With increasing internal cost pressures, growing model complexity, and a talent gap for specialist skills, many actuarial teams find themselves needing outside support.
As their products evolve to better fit customers’ needs, life insurance companies face the ongoing challenge of managing products that have been discontinued but still have active policyholders on the books.
For a large life insurance company, the day-to-day reporting work involved with actuarial operations is foundational but repetitive.
Outsourcing is not new to the life insurance industry. For many years, life insurance companies have been outsourcing their non-core business processes and some aspects of business-as-usual (BAU) actuarial processes, policy administration and customer services to third-party vendors. The life insurance industry has an advanced understanding of what it takes to establish an effective outsourcing model to manage these standardised processes. Outsourcing of non-core process-oriented business functions, which requires only rule-based monitoring and tick-box service level agreements to comply with the business requirements, has achieved reasonable success in the past. However, when it comes to core actuarial functions, outsourcing has generally not received enough consideration by life insurers. Perceptions around quality and cost are often considered roadblocks to actuarial outsourcing.
As the global life insurance industry grapples with changes to financial reporting standards, regulatory regimes and a challenging business environment, companies are reconsidering the outsourcing of core actuarial functions. The resourcing needs of life insurance companies’ actuarial teams are increasing, and companies are looking outwards to meet the growing demand. The following factors are driving the demand for actuarial outsourcing services:
- Cost savings
- The ease of scaling teams at short notice
- A shortage of local skills
- Access to expertise
- Keeping pace with the volume of regulatory changes
- Focus on other strategic initiatives
While the requirement for actuarial outsourcing services continues to trend upwards, there is scope for life insurance companies to think of actuarial outsourcing in a more strategic manner and with a long-term view. In this article, we discuss some of the key risks to consider when outsourcing actuarial processes and how companies can mitigate these risks.
Figure 1: Actuarial function outsourcing: a viable solution to meet resourcing needs and manage priorities
|Helps plan resources with a focus on long-term objectives||Using expert outsourcing teams to effectively navigate through regulatory changes or other strategic initiatives|
|Eases resource management during periods with uncertain staffing requirements||A well-managed outsourcing function can help reduce risks as well as costs|
Risks associated with outsourcing actuarial functions
Concerns around outsourcing critical functions such as the actuarial function can be better understood by analysing the associated risks
Actuarial functions and processes are not only complex but play an important role in any life insurance company. Actuarial work such as pricing, determining reserves, assessing capital requirements, financial reporting etc. is critical and has a direct impact on the functioning of a life insurance company. Given the criticality of actuarial results with respect to outcomes as well as timelines, we have identified the following as key risks which could hinder the effectiveness of an outsourced actuarial function:
Actuarial processes require an advanced level of expertise and judgement to produce accurate results. An outsourcing service provider’s inability to analyse results for accuracy or to explain results to the company’s management can cause unnecessary delays and errors during crunch reporting periods.
At the same time, if an insurance company that does not outsource is not adequately staffed (both in terms of the number of resources and their expertise levels), there is a risk of missing deadlines or producing incorrect results. Major issues, if not identified in time, could find their way to the company’s financial statements, and prove costly.
For traditional non-core outsourcing contracts, which have been in place for many years, the business discontinuity risk is low. The outsourcing of core actuarial functions can benefit from time-tested outsourcing practices and processes. However, one area which requires special attention for actuarial functions is communication—with a need to understand the business requirements, resolve process-related issues and explain results. The lack of good communication can lead to substandard project management, poor analysis of results, delays in critical processes and frustration among all stakeholders involved.
Further, issues can arise from inadequate quality and risk management processes of a service provider. If the service provider does not appreciate the high professional standards required to conduct an actuarial process, then it is likely that it cannot set up a comprehensive quality and risk management process, which would expose the actuarial function to the risk of not delivering critical results with the required level of quality.
We see counterparty risk not only as the risk of a service provider’s inability to honor the contractual terms, but also the service provider’s inability to scale resources as actuarial workload increases. The service provider’s capabilities to provide surge capacity for significant strategic transactions and deliver end-to-end actuarial work, i.e., from data analysis to drafting reports across multiple domains, become an important factor for the ease of expanding outsourced processes. The service provider’s inability to scale, due to the lack of resources or expertise, is a major concern for achieving the long-term success of the actuarial outsourcing objectives of a company.
Several actuarial roles require interaction with other insurance or reinsurance companies, regulators, policyholders and other vendors. It is imperative to have a high level of confidence in the actuarial function's ability to maintain healthy relationships with all stakeholders. A service provider’s inexperience in dealing with external stakeholders could lead to reputational risk for the insurance company. We believe the reputational risk will increase as more specialised actuarial roles are outsourced at a time when the need for outsourcing such roles will increase as locally available talent becomes scarcer.
Figure 2: Actuarial outsourcing risk matrix
|FINANCIAL RISKS||OPERATIONAL RISKS|
|COUNTERPARTY RISKS||REPUTATIONAL RISKS|
How to set up a successful outsourced actuarial function
Strategic long-term view to mitigate the risks associated with actuarial outsourcing
The risks discussed above are real and significant risks, which need to be evaluated when entering an actuarial outsourcing arrangement. A careful analysis of these risks along with a mitigation strategy will help life insurers to be more confident in the success of actuarial outsourcing. Based on our experience, the following measures can help control or eliminate the risks associated with an outsourced actuarial function.
Structure of the engagement
The outsourcing team must have an ideal mix of onshore local experts with the relevant market knowledge and skilled offshore resources overseen by experienced actuaries. This may appear more expensive than full offshoring, but it helps guarantee long-term success. The involvement of a mix of local experts, experienced actuaries and other skilled resources working as one team helps to deliver quality actuarial work measured against the highest professional standards.
Market knowledge and local expertise are very important when interpreting local regulations, setting assumptions, analysing results, explaining results and making key decisions. Onshore local experts are best placed to manage these aspects of an outsourced actuarial function. The offshore outsourcing unit needs to have well trained actuarial analysts to design and implement models, execute processes, perform checks and document results. Experienced actuaries, who are experts in their domain, sitting within the offshore center, provide the necessary guidance to the offshore resources, conduct reviews and assure the quality of the work performed and delivered. Without the required level of expertise within the outsourcing team, it is easy for errors to find their way into the actuarial processes and for the client’s own internal resources to spend hours fixing them.
Figure 3: An ideal mix of resources
We believe that the first step towards successful actuarial outsourcing is to set up a team structure (a mix of local experts and offshore resources), which can provide the right balance of skills required for effective delivery. The structure should be evaluated to not only cater to current requirements but also for its ability to adapt to changes.
Risk and quality management
The outsourcing team’s commitment to the quality of end deliverables and its internal processes to manage risks are of paramount importance, especially in the case of actuarial results which impact company financials. The service provider should be able to demonstrate:
- An understanding of the required actuarial professional standards
- Its success in managing large actuarial projects which required the production of critical results
- Its capabilities to take ownership of results which are backed by thorough expert analysis
- Its ability to document and explain results to other actuaries as well as to senior management
An assessment of the track record of the service provider’s capability to take ownership of end-to-end processes as well as the results will help to mitigate the risks associated with delayed or inaccurate results.
An actuarial outsourcing engagement should be viewed as a business-as-usual process mingled with a consulting approach, where the service provider manages client relationships at all levels, works towards meeting the business requirements and offers flexibility to meet changing requirements. The service provider’s capability to provide expert advice can help the insurer improve its reports and processes over time and implement new reports and processes as the need arises. A consulting approach to outsourcing actuarial functions involves:
- A client-first approach with trained actuaries who are capable of identifying and analysing their stakeholder needs at all times
- Effective project management where the outsourcing team is responsible for driving the project forward, rather than client teams worrying about project management
- The outsourcing team should have high regard for effective communication of not only the ongoing business-as-usual work but also of the changes impacting results production
- The outsourcing partner should possess knowledge of global best practices for conducting actuarial work and act as an enabler for areas such as information technology and human resource management
In our view, a consulting approach is essential to deliver beyond the minimum requirements of an outsourced actuarial function.
A real-life example of successfully outsourcing an actuarial function
We looked at one of our own clients to help illustrate an example of how this can be successful. Our client, a large life insurance company, outsources its financial reporting actuarial function, for selected business units. What initially began as outsourcing of just the financial reporting processes to Milliman, has now been scaled up to support transition to new financial reporting requirements. Through this arrangement, the senior management at our client was able to focus on achieving its strategic goals, as it was not distracted with setting up and running a large actuarial team. The outsourcing project has been successful because:
- A consultative approach was adopted resulting in a business partner rather than a supplier-vendor relationship allowing for strategic cohesion rather than solely transactional delivery
- The outsourced model and process flow offered the ability to be cost-efficient operationally, while maintaining a high level of quality control through senior consultants managing the critical aspects of the project
- A reporting process and structure providing sufficient explanation and analysis was established
- The insurer had access to an offshore team of several fully qualified actuaries and part-qualified actuaries with experience in working on a range of projects and roles
The client believes that the outsourced team’s capabilities and flexible approach helped meet their immediate need and provides them the ability to scale up or down relatively seamlessly depending on changes in their requirements.
We have analysed concerns around actuarial outsourcing through the lens of risk management. While there are several challenges in setting up a successful actuarial outsourcing arrangement, outsourcing offers a powerful solution to address resourcing needs as the demand for actuarial skills increases. Building awareness of the risks and devising a strategy to tackle those risks from the very start will help life insurers realise the full potential of an outsourced actuarial function.