Joanne Joseph talks to Tom Wilson about major impending risks, the benefits of big data, how regulation can spur innovation and how actuaries can broaden their horizons.
Don't be fooled by his American accent: Tom Wilson is well and truly used to spending his personal and professional life in Europe. He has worked for the last 28 years in Zurich, London, Amsterdam and, for the last 10 years, in Munich. His career spans finance and risk in the insurance and banking sectors, including CRO or divisional CFO roles in large corporations such as Swiss Re and ING, as well as McKinsey and Oliver & Wyman. He now finds himself at Allianz.
When asked about the high points of his wide-ranging career to date, he proudly states: "I believe that I have left companies better off than when I started. I have tried to help them achieve something more - through balance sheet resilience or capital allocation for the benefit of shareholders and policyholders, improving understanding of the business or having a positive impact on corporate culture."
An overview of the risk landscape
Asked about the major risks affecting large insurance companies, Wilson breaks them down by timeframe. In the short term, he sees financial risk as critical, given its significance for life retirement balance sheets - ahead of more traditional risks such as natural catastrophes or longer term risks such as climate change. He believes a downturn of the financial market could be due soon, potentially fuelled by unstable global political relationships. In the medium term of three to five years, Wilson stresses the increasing importance of regulatory changes affecting taxes, capital requirements or market conduct and sales practices. Also of critical concern over a mid-term horizon is cyber risk. "We don't have a good handle with accumulation scenarios," he says. "It's a challenge because those accumulation scenarios change as the attack vectors change, as defences change, and it's not clear if traditional underwriting approaches will be amenable." It is also unclear whether cyber terrorism is insurable, and what the true definition of it is, adding an extra layer of uncertainty.
Long term, technology is his top choice: "The question is, what will the business system look like in the next 10-15 years in terms of acquisition, and customer lifetime management, underwriting, claims management, third-party administration businesses and so on? Second, what will the profit pool look like in the face of technological and demographic changes?" In Wilson's view, FinTech is likely to result in disaggregation of the current business system. This could severely impact how acquisition of business is done in the future - tied agency networks will be increasingly challenged by new competitive ecosystems or even by artificial intelligence robots. Another area of potential impact is motor insurance. The growth of megacities and the sharing economy will see car ownership decrease, and become concentrated, replacing B-to-C with B-2-B insurance offerings, while autonomous vehicles will substantially reduce frequency, all which will bring motor premiums down.
Risk management is driven by early identification of risks, Wilson believes - "by the time I see the risk show up in my numbers, it's too late". It is important to keep abreast of the development of risks and to stay close enough to the business, so that you can identify risks as they develop - rather than when they show up on your radar. Through job rotations, people development and "walking the walk" Wilson has built a network of risk-aware individuals within the organisation to ensure he can stay on top of risk management. These individuals are involved in business decisions on a regular basis, as the issues are emerging, rather than hitting once the risks have crystallised.
Allianz is classified as a 'globally systemically important' company - which means it has higher capital requirements and greater regulatory oversight. Despite the additional requirements imposed by regulators, Wilson insists the positives outweigh the negatives: "The advantages of having the critical mass and a strong enterprise risk management framework, and being able to influence decisions, mean that we can lead the market in terms of capital allocation decisions - whereas maybe some smaller companies who are less burdened by regulation are not as empowered."
Despite his positive view on regulation, Wilson believes that there could be a less formal approach, which would increase alignment between regulatory reporting and business need. He maps out the Solvency II Own Risk Self-Assessment (ORSA) process: "From a formalistic sense, I do my balance sheet and risk planning projections in September, I refresh the analysis with year-end data in March/April and then present to the board and submit the results to the regulator in June/July. It is already nine months old and the board has moved on in terms of reviewing our current and forecasted capital position - in fact, we review our projected capital and liquidity requirements every two weeks. This process, and not a backwards-looking annual report, is the hallmark of a dynamic ORSA."
He outlines the difficulty of balancing the growing financial reporting landscape and shareholders' information needs, and how these aspects result in necessary innovation. "We have an increasing shareholder expectation for value creation despite challenging growth conditions, which means that either I get more efficient or I could turn into a pure reporting unit. In terms of meeting shareholder expectations, we are very well positioned to innovate, simply because the need is higher. If we don't innovate, we will be stifled by our tasks and relegated to a pure controlling perspective." As Wilson explains, risk innovation means addressing interesting issues, for example, how capital is allocated to different segments of the business and regions, whether capital is appropriately renumbered, and whether peak accumulations are within risk appetite.
Big technology or big fuss?
Interestingly, Wilson does not see as much value from big data or artificial intelligence on the corporate side of the business in the near term. Rather, he feels that the positive impact is likely to be more prominent on the front end. He discusses the benefit of using enhanced technical tools to acquire, underwrite, cross-sell and retain business. These can help optimise the customer lifetime value, which has a tremendous amount of power. Additionally, he proposes the idea of using artificial intelligence to use robo-advising for life-cycle savings products and to make investment decisions on a more effective basis, which would be very disruptive for the life insurance industry. "This will add value where we are managing customer lifetime value. We are making propositions to customers based on better underwriting decisions. These should make the customer happy, but also ensure our customers are profitable customers."
However, Wilson also believes that the industry faces some challenges that neither big data, nor small data, can overcome. "For example, what are the relevant cyber accumulation scenarios in the dynamically changing technological landscape? Analogously, what are the possible implications of a polarised, populist political system or the current anti-globalisation trends? These types of scenarios that are relevant today are not in big data or small data simply because we have never lived through them before; rather, they are continuously evolving into completely new threat. As such, I believe that thoughtful and creative scenario analysis is equally as important as a greater reliance on big data."
The value-add actuary
We move on to discuss the role of the actuary in organisations. It's clear that Wilson respects actuarial contribution but observes that actuaries often too narrowly define themselves based on function, whether it be reserving or pricing. He suggests that in order to take a broader role, we should seek out the meaningful questions facing the organisation, for the benefit of the policyholders and shareholders. He strongly believes that actuaries can add more value to businesses. "If you want more business impact, you have to be prepared to apply your toolkit to broader and more impactful questions. Insurance is a very technical business, but it doesn't mean that you have to be in a very narrow niche of it."
He goes on to discuss how actuaries can have an active role in organisations' ability to maintain relevance in the future. "Maintaining relevance isn't going to be about looking backwards with the data we have today - it's about asking questions about the future. Being successful will require a better, broader and more commercial view and making sure you have the emotional intelligence to build the consensus that is necessary to change an organisation."
Words of wisdom
What advice does Wilson have for actuaries hoping to develop a successful career? "First, don't be afraid to ask questions. Life is complicated, and to fully understand all the implications of business decisions, you need to understand the human context, the commercial context and the possible trade-offs. None of those will be transparent - asking questions is the way you're going to learn."
Second, success is not just about understanding problems, but also about fulfilment, he adds. "If you're not excited about what you're doing five out of seven days, then make a change. If you're going to work, you might as well enjoy it, whether its being an actuary or raising goats for cheese-making in a small farm in the south of France. Follow what puts a smile on your face."