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Actuarial Practice: Unearthing the Data Gold Mine for Insurers

August 29, 2019 | Neelaakshi Piplani, ACAS

Where there’s risk, an actuary is looking for creative solutions to manage it. From building sophisticated risk models determining the likelihood of specific events to explaining technical matters to various stakeholders, the role of actuaries is to add value to the strategic decision making. They make financial sense of the future and their place in the insurance industry is critical.

In particular, actuaries drive long-term strategy at smaller insurance companies by forecasting demand within a competitive geographical market. However, it is important to note that what they bring to the table is not just their number-crunching prowess. They possess a sharp sense of judgment honed over time, allowing them to understand the functionality of sophisticated risk models, make assumptions to calculate results, and ensure assumptions fall in line with market trends, subject to competitiveness constraints.

Let us consider a situation where a small insurer is experiencing deteriorating loss ratios. The logical next step: work closely with underwriting, claims, and reserving units as well as with finance and compliance teams, and apply their data, metrics, and outcomes to the strategy and process of price optimization. However, the same business challenge of loss mitigation — when looked at through an actuary’s lens — presents numerous ways to tackle the issue. Starting with a statistical analysis of available data, the actuary refreshes rate indications, runs a profitability analysis on the book of business, considers capital implications, and performs profit testing. The results are compared with industry benchmarks, and finally, the actuary assesses if the company has lax underwriting standards, before recommending changes. The scope of work of an actuary extends well beyond filling complex spreadsheets and requires a highly analytical bent of mind and keen business acumen.

To understand that better, let’s look at another application of actuarial methods. Every year, insurance organizations store millions of claim records for compliance purposes. By adopting a data-centric approach to strategic decision making, insurers can harness those claim records to improve the combined ratio and boost policyholder experience. But, how does an actuary help with that? The actuary builds an actuarial cost model using the claims data, involving the creation of cost utilization reports, which can be further granularized based on the line of business, market segment, or any other attribute. More detailed models can be built to pinpoint areas influencing the cost significantly and derive actionable insights. Based on their knowledge of business, legislation and socio-economic drivers, and their mathematical and analytical skills, actuaries can interpret data and construct those easy-to-understand reports.

Actuarial experts regularly interact with various stakeholders in the insurance ecosystem to gain domain knowledge, which helps them with ratemaking, optimizing costs, or developing plans to enter a new market. Taking the previous example forward and contextualizing it for health insurance, we can appreciate how actuaries can help with improving combined ratios. They can build provider cost models to understand the healthcare provider landscape better. Those reports would typically consist of total volume each provider receives, types of services they perform, and a provider-to-provider comparison of utilization metrics such as visit frequency, unit cost, and mix of procedures. The reports can be used to analyze cost differences across providers. To do that effectively, actuaries work closely with clinicians to understand treatment plans and interpret the results of the cost model. That helps them to recommend provider benchmarks, identify treatment plans with cost-efficient practices, and discover scalability issues in the provider network.

Actuaries challenge existing approaches to risk analysis and reimagine insurance concepts to accommodate dynamic and emerging business forces. Their role is fluid, agile, and constantly evolving and will be crucial to transforming traditional insurance business models, improving the efficacy of insurance operations, and enhancing the overall policyholder experience.

To learn how the Xceedance actuarial practice delivers value to insurance organizations worldwide, click here.

Neelaakshi Piplani, ACAS is a manager, actuarial services, at Xceedance.

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