Actuaries need to improve their strategy if they are to deal with the great changes taking place in risk, technology and culture – Charl Cronje gives some pointers
As a general insurance actuary, you need to understand what’s keeping your board up at night. You should be clear on how your firm will define success in a post-COVID-19 market that is increasingly environmental, social and governance-savvy, as well as diversity and inclusion-conscious. And you need to play your part to ensure your firm remains competitive, sustainable and relevant.
At GIRO 2021, I spoke to Tom Clementi, the former CEO of MS Amlin, and Jo Fox, an experienced non-executive director, about these questions. The following is a distillation of the lessons I took from that conversation, to help you contribute effectively to the future success of your own firm.
Strategic triple whammy
There has never been a more important time for general insurers to review their strategies. We face a strategic triple-whammy of challenges in risk, tech and culture – more than enough to keep boards up at night!
The risk environment is fundamentally changing thanks to a heady combination of climate change, high inflation, the continuing fallout from COVID-19, and rising global political tensions. When it comes to technology, we are evolving beyond just talking about big data and machine learning. Some firms are genuinely embracing technology to change distribution, pricing, reserving and more. They stand to reap massive competitive advantages over firms that lag behind.
In terms of business culture, we’re experiencing unprecedented and rapid change. Last year, LCP spoke to 25 firms about board diversity. Most hadn’t made much progress and felt that diversity of professional background was more important. In contrast, today I’m aware of several firms that are urgently seeking to appoint a more diverse set of directors. In addition, board members told us 18 months ago that it was not for insurers to proactively refuse cover for polluting industries – rather, it was for governments to set guidelines. Since then, several large insurers have made public commitments to withdraw support for certain industries in the coming years.
Strategy by happenstance
If now is a crucial time to review strategy, let’s consider how strategy is evolving.
CEOs admit privately that strategy has historically been a matter of happenstance – “we write these classes because we’ve always written them”; “we will probably never write that class because we were once burned badly by it”. They also tend to react to emerging opportunities, rather than proactively seeking out opportunities that are consistent with their strategic goals.
The same CEOs recognise that this cannot continue. Many firms have now established dedicated units that are tasked with bringing statistical rigour to the strategic process. A key focus is portfolio optimisation, recognising the fact that you are more likely to outperform through superior portfolio mix than through lower expenses or smarter underwriting.
To optimise a portfolio, you need more robust ways to:
- Measure and attribute historical performance
- Judge the likelihood of repeating good performance or remediating poor performance
- Appropriately value synergies, including diversification, but also softer factors such as expertise and relationships.
The more advanced firms are quantifying what their underwriting ‘fantasy portfolio’ looks like, in the same way that investors quantify their optimal asset mix. You may not be able to achieve this portfolio overnight because of commercial constraints, but you can appraise each strategic opportunity by considering whether it moves you closer to your optimal portfolio.
Insurers and their priorities
We’ve seen that reviewing strategy is crucial and needs to work differently from before. How is that going in practice?
In early 2021, we asked boards about their priorities for the coming year. Then, in December, we asked them to look back and identify how they actually focused their attention. You can see what we found in Figure 1 and Figure 2.
Although there are some positives, such as staff welfare making it to the top of the to-do list, the overall picture is alarming. Firms are struggling to stick to their plans and finding themselves swept along by unexpected changes. This state of affairs presents a clear competitive opportunity for those firms that can make realistic plans and deliver on them each year, particularly in areas such as technology.
Even the best strategy will fail if the culture isn’t right
Almost every insurer I speak to is struggling to hire skilled staff at an acceptable price, and recruiters tell me the first question candidates are asking is often “what’s the flexible working policy?”. Furthermore, people increasingly want to work for a firm whose values align with their own. If there’s a cultural disconnect, that may be a deal-breaker.
What does this have to do with strategy? Consider Maslow’s hierarchy of needs: firms will fail to achieve the ‘higher’ goals of innovation and competitive advantage if they don’t look after the ‘base’ needs of culture and staff welfare. At a recent insurance non-executive director roundtable held by LCP, participants stated that this has become a major concern and is proving hard to correct where things have not been right historically.
As an actuary, how do I respond?
How can you help your firm address this ‘triple-whammy’ of challenges? It’s tempting to say that actuaries should focus on risk and tech, and leave culture to management, but this would be a mistake. Instead, actuaries should focus on culture, particularly:
- Sticking to the plan – Most actuarial teams are continually overstretched and struggle to push forward strategically valuable development work to address risk and tech challenges. This entrenches a culture of ‘not sticking to the plan’. The first action should be to form a clear actuarial development plan, get buy-in from management and follow it through.
- Selling your value – Many chief actuaries I speak to are finding it difficult to justify additional headcount, despite their team’s to-do lists getting longer and longer. Is this because management are short-sighted, or because actuaries are insufficiently skilled at selling our plans and our value-add to management? This is a second area worth investing in.
- Finding your voice – Successful actuaries will be bolder and more articulate in calling out not only risks, but also poor strategy in general. And an increasing number of them will go on to lead their firms, in a world where true data insight is a prerequisite for competitive advantage.
With the pace of change in the risk environment and in tech, there has never been a more exciting time to be a general insurance actuary.Responding to these challenges is exactly what we have been trained for – just don’t let outdated cultural norms hold you back!
Charl Cronje is a partner at LCP and the author of The Virtuous Cycle: How insurance boards can work better with actuaries
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