Ed Plowman sets out a framework of best practice for underwriting portfolio management, and the skills actuaries need if they wish to enter this area
Business planning and enterprise risk management (ERM) are the top-down processes that identify strategy – the business mix and target risk profile needed to advance a company’s grand strategic objectives. Portfolio management is the bottom-up process that identifies the tactical actions needed to achieve strategic goals.
The latter is increasingly seen as a key discipline in the successful running of a general insurance company. A 2020 study co-produced by Lloyd’s and WTW identified that, among companies with highly effective portfolio management in place, 69% assessed the benefit as a three or more point improvement in combined ratio. For Lloyd’s syndicates specifically, those assessed as being in the top quartile for portfolio management capability ran eight points better than those assessed as being in the bottom quartile.
We are currently in the hardest market for London Market business that we have seen for some time, and it may seem like all business is good business. However, this does not lessen the value of portfolio management. The emphasis may have switched to growth, but it is the perfect time to shape a sustainable and resilient portfolio with built-in market outperformance.
Portfolio management is no less important for retail business, and with the price walking rules now applying for UK personal lines, we need to refresh the concept for the new environment.
It is a dynamic field, with expanding possibilities from new sources of data and risk intelligence, data science techniques and platforms, electronic placement and increasing digitalisation elsewhere in the value chain. “By combining data, high-impact visualisations such as heat maps, and narrative, portfolio managers become the data storytellers, able to influence major decisions within the organisation,” says Radul Radulov, portfolio actuary at IGI.
It is no surprise that companies have been investing in this capability; job titles such as ‘portfolio manager’ or ‘head of portfolio strategy’ are becoming increasingly common. Actuaries are well-placed to move into these roles, believes Sunil Kamath, senior vice president and head of pricing at Allied World: “Portfolio management is a natural progression for pricing actuaries; moving past a narrow loss ratio focus to a broader view of underwriting performance will help actuaries maintain relevance in the current rating environment.”
Many of the skills required to be effective in these roles are closely aligned with those of pricing actuaries, so this may be attractive as a gateway for actuaries who aspire to broader management roles rather than a more technical career path. Equally, there are some skills that may not naturally link to actuarial training – what are these and how can actuaries acquire them?
The golden rules
Best practice portfolio management will look very different for a retail portfolio, a London Market portfolio and a reinsurance treaty portfolio. Still, there are some general observations we can make on the key success factors in its design and implementation.
- Granular understanding of profitability – The starting point for effective portfolio management is an assessment of profitability at a granular segment level. This has close parallels with technical pricing. However, portfolio management is not just meant to validate the pricing model or rediscover the pricing assumptions; it is important to view the portfolio from different angles and through different lenses – new dimensions, new factors, new methodologies.
- Alignment of data – The quality of the data is a major determinant of the quality of portfolio analysis. Process and operational data architecture are important too – this is not the type of exercise that can be bodged together in Excel. Where data gaps are identified that constrain the analysis, there should be a feedback loop to improve the data capture or seek out other ways to source the information.
- Forward-looking – When driving the portfolio, your eyes should be fixed on the road ahead, not in the rear-view mirror – looking beyond the experience data to identify the leading indicators and anticipate the future trends and changes to steer around.
- Formalised, but not too formalised – Portfolio management should be a formalised exercise with documented outcomes, forming part of the annual business cycle. However, this should not be a straitjacket that inhibits the discovery process. A spirit of exploration (deep dives into the data), and experimentation around approaches and actions, are essential.
- Incorporate the risk dimension – Maximising return is not the only objective; there is a trade-off with risk and volatility. Aggregation of natural catastrophe exposure is the most obvious aspect, and we increasingly have the tools to also measure man-made systemic risk. The selection benefits of focusing on more profitable segments should be weighed up against the resilience benefits of a diversified book.
- Collaborative buy-in – Portfolio management can only be successful if it is done collaboratively and with buy-in from all stakeholders – firstly in seeking a diverse range of inputs to the analysis and identification of actions, and secondly in the implementation of those actions. Aligning incentive structures may help with this.
- Identify and assess actions – Potential actions are not limited to pricing or underwriting changes; they may embrace, for example, claims, marketing, distribution, reinsurance, product design and new markets. Assessing the impact of each candidate action is another key analytical aspect of portfolio management.
“Moving past a narrow loss ratio focus to a broader view of underwriting performance will help actuaries maintain relevance in the current rating environment
- Clear and executable actions – Actions should be clear so that they can be easily communicated to frontline operations (including distribution partners). There is a balance to strike here – using a sledgehammer to perform portfolio surgery is not likely to give a good outcome, but actions that are too complex or fuzzy will not have any practical effect.
- Active monitoring and feedback – Portfolio monitoring is not just an annual review; it is a continuous process. Dashboards and updates should be built into the process to track progress and adjust as needed; this information should be visible to the frontline staff who can execute on the actions.
- The external perspective – Market intelligence and consideration of how actions will look to the customer or broker is critical. We may identify portfolios and segments based on how we manage business internally, but does that result in a coherent proposition for the customer?
- Positive opportunity – Portfolio management is not just about cutting underperforming business to improve loss ratio; it is as much about looking for positive opportunity for growth.
- Joined-up strategy – The top-down and bottom-up views need to join up and meet in the middle; portfolio management should inform the business plan and ERM, and vice-versa. Good communication and some iteration between the two perspectives are essential to arrive at a coherent, achievable and optimal solution.
A job for an actuary?
Many of these success factors are naturally actuarial; others are more aligned with underwriting and commercial backgrounds – portfolio management, in many ways, falls somewhere between the two. However, it also extends into wider operations and links to the strategy.
There is a need to have a collaborative mindset, good influencing and communication skills, and the ability to switch between the bird’s eye view (the strategic picture) and the worm’s eye view (the granular details). If you are currently in a more technical role, there are still opportunities to get involved in technical aspects of portfolio management, and to leverage the collaborative nature of the work to foster relationships outside the actuarial team and gain a broader perspective.
So, is a lead role in portfolio management a job for an actuary? Anthony Hill, director at Arthur Recruitment, says: “There has been a sharp rise in actuaries establishing themselves as the driving force behind newly formed portfolio management functions. Hiring managers increasingly recognise the value of the actuarial toolkit in this field.”
Nobody really owns this space, but actuaries have a strong case – let’s stake our claim.
This article was commissioned by the IFoA General Insurance (GI) Pricing Research Group under an initiative to showcase wider opportunities for GI pricing actuaries.
Ed Plowman is group chief actuary at Sompo Holdings and Chair of the IFoA GI Pricing Research Group
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