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Modernization: Actuaries Must, Too

To effectively produce a variety of new financial reporting, reserving and risk metrics, actuarial departments will need to modernize with new tools, hardware, processes and skills. This will be a significant undertaking, especially considering how most organizations and regulatory environments are constantly changing. Re-engineering projects will require careful planning and will affect people, processes and technology. Developing a modernization strategy that provides a path to real change includes visualizing a compelling future state, articulating and communicating expectations, defining a roadmap with achievable goals and avoiding overreach during the implementation.

Case for change

The insurance market has changed significantly in recent years, which has had a particularly pronounced effect on how companies operate, meet internal and external demands, report externally and comply with regulations. However, many insurers have not modernized their actuarial functions to keep pace with these changes and are struggling to effectively meet not just existing demands but also impending ones.

Specifically, drivers of actuarial modernization include:

  • Internal drivers – The audit committee seeks assurance that reserves and risk-based capital are sufficient and being determined in a well-controlled environment. Senior management wants actuarial departments that work toward the same strategic goals as the rest of the company. Business units are looking for trusted actuarial advisers who can collaborate effectively with them, as well as develop practical solutions to complex problems to help them meet their business objectives. Lastly, the finance department needs timely insight into how the reserve movements affect earnings and equity.
  • External drivers – The need to issue financial reports under multiple accounting bases necessitates the adoption of new processes as well as the collection of additional data. Similarly, regulatory requirements have mandated additional analyses, various views of the book of business and a push toward more forward-looking information. Other external parties, including investors and rating agencies, demand more information with a greater degree of transparency than ever before.

The modernized actuarial function

In a modernized company, the actuarial, finance, risk and IT functions have clearly defined, collective expectations and utilize common, efficient processes. More specifically, the following characterizes a modernized actuarial function:

  • Data – The organization, with significant actuarial input, clearly defines its data strategy via integrated information from commonly recognized sources. The goal of this strategy is information that users can extract and manipulate with minimal manual intervention at a sufficient level of detail to allow for on-demand analysis.
  • Tools and technology – Tools and technology enhance the effectiveness of the actuarial department by delivering information faster, more accurately and more transparently vs. the traditional, ad hoc computing done by end users. Specifically, tools that use data visualization can more effectively convey trends and results to management. Algorithms can be programmed to automate first-cut reserving and other actuarial analyses each reporting period based on rules that can help point staff to business segments that may require deeper analysis in the quarter.
  • Methods and analysis – Modernized actuarial organizations enhance traditional actuarial methodologies with additional cutting-edge methods that yield superior insights (e.g., predictive analytics, which have transformed personal lines pricing and are being adopted in the commercial arena). Another example is stochastic analysis, which enhances deterministic approaches with statistical rigor, helps actuaries prepare transparent reserve range indications and enables management to better understand uncertainties.
  • Processes – Operations are reviewed from the top down and well-defined in terms of controls, responsibilities, timing,and outputs, particularly in the quarter-close procedures for reserves. Automation of key processes is a primary organizational objective. Modernized actuarial organizations have streamlined processes that eliminate unnecessary or excessive evaluation.
  • Organizational structure – The ability to deliver superior business intelligence to management often depends on how an organization uses its actuarial resources. Many companies are debating the merits of centralized, decentralized or hybrid organizational structures. While each structure has its own set of advantages and disadvantages, organizational structure is not the most vital factor in a function’s success. Rather, it is much more important that actuaries serve as trusted advisers to company stakeholders while fostering a culture of innovative thinking that identifies new information and opportunities to test, learn and scale.
  • Reporting and governance – Strong governance, particularly around data, analysis review, challenge, issue escalation and resolution and reporting are cornerstones of a modernized actuarial function. Actuarial functions solicit stakeholder input on information demands and provides consistent, quarterly reporting packs that satisfy these stakeholders’ reporting demands. Additionally, modernized actuarial functions have formal policies and procedures that clarify the roles and responsibilities of management, reserve committees and the audit committee.
  • Business intelligence – Modernized actuarial functions focus on providing operational metrics that meet individual stakeholder needs and objectively relate business performance. For example, senior managers often desire corporate dashboards that provide them access to real-time information on business performance to help them make strategic decisions.

Benefits of insurance modernization

A modernized actuarial function produces insightful, strategic information and allows the actuarial function to deliver the value management desires while meeting external stakeholders’ regulations and demands. Modernized actuarial functions have robust feedback loops within pricing, reserving and capital management.  Additionally, the modernized actuarial function understands the business’ fundamental performance and takes an active role in helping management define the company’s future direction.

Modernization represents a fundamental shift in the actuarial function priorities. Traditionally, the actuarial function has provided a retrospective look at business performance despite various data, technology, process and personnel limitations. However, modernization seeks to address these limitations and allow the actuarial function the freedom to innovate, dig deeper into the business, provide forward-looking insights and have a strategic partnership with management.

At modernized insurers, tailored reports direct actuaries’ attention to portfolios with unusual characteristics. Automated programs quickly populate various templates for additional ad hoc analyses and drill-down investigation. Data visualization tools provide management comfort with findings and remediation recommendations. Cross- functional reporting and implementation teams fluidly improve on-the-ground results. Research features exploratory environments (“sandboxes”) and widespread data access that helps innovators discover emerging trends early, leading to potential differentiators. As an added benefit, actuarially modernized functions operate at a much higher level of efficiency, with greatly reduced levels of time needed for manual processing and data manipulation.

Factors for successful modernization/ key considerations

The thought of overhauling entire systems, processes and functional areas may feel overwhelming for company executives. This is understandable, as comprehensive modernization is a long journey that likely will have a significant price tag. As a result, many companies address modernization in steps. Although, in an ideal world with limitless resources, modernization could occur in a “big bang,” there is significant value in first addressing the areas in most need of modernization (while maintaining an overarching focus on holistic modernization). As one area becomes more streamlined and efficient, other areas will start to reap the benefits.

Regardless of the breadth of modernization initiatives, modernization strategies will require a holistic consideration of data, methods and analyses, tools and technology, actuarial processes and human capital requirements.  These strategies will also need to address the business and operational changes necessary to deliver new business intelligence metrics. Any weak links between these closely connected components will limit the realization of actuarial modernization.

Although a modernization strategy should be holistic to avoid “digging up the road multiple times,” it is possible to tackle modernization issues in logical, progressive ways.

Achieving the vision

The first step is a comprehensive assessment of current processes and identifying the areas in greatest need of modernization. If we consider each modernization dimension (e.g., data, processes, technology, etc.) as a gear in motion, the first step to modernization  involves identifying which gear in the function does not work in concert with the others. Stakeholders should collaborate on creating a comprehensive plan of action with an objective view of the dimensions that require immediate attention, while keeping in mind how each gear affects the organization as a whole.

Breaking Through The Barrier Of Hardnosed Workers, Part 2

Righting The Ship Wrongly
For torturous purposes, let’s say that you are an executive manager who has inherited the type of hardnosed workforce described in Part 1 of this series.Your laborers are largely emotionally repressed, unsympathetic, narcissistic, uncontrollable and prone to permanently go AWOL. Ditto for your supervisors and managers. Collectively, your work force constitutes a change-resistant barrier that thwarts every attempt at achieving continuous improvement.

As risk strategist Greg Pena suggests, you set about to correct the obstructionist nature of your workforce. Otherwise, your best management efforts are “doomed from the start.”

Which quick-action strategy do you choose?

  1. Create and enforce more rules designed to secure better worker behavior?
  2. Implement a system of rewards and awards designed to reinforce good behavior?
  3. Pursue an aggressive program of quality assurance that requires strict behavioral compliance and reporting?
  4. Institute a behavior observation program that results in establishment of improved work procedures and oversight?

This is not a trick question.

Damage Control

To begin, you might start by quickly doing what others have traditionally done in similar situations.

  1. Assess where the most “damage” is being done by the most resistant workers.
  2. Speed headlong in pursuit of the holy grail of gaining control of those workers.

You do this because you’ve been taught that lack of control is the foundational cause of rebellious behavior. Control is considered a weapon. To heck with human resource management laws and employee management policies. They are slow, ineffective weapons of change. You need something that works quickly.

So to gain instant influence, you deploy whichever of the quick-action strategies (above, a–d) that you think will give you the fastest results. Each approach promises control; all are known quantities. Together, they constitute the bulk of management’s current wisdom in wrestling control from hardnosers.

The strategies are as follows.

a. Control By Directive — create and enforce more rules.
This is an old tactic closely associated with authoritarian or directive leadership style — it is dependent upon the strict use of the chain-of-command for enforcement. The strategy involves using rules and regulations to achieve (by demand) behavior compliance — control. It is the attempt to regulate and regiment behavior.

b. Control By Incentive — implement a system of rewards and awards.
This is a popular method of gaining control because it seems to “make the most sense” when it comes to worker motivation. It is based upon the belief that workers will be motivated to better behavior if they receive objective rewards, incentives or other strokes of positive reinforcement. Typically these take the form of safety awards, cash rewards or financial incentives that depend on the utilization of performance evaluations, merit ratings, or periodic reviews.

c. Control By Quality — pursue an aggressive program of quality assurance.
This is an old but evolving strategy, currently masquerading as the GRC (Governance, Risk & Compliance) movement. It promises the possibility of simultaneously achieving quality assurance, risk control, regulatory compliance, and behavioral control — with a dash of ethics, integrity, and maturity thrown in — if only we pursue the perfect quality assurance processes. This strategy started as the ISO quality certification process in which rigid paperwork and reporting processes are utilized by managers as an accountability tool.

d. Control By Observation — institute a behavior observation program.

This is a relatively new approach to gaining control of worker behavior. It is known by its popular name, behavior-based safety. In this approach, workers are trained to make intense and frequent observations of common work tasks in order that they might consult together and develop better methods for carrying out the work task. Workers are also taught the basics of how to communicate with each other when feedback is given on performance of work tasks. They are typically required to submit observational reports to authorities.

You don’t need to look hard to find assistance in whichever line of attack you choose. Professional pundits and practitioners of each stratagem are plentiful. So you select a plan. And it initially appears to work.

But its effectiveness in providing you anything other than short-term victory is sadly wasteful — your plan does not consider the characteristics of hardnosed behavior described in Part 1 of this series. None of the traditional control strategies do.

Eventually, you join the ranks of the frustrated transportation manager (Part 1) who implemented a safety training observation program, improved his operational policies, and led his organization in the ISO 9000 certification process — all to little avail. He still couldn’t control his hardnosers.

Changing the emotionally insular nature of rejection-prone people is hard. But as the manager stated, “The alternative, letting them continue to drag our company down, is not an option.”

Rejection On Demand
The fundamental mistake made by a majority of managers is assuming that control is the main issue, that control reduces resistance. And while control certainly occupies a high priority, the real issue is how it is obtained and why it is necessary to sustain it.

The tendency is to forget the lesson learned by all authorities. Any attempt to gain and maintain control of people in the wrong way ultimately results in the rejection of the authority.

Historian Page Smith states it this way. “The whole course of history indicates that one of the most potent bases of common action is a common sense of unjust subordination.”

Unjust. Fair or not, that’s how the common hardnoser views your attempt to gain control of him when you employ any of the well-intentioned strategies listed above. Setting aside the perception of justice, the hardnoser makes a valid point. Many times management demonstrates that it doesn’t know how to gain control, nor bother to explain why it is necessary.

What? Is Not The Question
Tom Slattery, Environmental Health and Safety Manager at POET Plant Management, pulls no punches in holding management accountable. “The way management and safety people talk to and treat the workforce,” he says, “is largely responsible for the ‘bad attitudes’ in the workforce.”

Slattery cites instances in which management says it wants one thing yet subtly rewards the opposite, essentially abusing its control. Placing himself in the mix, he says, “We do not follow through on promises, ask for true employee participation, nor explain the ‘why’ behind policies.”

In the realm of change-resistance, telling someone what to do and how to do it without telling them why they are doing it — why it is to their benefit to do it — is a cardinal sin. As Slattery emphasizes, telling them poorly adds fuel to the fire. It is the equivalent of assuming the listener has no needs other than the need to obey the management. Part 3 of this series explores the depth of the disdain created by this assumption.

Any child knows that asking an uncaring parent the why question (in a response to a command) almost always solicits the brusque answer, “Because I said so.” Yep, that really works.

Ignoring the need of workers to know why they must relinquish autonomy in order to follow the lead of management will provoke resistance from even-tempered people, much less needy hardnosers. Yet historically, that’s what management has done.

In the attempt to gain control of hardnosers, we’ve employed a lot of ‘what to do’ and ‘how to do it’ tactics without first considering the felt needs of the worker. Management asks for the rejection it anticipates.

As a result, a Cycle of Rejection develops. Most organizations that spawn hardnosers are guilty of entering this 6-step cycle. As illustrated below, the black colored steps represent management; red represents workers.

The 6 R’s Leading To Rejection

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Frequently the cycle of management missteps — the six R’s — that reinforce an ever-increasing change-resistant work force is as follows. If the object is control, this is how not to get it.

Revelation — Often using poor and impersonal communication, management tries to educate the worker with bits and pieces of the performance puzzle, most often “what we want you to do” and “how we want you to do it.” These are typically the minimum requirements of compliance — the policies, practices, or procedures that the worker is expected to obey/follow.

Response — The worker responds negatively to poor communication and perceived command-and-control tactics — they remain largely unresponsive to performance expectations. The worker equates poor communication with perceived neglect of both his real and felt needs. He begins to develop an attitude of skepticism/pessimism towards management.

Rationalization — Based upon the worker’s non-response, management perceives a resistance in the worker. Rationalizing that the only way to accomplish its desired performance goals is to use more direct commands, they resort to directive leadership methods designed to seize control of the sources of resistance and to force worker compliance.

Regimentation — Upon rationalizing that the worker will only respond to authoritative command structure, managers put forth a regimented series of operational rules and regulations — more specifics about what to do and how to do it — designed to force the worker to shape up (comply).

Resistance — The worker resists management even further, thinking that management is overbearing and taking away his ability to conduct his job as he sees fit. The process of addressing performance management through poor communication skills and mistaken tactics results in an increasingly change-resistant hardnosed worker.

Repeat — Management redoubles its effort to control the worker without rethinking its strategy. Nor does it stop to analyze the nature of the resistant worker and his felt needs. Repeated failure to do so leads the worker to forthrightly reject any and all attempts by management to seize control. To the worker, management becomes an unjust usurper.

Management’s inclination to simultaneously consider the steps of Rationalization and Regimentation are why they appear back-to-back in the cycle. As management becomes more entrenched, determined to win the control war, the gap between the two steps narrows. It becomes easier to rationalize that more regimentation is needed.

Duck & Cover
What the Cycle of Rejection illustrates is the futility of thinking that command will result in the control of hardnosers. Quite the opposite. But while it’s folly to follow this path of thinking, there is an even more damaging option to choose: doing nothing.

An operations manager whose supervisors had long been on the road to rebellion had this exact strategy in mind — do nothing — when he sheepishly asked the author, “You aren’t going to stir the pot, are you?”

The manager was worried that a few forthright words from the author’s keynote address to the supervisors would enflame the emotions that lay, he thought, comfortably submerged below the thin surface of civility. Yet his boss, the business owner, wanted a permanent solution to his hardnosers’ resistance. He wanted to take back control of his workforce. But no one knew how, much less why. Part 3 of this series will show you both.

Yes, the pot will be stirred.

Bibliography

“Focus On Teamwork, Attitude Improves Quality And Safety.” The Waterways Journal. April 25, 1994: 41-44

Newton, Ron. No Jerks On The Job. Irving, TX. PenlandScott Publishers, 2010.

Riddle, Glenden P. An Evaluation Of The Effectiveness Of Stress Camping Through The Use Of The Taylor-Johnson Temperament Analysis Exam. Research Project. Dallas Theological Seminary, December 1978.

Taylor, Robert. Taylor-Johnson Temperament Analysis Manual. Thousand Oaks: Psychological Publications, Inc., 1992.