It is increasingly important to be able to articulate accurately, adequately and appropriately without confounding or misleading the audience, says Sonal Shah
In last month's edition of The Actuary, both the magazine's editor and the President of the Institute and Faculty of Actuaries drew attention to the importance of soft skills, including communication skills.
Unfortunately, actuaries suffer from an uncomplimentary stereotype of being poor communicators. We would do well to cultivate good communication skills, including for that key product - documentation. This can take a number of forms, with those most relevant to actuarial work being:
? Recording the application of knowledge, such as methodologies and assumptions;
? Recording of events and processes that might be required as evidence, such as for regulatory purposes.
Most of us have encountered frustratingly poor documentation due to inaccuracies, incompleteness, irrelevance, ambiguity, disproportion and obsolescence. Poor actuarial documentation is the consequence for a number of factors, including the resource-intensive nature of creating and maintaining adequate documentation, and the fact that many actuaries are not keen on writing.
Solvency II has put an unprecedented spotlight on documentation in the insurance industry, and this has had consequences on the work done by actuaries. While some view documentation as a regulatory burden or formality, there are concrete benefits to be gained from good quality records.
This article focuses on some key tangible benefits of sound documentation, with supporting excerpts taken from a couple of documents recently issued by the European Insurance and Occupational Pensions Authority (EIOPA): Guidelines on Pre-Application of Internal Models, and EIOPA Final Report on Public Consultations No. 13/011 on the Proposal for Guidelines on the Pre-application for Internal Models. The excerpts relate to the making of assumptions and application of expert judgment, as these are prevalent and significant in all fields of actuarial work.
A better understanding of the importance of documentation may lead to changing attitudes towards this - often neglected and disliked - area of actuarial work. Besides meeting regulatory requirements, investing resources and utilising suitably skilled actuaries in amassing a functional suite of documents can be very useful in a number of areas, notably: sharing knowledge, promoting clarity, encouraging enhancements, facilitating review, and demonstrating competence.
Documents are valuable sources of reference for sharing knowledge with both internal and external stakeholders, such as management, new staff, colleagues in different departments, regulators, rating agencies and independent validators. Relevant documentation supports the induction and training of new joiners in a team, and user-friendly documentation provided by developers and vendors of software supports clients' understanding of the products, thus reducing the demand for resource-intensive support.
There may be instances where specific information is known to only one or a few people in a company; for example, rationale on values to be assigned to certain parameters. There is the risk of the loss of such important information upon the departure of such staff. Detailed documentation of this knowledge would greatly expedite familiarity. This is vital for developers of software products, which can take several months (or years) to create. If there is no thorough documentation of the evolution of the software, it can be extremely burdensome to recreate, understand and test specific parts of the original program.
When a particular process is to be followed in a consistent manner across a company, diligent documentation considerably helps this objective: "Through the pre-application process, national competent authorities should form a view on how the insurance or reinsurance undertaking documents the assumption setting process, and in particular the use of expert judgment, in such a manner that the process is transparent." (Paragraph 1.61 of the EIOPA document, Guidelines on Pre-Application of Internal Models.)
Documentation promotes lucidity and transparency, as it compels articulation of ideas that may otherwise remain abstract. Ambiguous, wishy-washy interpretations of concepts such as risk appetite and materiality get refined and defined when required to be committed to paper, enabling a consistent grasp of such concepts.
Making assumptions and the application of judgment are central to actuarial work. Documenting these encourages care and clearer thinking. Creating comprehensive documentation encourages examination of the 'big picture' and facilitates clarity around the thought process: "EIOPA considers [ ] documentation and validation as crucial for undertakings as expert judgment is generally most important in the frequent case that there is a lack of data and the assumption setting process involves a large degree of subjectivity. It is in their own interest to ensure that assumptions are set as a result of a validated and documented process." (Paragraph 3.46 of the EIOPA document, EIOPA Final Report on Public Consultations No. 13/011 on the Proposal for Guidelines on the Pre-application for Internal Models.)
Where quantification of risk and uncertainty requires a significant degree of 'guesstimation', this can be made clear by documenting the appropriate caveats and constraints, along with the rationale for the selections made.
When faced with an instance whereby articulating is proving exceptionally challenging, it is beneficial to think about why this may be the case instead of perceiving it as a nuisance. It may be that the problem stems not from a lack of writing skills but from lack of clarity in understanding and interpretation.
A situation where something is tricky to explain and vaguely expressed, provides the opportunity to question what needs to change in the underlying work, encouraging re-thinking and enhancing approaches.
Good documentation provides a clear trail of the various steps followed, thus making it easy to identify areas needing improvements. Documenting concurrently with the progression of a project helps to expose problematic areas, providing timely feedback to remedy the problems.
Consider as an example planning the contents of a capital modelling methodology document. Integral to this process is a discussion of the key assumptions feeding into the model, and how the validity and sensitivity of these assumptions have been ascertained. What may have been an assumption employed without much attention having been paid to it now gets its due consideration and investigation. Documenting the process gives rise to the opportunity to test it so as to better understand its impact and sensitivity, perhaps leading to enhancing it, or even replacing it with a more suitable alternative.
There is a clear benefit in having a better appreciation of key drivers of the model: "National competent authorities should form a view on how the insurance or reinsurance undertaking establishes a formal and documented feedback process between the providers and the users of material expert judgment and of the resulting assumptions." (Paragraph 1.59 of the EIOPA document, Guidelines on Pre-Application of Internal Models.)
Good documentation appreciably facilitates review of work carried out, especially when the subject is complex or cannot be easily followed, such as in spreadsheets or meeting minutes. Often, actuarial work requires multi-faceted processes. These are used to test different hypotheses by making use of a number of assumptions and judgments to simulate possible real-world outcomes so as to quantify numerous areas of uncertainty.
Well structured, methodical documentation allows a reviewer to follow the stages of the work and reasoning applied at each stage, including understanding the limitations of the approach adopted relative to alternative approaches. "National competent authorities should form a view on how the insurance or reinsurance undertaking makes sure that users of material assumptions receive clear and comprehensive written information about those assumptions." (Paragraph 1.64 of the EIOPA document, Guidelines on Pre-Application of Internal Models.)
A coordinated approach to documentation both expedites and harmonises review tasks, especially for reviewers such as senior actuaries, regulators and project managers looking at a number of such documents. Consistency of documentation amongst different entities, lines of business, and so on, facilitates the review of the entire suite of documents. Omissions and contradictions of details in one document compared to another can be more easily recognised when documents are standardised. Comprehensive documentation also contributes to an audit trail, facilitating reviews by both internal and external auditors.
One key purpose of some documents is to demonstrate proficiency. Examples of such documentation include project proposal packs, magazine articles, web-based marketing literature and regulatory reports. Often, the documentation sent to stakeholders such as clients, regulators, investors and rating agencies forms the basis for the impression that is formed about both the author's and firm's capabilities.
Well-structured, professional documents with clear and relevant content inspire confidence and contribute towards demonstrating competency. They can serve to be compelling evidence of the attributes of processes and abilities of the people involved in them and even boost the perceived quality of the processes and people.
This is not to say that the lack of sufficient documentation is a consequence of a deficiency in processes and people; however, without adequate documentation, assessing competency becomes a far more onerous task. Once a poor impression has been created owing to sub-standard documentation that compromises confidence, it can be quite a task to convince someone otherwise.
Putting in focused effort to amend and enhance the inadequate documents not only helps to demonstrate competency but also carries the associated benefits already discussed in this article.
In conclusion, the case for clear, concise yet comprehensive communication - including documentation - can perhaps be succinctly summed up by quoting Albert Einstein, who is alleged to have said: "If you can't explain it simply, you don't understand it well enough."