Articles - Do our controls and documentation need a nudge


Controls and documentation… not the most inspiring subject, but an important part of actuarial work and back in the spotlight again because of the upcoming changes to TAS. This article looks at some of the pitfalls that documentation and control processes often fall into and how we can give them a refresh to make them easier to manage. In particular, we consider the idea of nudge theory and how this can help encourage positive engagement with these processes.

 By Ed Harrison, Senior Consultant at LCP

 What’s changing in TAS 100 (version 2)
 Documentation has always been a key part of TAS, but the new version moves away from the “principles based” approach that we are all familiar with and sets out a more prescriptive list of areas that must be covered by documentation.

 The FRC’s position is that the updated TAS simply clarifies the standard of documentation already expected, although some might suggest that the new rules impose more onerous requirements.

 In addition, principle 1.7 states that “evidence demonstrating compliance must be available to the intended user [of the work], if requested”. This may pose an added need for actuaries to ensure that documentation is structured and written in a way that is more comprehensible to the users of actuarial work, in case it is requested.

 Nudging us to do better
 Documentation is best written as the work is done. We all know this, but often time pressures or competing priorities get in the way, and its only fully brought up to standard at the end of a project.

 Nudge theory can help with this. This is the concept of using subtle, indirect prompts or interventions to influence people's behaviour and encourage positive decision-making. Most of us will have experienced “nudges” in our daily lives, from supermarkets putting the expensive named brands at eye-level through to government-making pensions opt-out rather than opt-in.

 The same principles apply to actuarial work:

 • It is good practice for spreadsheets (and reserving software) to have comment boxes so “doers” and “reviewers” of work can record their decision-making as they go. The visual cue provides a nudge to record what you’re doing.

 • Better yet is to make the nudge stronger. For example you can introduce a simple macro that checks if the comments box in your modelling spreadsheet has content and then prompts you to complete it if its empty as you save. We incorporated this stronger nudge into LCP InsurSight, so that you are prompted to enter your review notes when you save a change in the software, and cannot complete the save until something has been entered.

 Even very small changes can have a beneficial effect. For example, saving documentation and controls in the same place as the underlying work provides a visual prompt to complete it, as does having a final completion checklist.

 Sometimes less is more
 When someone makes an error, we often ask ourselves “what can we do to avoid it happening again in the future?”. The default answer is often “more controls”.

 As a result, control frameworks tend to grow over time. Like a garden left to get out of control, they can become dense and difficult to navigate, and paradoxically make errors harder to spot.

 A control framework that claims to capture every issue that has ever occurred in the past invites false confidence and leaves us less likely to spot a more complex mode of failure in the future.

 Indicators that your control framework may be overgrown include:

 • Controls that don’t clearly provide comfort, but are carried out nonetheless.

 • Controls where you have to do additional data manipulation specifically to run them.

 • Excessive numbers of check cells in excel spreadsheets.

 • Controls which continually fail but for a long-standing reason, potentially obscuring other issues that could cause the same check to fail.

 A well-designed and intuitive control framework can be much more powerful than a more complex and time-consuming one that claims to be comprehensive.

 A simpler framework helps in two ways. Firstly, it gives confidence that simple and fundamental points (like data inputs) are correct. Secondly, because it isn’t expected to be comprehensive, we are more likely to see an unusual result as a possible error, rather than something that we try to rationalise.

 Next steps
 The introduction of TAS-100 (v2) on July 1st is a good prompt to revisit your team’s approach to documentation and internal controls. If neither has changed in the past 2 years but your process has, its likely that there is a mis-match between the process and the controls.

 Using nudges is a great way to improve documentation and controls in an efficient way. This is because they are by definition little things and so often take little or no time to introduce. This is helpful when we are under pressure to deliver results ever more efficiently.

 There’s a commercial incentive to get it right too. Teams that engage positively with well designed documentation and control frameworks are more likely to add value to their business and avoid errors, corrections, and reissued papers that can dent confidence in future actuarial work.
  

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