plug-in and plug-out the components. The arrows represent the data exchanges. Assumption repository Data integration Calculation engine Data integration Analytics and reporting Scenario generator Data warehouse Optimizing the actuarial modeling environment 2

How will model runs be automated? Is job scheduling of the model run sufficient, or will end-to-end automation of the process from data collection to reporting be required? How often are new reports or changes to existing reports needed, and how responsive does the system need to be that produces these changes? While there is no one-size-fits-all answer to the question of which is the right architectural approach, there are multiple factors that can considered to decide how tightly or loosely coupled the integration of components within an actuarial environment should be. The need for periodic changes to actuarial modeling tool is an important factor to consider when deciding on a tightly or loosely coupled architecture. Some large organizations routinely review the tools they use to assess their continued effectiveness in light of changing business needs, shifting regulatory requirements, or the evolution of new and more powerful tools. A loosely coupled architecture helps an organization make such changes with minimal impact on other components (assumption repository, scenario generator, etc.) within the actuarial environment. This modular approach decreases time to market and reduces cost and time in making the changes to the modeling software since some of the externalized components can be reused within the environment. The degree to which the actuarial organization relies on IT resources must also be taken into account. Actuarial shops that limit the involvement of IT resources in the actuarial process may prefer a tightly coupled architecture that can be installed and configured and operated by actuaries who have responsibility for the whole process end to end. A loosely coupled architecture requires a deeper set of IT skills to design and build and, ideally, returns this investment by allowing for more involvement of IT in selected sub-functions such as data preparation and report design and development. Critical success factors for changing the modeling environment Architecture changes to actuarial modeling environment (including transitions from tightly coupled to loosely coupled components) are significant events. A clear vision and a solid road map are necessary for success. The following enablers and critical success factors should also be considered during design and implementation planning: Implementation road map: Transforming the actuarial IT architecture requires a well-defined implementation road map with an understanding of the existing current state, long-term goals and a target architecture that focuses on creating loosely coupled components in incremental stages. Adopt guiding principles and pay attention to leading practices: As part of the actuarial IT architectural transformation, the IT team should use IT architectural leading practices, principles and appropriate patterns to design and effectively build the loosely coupled components within the actuarial environment and to govern the architecture process, affecting the development, maintenance and use of the actuarial IT architecture. Commitment: Replacing end-user tools with industry standard components can be expensive and time-consuming. Therefore, it is paramount that all stakeholders fully commit to completing the transformation and changing the operating model to see the project through until the business case is fulfilled and the longterm benefits are realized. Flexibility: Implementing new tools and components can also leave the actuaries with a sense of lost control and inability to respond to the need for ad hoc analysis. The actuarial need for hands-on flexibility is real and meaningful. Meeting that need must be a top priority in designing or redesigning actuarial modeling environments. Effective use of development and sandbox environments and prototyping are must-haves in moving toward optimal environments. 3 Optimizing the actuarial modeling environment

IT-actuarial partnership: A significant benefit to adopting de-coupled, industry-standard components within modeling environment is to facilitate the shift of management for these functions from the actuarial to the IT organization. The two groups need to form a strong partnership and be fully committed to its success. Actuaries need to clearly articulate their business needs and priorities, and IT needs to focus on delivering against those business needs first and improving the controls and total cost of ownership second. Strong leadership: Changes like this are transformative and will result in rethinking roles and responsibilities for the organization. Thus, there is clear need to apply proven communications and organizational change management techniques. Otherwise, fear and resistance may become substantial barriers. The mandate for change must come from the top, and leadership has to communicate its commitment to change and to explain why it is good for the business and for affected individuals. Optimizing the actuarial modeling environment 4

The bottom line Clearly, loose coupling vs. tight coupling of actuarial modeling components is only one of many factors to be considered in the design of an effective architecture. It is, however, a central factor with influence on several critical goals: Actuaries want to spend more time performing businesscritical analysis and less time manipulating data, running models and building reports. The actuarial models are increasingly becoming central to producing financial results and are therefore expected to operate in a fully controlled production environment. The nature of the actuarial role demands the ability to make frequent changes to assumptions and logic in the models in order to test sensitivities and provide timely answers to questions posed by company leadership. While improving or designing a new actuarial modeling environment, consideration of the appropriate interaction between key components and how those components are used is necessary in adopting an architecture that best serves the customers of the actuarial models. There is no doubt that actuaries have better and more powerful options for modeling tools than they did even a few years ago. Effective use of this robust functionality whether as a built-in feature or stand-alone tool requires careful consideration and a view to the broad needs of the organization. The key to designing the optimal actuarial modeling environment is to balance the big-picture, long-term strategic objectives with the many technical details that can lead to improvements in this quintessential actuarial activity. 5 Optimizing the actuarial modeling environment

Contact us Michael Hughes Ernst & Young LLP Partner michael.hughes@ey.com +1 312 879 2122 Tim Pauza Ernst & Young LLP Senior Manager tim.pauza@ey.com +1 215 448 5836 Optimizing the actuarial modeling environment 6

EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and con dence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member rms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP is a client-serving member rm of Ernst & Young Global Limited operating in the US. EY is a leader in serving the global nancial services marketplace Nearly 43,000 EY nancial services professionals around the world provide integrated assurance, tax, transaction and advisory services to our asset management, banking, capital markets and insurance clients. In the Americas, EY is the only public accounting organization with a separate business unit dedicated to the nancial services marketplace. Created in 2000, the Americas Financial Services Of ce today includes more than 6,900 professionals at member rms in over 50 locations throughout the US, the Caribbean and Latin America. EY professionals in our nancial services practices worldwide align with key global industry groups, including EY s Global Wealth & Asset Management Center, Global Banking & Capital Markets Center, Global Insurance Center and Global Private Equity Center, which act as hubs for sharing industry-focused knowledge on current and emerging trends and regulations in order to help our clients address key issues. Our practitioners span many disciplines and provide a well-rounded understanding of business issues and challenges, as well as integrated services to our clients. With a global presence and industry-focused advice, EY s nancial services professionals provide high-quality assurance, tax, transaction and advisory services, including operations, process improvement, risk and technology, to nancial services companies worldwide. 2015 Ernst & Young LLP. All Rights Reserved. Score no. CK0921 1503-1425035 ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for speci c advice. ey.com