Articles - How to get more value from your Actuarial Function Reports

 By Matthew Pearlman. Partner and Daniel Sacks, Analyst, LCP

 We focus on putting into practice three key principles that should underpin every stage of the Actuarial Function’s (AF) opinion:

 Target value-add, not (just) compliance
 AF activities should occur before decisions are made
 Achieving best practice may be an iterative process

 We provide practical tips and steps in each section to help the AF add more value, engage in decision-making promptly and continuously improve processes in line with best practices.

 Technical provisions
 Technical provisions (TPs) often rank as the least read section of the AFR. We find that the lack of engagement is not solely due to their inherently technical nature but also because Boards typically seek insights on reserves elsewhere, such as in quarterly reserving packs.

 We see the TP exercise as an ongoing process, not just a final report, where valuable insights will emerge throughout. The AFR records these insights even if it is not the main way they are initially communicated. An ideal project plan could be structured as follows:

 Typically, TPs build on the foundation of GAAP reserving. Planning should start before starting the GAAP reserving process, with a focus on making recommendations that can add value. These recommendations should be reviewed and carried forward into the following year, ensuring they are implemented effectively. This approach supports an iterative reserving process, driving meaningful improvements year after year.

 This could involve, for example, improving data flows across the system or properly implementing the reinsurance programme into the calculations. Additionally, it is worth revisiting the key judgments made and the methodological challenges recorded in the previous year. These elements should be incorporated into the planning phase before the annual reserving process begins.

 We find the quiet period before the annual year-end reserving process an ideal time to conduct deep dives. For example, this time could be used to assess case reserving adequacy, using the broader perspective offered by the reserving exercise on the claims process. Insights from these deep dives can then be incorporated into GAAP reserving and subsequently into the TPs, ensuring they do not become an additional strain on resources during the critical first-cut reserving phase.

 We suggest that the TP report focus on two key parts:

 Value-add: Explaining the walk from GAAP reserves to Solvency II reserves, which is typically shown as a waterfall chart. In our experience, this is poorly understood by all but those close to the analysis. The Board needs to understand the sensitivities around individual items in the waterfall and when they could be potentially material

 Compliance: Picking up the important points from GAAP reserving and ensuring that they are all documented within the TP report. Most reserving insights should ideally be highlighted earlier in the process.

 The underwriting opinion
 Every firm has a unique business plan, but all companies use a structured planning process involving senior management, finance and the Board. We find that tight timelines can often make it hard for the AF to provide meaningful input during the plan’s development. If actuaries aren’t involved early, they may end up having to justify aspects of the plan retrospectively, a practice that adds little value to the business.

 Some of the most effective challenges raised by actuaries are simple yet impactful. For example, questioning assumptions such as “What is our justification for assuming we can increase business volumes while also increasing premium rates?” can prove insightful. Similarly, comparing business plan loss ratios to historical trends can highlight potential issues, such as unrealistic expectations that historical loss ratio deterioration will reverse through “re-underwriting” efforts alone.

 It is important to present facts in a way that the Board can easily understand. For example, showing how much advance credit is being assumed for underwriting changes can help the Board assess whether such assumptions are reasonable. We suggest framing facts in terms of their impact on decisions, to ensure that the Board has the information needed to make right choices.

 Reinsurance opinion
 Reinsurance is a critical business decision because of its direct impact on managing the risks of the business. It is not an exact science as multiple solutions can align with the theoretical risk appetite. At its core, reinsurance purchasing is an optimisation problem, requiring Board to weigh various factors carefully to arrive at the best decision. The Board must have sufficient information to understand the financial dynamics of the various reinsurance options. While actuarial teams typically provide detailed modelling to support recommendations, the final decision often involves a commercial compromise.

 The reinsurance opinion usually comes after the main reinsurance purchase decisions, offering a chance to independently assess the quality of MI and look at the decision from a different angle. A common issue identified in these opinions is the imbalance between qualitative and quantitative information provided to the Board, with the latter often lacking the detail needed for fully informed decisions. Below are some ideas to enhance the value of the reinsurance opinion for the business.

 Using the right metrics
 An effective start is the simple question: “Is this year’s renewal offering better or worse value than last year?” Metrics aligned with the company’s risk appetite or reinsurance policy can effectively illustrate this. Comparing and ranking the current programme against the previous year provides meaningful context.

 For example, the reinsurance policy may state that no single reinsurer should have more than 20% of any layer. While it is normally clear whether this technical limit has been breached, reviewing the entire programme can reveal surprising levels of reliance on one reinsurer. This may then highlight that the policy has not been expressed clearly, providing the opportunity to clarify the risk appetite and improve future reinsurance decisions.

 Another effective approach is to supplement actuarial modelling results with tests against historical experience. Board members will likely remember the company’s worst recent year and will want to see how the reinsurance programme would have responded to those losses. We often find that clearly explaining any differences, such as changes in line sizes or improved terms and exclusions, can help the Board in understanding how those past losses relate to today’s exposures.

 Governance of information is another key area for the reinsurance opinion. For example, if reinsurance modelling relies on a capital model calibrated to a 1-in-200 level for capital setting, it may be less reliable at the 1-in-10 or 1-in-20 levels typically used for reinsurance decisions. It is important for the opinion to communicate these limitations, helping the Board to understand implications of relying on such data.

 Feedback loops
 The reinsurance opinion is produced after decisions are made and provides a good opportunity to identify gaps in technical analysis or highlight additional insights that proved useful to the Board. This feedback loop supports continuous improvement of MI, enabling the Board to make better decisions each year.

 Contribution to risk management
 Risk management is the least defined area of the AF’s involvement, as there is no formal requirement for an opinion. However, the AF plays an important role in supporting and enhancing the company’s risk management processes.

 Other general considerations

 Timing of the report
 The AFR can add significant value if done at a time early enough to influence decisions. Instead of acting as a retrospective review of decisions already made by the Board, it should act as record of how the AF actively participated in the work leading up to those decisions.

 For example, the Underwriting Opinion, or at least the initial findings, should be presented to the Board while the business plan is still live and where any key challenges from the Actuarial Function can still be factored into the plan by the Board.

 Another example is the AF’s involvement in the Own Risk and Solvency Assessment (ORSA). Before the Board signs off the ORSA, they should have the benefit of input and challenge from the AF.

 Structure of the report
 Good presentation improves the Board's engagement with its findings. It is important to recognise that Board members have unique preferences, and it’s crucial to regularly discuss how they interact with the results.

 We suggest some simple changes below that can make a big difference to how the audience engages with the findings of the report:

 Putting the opinions and key recommendations on page 1. This helps Boards focus on the purpose of the report.
 Board members typically prefer a short report (approx. 10 pages) with signposting to appendices and other reports where the detail is presented.
 Ensure that AFR addresses the following three key questions for the Board early on:
 “So what?”: What is the point of this advice for the Board, what question are we trying to answer?
 “What if?” What are the key assumptions and uncertainty around the results presented?
 “What next?”: What needs to happen next, and what implications does this advice have on other areas?
 Ensure that the opinions from the AF are clearly stated to avoid giving false confidence. For instance, instead of stating “the firm has low exposure to anti-selection risk,” provide analysis that quantifies changes in business mix and offers an indication of whether anti-selection risk is increasing or decreasing.