Reflections and predictions on the actuarial value proposition

The panel of four reputable and experienced general insurance actuaries shared their views and stimulated the audience to think about the future for actuaries as a profession.

The session started with Tim Clark (EGM, Enterprise & Financial Risk, IAG) who said, “as actuaries, we have been involved with equitable decision making since our inception”.

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Based on the book The History of British Actuarial Thought, Tim took us through the history of actuaries’ involvement in equitable decision making such as:

• Life tables – an actuarial invention which segmented mortality risk by age, occupation and gender and the philosophical unpinning that cross subsidisation should be minimised;
• Life insurers’ utilisation of Terminal bonus structures to manage market value assets and unrealised capital gains;
• Surrender value basis and dealing with Accrued Benefits in pension funds;
• In general insurance, appropriate profit margin for statutory classes in Australia and quite broadly in the US and Continental Europe in their ‘file and write’ systems; and
• Setting reserves whilst balancing policyholders’ and shareholders’ interests.

From the above examples, it is clear that actuaries have a role in analysing pools of risks and ensuring financial ‘equity’ for members within the pool. That is, ‘fairness’ to members within the pool. However, the notion of ‘fairness’ has been examined in quite a different light when it comes to the scrutiny that the insurance industry is currently facing.

“One theme that came through all the reports is around community expectations.” Estelle Pearson (Founding Director, Finity) commented on the Royal Commission into Financial Services.

“A question that actuaries need to think about is the difference between equity and fairness. When we think about equity, we think about equity in the pool. When we think about Fairness, in particular with respect to the Royal Commission, we think about fairness to the individual case.

“One example I thought of is about investigation of potential fraudulent claims. It’s good for the pool to investigate into fraudulent claims. But if you are on the receiving end of those investigations, and if your claim is not fraudulent, then it becomes a traumatic experience. So, investigations are good for the pool, but not for the individual.”

Estelle provided an overview of the major findings, outcomes and recommendations from the Royal Commission. She also highlighted certain findings which are related to actuarial work that can change our mindsets going forward.
 
“Regarding add-on insurance or poor value products, as Appointed Actuaries in their Financial Condition Reports, we report on premium adequacy, ‘Are premiums adequate?’ ‘Is there enough profit?’ ‘Will we be solvent?’ But how often do we say, ‘This product looks like it’s too profitable?’ ‘This looks like it has too much commission?’ ‘This doesn’t look like it’s giving a good return to the customer?’”

Estelle discussed the anti-discrimination report by the Victorian Equal Opportunity and Human Rights Commission (VEOHRC) and challenges for actuaries involved in product design and pricing whilst tackling sensitivities around mental health.

The ‘Fair-minded cover’ report focused on the use of a blanket exclusion for mental health conditions in travel insurance policies, which is in breach of anti-discrimination laws. However, the law permits discrimination if it is based on ‘actuarial or statistical data on which it is reasonable for the insurer to rely’.

Referring to recent cases, Estelle commented that, “If there is a discriminatory act based on our advice, we have to make sure our advice is based on sound data”.

David Whittle (Director, Deloitte) continued the conversation by examining the “wave” of proposed legislative changes coming out of the Royal Commission, including:

• Design and Distribution Obligations (DDO) which will come into force in 2021;
• Claims handling as a financial service;
• Unfair Contract Terms (UCT) extended to general insurance; and
• Restriction on sale of add-on insurance products.

He commented that actuaries as a profession should be involved as ‘part of a solution’ and work with regulators, government and community to make the problems less likely to re-occur. Though he questioned the full effectiveness of the proposed ideas, he emphasised the importance of involvement of actuaries in crafting the details of recommendations to put into practice.

“Echoing Tim’s comments, this is a chance for us to go back to our roots as our profession – providing insurance products that are fair within institutions that are sustainable – financially sustainable but also sustainable in terms of public opinion… giving us that social licence to keep operating and that is a big part of what actuaries are for”.

Under the DDO, he posed a question for actuaries to consider with respect to ‘Target market determination’ – who are the appropriate people that a product should be sold to? A product may only be of value to a subgroup of a broader group that the product is actually sold to. The issue of segmentation is subtle and complex and requires a deep understanding of data, including a company’s own data as well as broader demographic data. This is a critical issue where actuaries need to be part of the solution.

David also asked the profession to consider their deep understanding of how insurance works to reflect their views on the impact of proposals.

For example, what is the impact on potential under-insurance if there is a mandatory four-day wait for purchase of travel insurance after the traveller completes their travel booking? In this way he encouraged actuaries to think through the implications of removal of certain clauses under the UCT.

Shifting the picture to the rise of data analytics, Karl Marshall (Chief Actuary, QBE) raised that actuaries now have a much wider range of problems to solve, access to more data than we have ever had and a vast array of tools, but also face competition from emerging professions such as data scientists. Despite this setting, he maintains that the actuarial value proposition remains.

“Actuaries have domain knowledge and deep understanding of our domains. We are good at problem solving – we are good at designing solutions for business. We have technical capability, including that of new technologies.

We have financial acumen, we understand what the analytics mean in terms of financial outcomes. We are bound by professional standards. We have commercialism and bring insights and foresights from data. We are well placed to communicate the outputs of data analytics, including the pitfalls and opportunities.”

With that, Karl encouraged actuaries to partner with data experts, technology experts and management consultants in furthering these pursuits.

He also talked about the opportunities that arise out of using external data (e.g. Open Banking data) though actuaries need to consider the ethical use of data and help to draw the boundaries. This, again, is another domain actuaries can act under our ‘social licences’.

In closing, the panellists left the audience with a lot of food for thought and also stirred a lively discussion on how the actuarial profession’s voice can be raised. This could include through the FCRs. At this point, all general insurance actuaries were called to actively volunteer for the Institute and contribute their thought leadership and be part of the actuarial voice whose opinions are well sought after by various public institutions, including APRA and ASIC.

Watch the session in full.

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