Based on recent interviews we conducted with actuaries and board members, we observed a clear correlation between a firm’s approach to “deep dives” and its overall maturity in its use of the Actuarial Function.
In addition, at our recent Chief Actuary roundtable, “deep dives on key topics” was highlighted as an area where actuaries have seen most board engagement with actuarial insight.
In this blog I explore what deep dives are, the benefits they can bring and best practice to approaching deep dives.
What is a “deep dive”?
Most actuarial work is completed to a set timetable, often driven by regulatory requirements. For consistency and given resource constraints, it is useful to keep these standard actuarial processes, including the reporting of such information, streamlined and repeatable.
However, to get most value out of actuarial teams, these should be supplemented by more bespoke “deep dive” investigations. These are one-off pieces of analysis where the actuaries investigate a particular issue in depth in order to understand the results or business better.
Examples can include investigating a deterioration in reserves, responding to regulatory challenge, assessing the impact of upcoming legislative change, or exploring an emerging risk. It is often advantageous for the actuaries to work with a number of functions when performing a deep dive (e.g. claims and underwriting) to ensure all relevant information is incorporated.
Deep dive example: Growth in a class of business
A good example of a “proactive” trigger for a deep dive investigation would be recent material growth in a class of business. The board may want to ensure that the growth is profitable as well as identifying any knock-on impacts to the business.
With strong growth comes the risk of lower profit margins, changes in business mix and anti-selection. An actuarial deep dive can help give comfort on these issues, as well as identifying areas for improvement or trends to keep an eye on.
The deep dive might investigate changes such as:
- Placing basis and inception pattern;
- Limit and attachment;
- Broker and lead underwriter;
- Terms and conditions; and
- Pricing strength.
It will consider how these changes impact, for example:
- Expected loss ratio and claims development patterns;
- Claims profile (e.g. perils, split between large and attrition, tail distribution);
- Aggregation of risks;
- Effectiveness of reinsurance; and
- Exposure to new and emerging risks.
Benefits to the business
In our experience, a deep dive exercise of this sort can help achieve two key goals:
- Ensuring that all actuarial processes and assumptions appropriately factor in the latest trends (in this case the recent business growth). This can help to pre-empt likely reserve movements or changes in capital, as well as feeding into discussions on risk aggregations; and
- Giving insight into the profitability of recent growth, helping the board to take strategic decisions on whether to pursue further growth in the same area.
Deep dive techniques
We have noticed an increasing trend towards greater automation of certain aspects actuarial work. By speeding up the production of standard analyses, these can free up the actuarial team to spend more “thinking time” on deep dive investigations. Also, by using newer techniques such as machine learning, actuaries can more easily identify emerging trends and other topics that would benefit from a deep dive.
It is important to use the ‘deep dive’ time to investigate areas that will give the most value. It is also necessary to consider the message are you trying to express, e.g. is everything broadly in line with expectations or has there been a change the business needs to act on.
As with all analysis, the presentation and communication of results should consider the audience. For example, a movement in an actuarial assumption is often less interesting to management, so focus on what this means for the business and the macro decisions they need to take.
Best practice
The best firms have a rolling program of deep dives, covering an appropriate range of issues and business areas over time. This plan is then adapted in response to emerging issues. Such firms also ensure that there is sufficient actuarial resource available to carry out deep dives alongside business as usual activity.
It is important that anyone from across the business can speak up and suggest a deep dive investigation, even if the board has the final say on prioritising deep dives.
Finally, it is crucial that deep dives are used as learning opportunities, rather than as a way of apportioning blame. An open and supportive approach will ensure that future issues are raised promptly and assessed in a balanced way.
You can find out more about how to improve your own deep dives in our recent publication “The Virtuous Cycle: How insurance actuaries and boards can work together more effectively”.