AN INSURANCE
REVOLUTION:
How Cloud-Based Industrialization
Will Reinvent Risk Management for
the 21st Century
By Patricia L. Renzi
Principal, Milliman
INTRODUCTION
T
ony Kassimiotis, head of
operations at Phoenix Life, summed
up the dilemma facing the insurance
industry this way: “I wince a little bit when I see all those
spreadsheets. You don’t want to drive your executive decisionsupport framework off the back of Excel.”
Kassimiotis was referring to a serious
operational challenge confronting not just
Phoenix but nearly every major player in
the industry: The tools and systems used to
drive one of the most complex sectors of the
economy are in serious need of an upgrade.
They work, but they do so with sharply
diminishing returns, and with rising costs,
inefficiencies, and risks.
For years, desktop tools, Excel, and
industrial-grade computing hardware have
turned in solid results for actuaries who
often developed and coded the models
themselves. But dramatic changes to the
regulatory environment and increasingly
complex insurance products are putting
enormous stress on these outmoded systems
and processes. Companies that once spent
as many as five months modeling thousands
of interest-rate scenarios now must model
hundreds of thousands of new scenarios
each quarter.
As their existing technology strains under the
weight of these growing demands, insurance
companies are finding it increasingly difficult
to strategically and profitably deploy their
highly trained actuaries. Dramatic changes,
page 2
not more incremental fixes, are needed to
bring the insurance business into the 21st
century. A huge opportunity cost hangs in
the balance.
Fortunately, there’s now a revolutionary,
cloud-based solution—aptly named
Integrate™—that replaces the old tools
and protocols with a state-of-the-art
industrialization platform. Developed by my
team at Milliman for Phoenix Life, Integrate
reimagines the relationships between people,
processes, and technology; manages risk and
maximizes efficiencies; and unlocks the true
potential of human capital to drive business,
not simply manage it.
At Phoenix today, the desktop tools and
manual, redundant, isolated processes are
gone. Integrate is in—and has already reduced
the number of man-hours required to produce
quarterly results by 95 percent and reduced
the elapsed time to get the answers by 97.5
percent. The results are unlike anything seen
before in the insurance industry.
milliman.com/integrate
AN INDUSTRY STUCK
AT THE DESKTOP
A brief history of insurance tech
Why Integrate™, and why now? A brief history of technology
in the insurance sector helps explain. In the 1980s, actuaries
were dependent on IT for the production of financial reports.
Actuaries wrote the formulas and then IT staff implemented them
on mainframes. Operational costs were quantified simply by the
numbers of actuaries and IT staff required to do the work.
Then came the PC revolution, and processing
shifted to the desktop. No longer dependent
on IT departments, actuaries had the
freedom to design and build the models
themselves. Actuaries took full advantage,
developing innovative new products quickly
and efficiently without the overhead of IT
processes such as documentation, code
management, and release management.
While this independence encouraged
innovation, it also resulted in a
proliferation of incredibly complex but
disconnected models and processes. Worse
yet, the actuaries became attached to a
way of working that significantly increased
the operational risk associated with the
models used to evaluate financial risk.
IT costs also factor into the need for new
solutions. In the 1980s, a typical insurer’s
annual costs for actuarial computing
infrastructure hovered around $5,000.
Today, this figure is closer to $500,0001,
and for larger companies it can exceed $3
million. Relying heavily on homegrown
IT infrastructure, many companies are
struggling to meet current needs. And as risk
modeling and reporting demands continue to
intensify, it has become clear that this is an
unsustainable formula.
Critical need for
automation
Another handicap of risk modeling today is
its heavy reliance on manual work. According
to a Society of Actuaries2 survey of 200 life
insurance and annuity firms, “almost all
companies currently input at least some
assumptions manually into the actuarial
models.” The required data generally
resides in a variety of different systems in
very different formats. Often, actuaries are
provided this disparate data and then must
1
”Actuarial models meet the cloud: A perfect marriage?” http://es.milliman.com/
insight/2013/Actuarial-models-meet-the-cloud-A-perfect-marriage/?lng=1048578
2
”Actuarial Modeling Controls: A survey of actuarial modeling controls in the context of a
model-based valuation framework,” Dec. 2012, Society of Actuaries
page 3
milliman.com/integrate
organize, consolidate and manipulate it
to feed the models with the necessary
information. This data is then manually
linked in to the models, creating even
more work and increasing the risk of
human error.
The process has turned seemingly simple
jobs into major undertakings. Annual cashflow testing, for example, which requires
insurers to run models using a small number
of financial scenarios, can often take months
to complete. Other tasks, such as updating
models, refreshing assumptions, and
manipulating results files, account for nearly
70 percent of the time it takes to complete
the cash flow testing analysis. That’s another
opportunity cost for companies that need to
compete for increasingly scarce, high-level
talent in a challenging global economy.
Integrate™ is the first solution to effectively
tear down these silos through the application of
a concept called industrialization. Delivered as
software as a service (SaaS), Integrate provides
a holistic, cloud-based computing environment
that seamlessly introduces collaboration,
governance, and automation to the actuarial
modeling process. And after 30 years, the
change is long overdue.
Doing Too Much
By Hand
Almost all companies currently input some assumptions
manually into actuarial models.
40%
Critical need for
collaboration
Despite the mass adoption of cloud-based
and other Web 2.0 computing solutions
outside of the insurance industry, 68
percent of insurers are still using desktop
applications and personal computers to
perform actuarial modeling, according to
the Society of Actuaries. This has created
a silo effect that makes it difficult for
actuaries to collaborate on critical decisions
about assumptions, methodology changes,
testing changes or reviewing results.
Instead of real-time collaboration, many
companies depend on a clunky workaround:
Actuaries work independently and exchange
information through email or shared
network drives to ensure consistency and
review each other’s work.
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13%
How Data
Is Fed Into
Actuarial
Models
Minor manual
adjustments
37%
Data manually
loaded
10%
Data directly
from source
Other
Source: “Actuarial Modeling Controls,” Society of Actuaries survey, 2012
INTEGRATE™: AN
ACTUARIAL REVOLUTION
The concept of actuarial industrialization plays well on
paper—but prior to Integrate™ , no product or platform
had been able to truly deliver on the promise. Introduced in
2008, Integrate is the first solution to successfully address the
following critical challenges:
Compliance
One of the primary benefits of Integrate
is that it provides a systematic means for
addressing data, assumption and model
governance, reproducibility, auditability,
business continuity, and disaster recovery.
End-to-end automation
Integrate is the first solution to automate
the modeling workflow, the governance and
control of assumption management, and
collaboration across all aspects of model
management. Integrate uses a common
model with various workspaces to specify
the workflows necessary to produce a range
of actuarial analyses, such as cash-flow
testing, valuation, business plan projections,
and capital management. The assumption
management feature provides the ability
to define various versions of assumptions
to be used for different applications and to
manage the governance around the updating
of assumptions.
A new social enterprise
for actuaries
The Integrate
platform is managed
entirely in the cloud,
securely and privately
through Microsoft
Windows Azure. This
allows actuaries
simultaneous, realtime access to the
model. So instead of
40 actuaries working
on discrete portions
of the model on their
own PCs—and then
trying to put all 40
pieces back together
into a working model
Desktop
Dependence
Production (Act.)
Desktop + Production (Act.)
Exclusive Desktop
Desktop + Production (Act.) + Production (IT)
Desktop + Production (IT)
Other
Desktop software and hardware still
dominate the actuarial modeling
environment.
Source: “Actuarial Modeling Controls,” Society of Actuaries survey, 2012
page 5
milliman.com/integrate
without errors—they all work in the cloud
simultaneously. The platform also provides
role-based access to the system, dictating
who can access the model and make specific
changes, which helps smooth workflow and
minimizes errors.
Ultra-scalable processing
Integrate™ gives insurers access
to supercomputer-like calculation
intensity whenever they need it. This
scalability translates into dramatic time
and cost efficiencies (paying only for what
you use) while enabling more robust and
regular monitoring of financial risks. IT
staff, meanwhile, are relieved of managing
infrastructure.
Optimized talent management
Integrate frees up untold numbers of
actuarial man-hours by eliminating low-level
processing tasks and the manual processes
that accompany them. Less time spent on
data and model management means more
time spent on analyzing model results and
higher yields on business intelligence.
New competitive advantages
Understanding capital requirements is
a vital part of the management process.
Many insurers calculate their capital
position using data that is sometimes three
or more months old. Using automation,
scalability, and controls, Integrate allows
for production of this valuable information
on a near real-time basis for quarter-end
data. Additionally, through the use of proxy
modeling tools, Integrate provides the
ability to monitor and manage the impact
of actual changes in the capital markets on
a daily basis.
page 6
Case Study: The Phoenix
AST Project
Integrate is a proven industrialization
solution, as evidenced by the success of a
three-year project with the Phoenix Group,
the largest specialist life and pension fund
consolidator in the UK.
Immediate Impact
with Integrate™
BEFORE
AFTER
Models
77
1
Fund-specific methodologies
Hundreds
1
Manual processes
900
44
ICA production time
4 months
3 days
Sources: InsuranceERM; Milliman
The challenge: At the start of the
project, Phoenix managed over 900
manual processes and hundreds of fundspecific methodologies, with a quarterly
reporting process that took four months
to complete. Phoenix sought not only to
reduce the complexity of its modeling
process, but to reduce the complexity of
the business itself—reorganizing from 13
separate companies down to three—as
well as to meet new regulatory demands.
The solution: Rolled out in phases, with
the client seeking to completely industrialize
and automate as much as possible, Milliman
worked to shift Phoenix’s entire actuarial
infrastructure to the cloud—eschewing less
flexible in-house grid options.
As Mark Hutton, Phoenix’s chief of actuarial
reporting, explained recently, “Private
grids don’t allow you to gear up to your
peak demand. You get only 5 to 10 percent
utilization.” Switching to Integrate™,
Phoenix now has “virtually unlimited IT
resource capacity. It’s been tested on up to
50,000 processing units.”
page 7
With Integrate™, we’ve shown that cloud-based
industrialization—if properly implemented—can
improve risk management, maximize operational
efficiency, and enable a more strategic allocation of
human capital. Getting there, however, requires the
willingness to make the leap. And a leap it is—the
old ways simply need to be retired.
Change is never easy, but insurers that make an
honest appraisal of their current actuarial modeling
environments are likely to conclude that the riskiest
thing they can do is to simply stand still. “You can
only patch systems up and make them achieve the
current requirement for so long,” says Mark Hutton.
“Ultimately, you’ll face the huge risk of doing nothing.”
page 8
milliman.com/integrate
Milliman is among the world’s largest providers of actuarial and related products and services. The firm has consulting practices
in healthcare, property & casualty insurance, life insurance and financial services, and employee benefits. Founded in 1947,
Milliman is an independent firm with offices in major cities around the globe. For further information, visit milliman.com
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