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Can’t Get No Satisfaction

Carriers need to improve financial modeling for actuaries and align them with the IT organization, according to Ernst & Young roundtable findings.

Though regulations such as Sarbanes-Oxley require that an insurer's actuarial department and IT organization communicate regarding the tools they are using to conduct financial calculations, recently released findings from an Ernst & Young (E &Y; New York) Insurance and Actuarial Advisory Services roundtable reveal that, in most companies, IT and actuary employees have minimal contact.

IT professionals and senior-level actuaries from the top 30 insurance companies convened recently to discuss this nonalignment. "Our participants agreed that IT and actuarial alignment is fairly weak at this point and there needs to be an increase in alignment to create more-up-to-date technology-enabled processes and computing environments for actuaries," says Mike Hughes, principal with E&Y.

Actuaries attending the event discussed their use of technologies, such as The Milliman (Seattle) MG-ALFA system, the Tillinghast (Valhalla, N.Y.) MoSes system and SunGard's (Wayne, Pa.) Prophet system, to calculate reserves and deliverable acquisition cost balances, project future results, establish product pricing, and perform risk management and asset liability management analyses. But half of them acknowledged that they were less than satisfied with their model validation process, citing their need to use multiple modeling technologies to obtain the correct calculations. "Some [systems] are focused on pure economic value while others are based on regulatory requirements set by the National Association of Insurance Commissioners," says Andy Rallis, senior vice president, MetLife (New York; $481.2 billion in total assets).

Another challenge is that the models have to be updated constantly to meet new regulation requirements and changes in the business, such as new products. "It is a huge resource need and expenditure, but ... we update models frequently," says Rallis. In contrast, many participants felt that their models were not up to date. "Our participants believed that traditional modeling approaches and tools were not adequate in keeping pace with changes in the business," says E&Y's Hughes. Steve Goren, senior manager and technology specialist within E&Y's Insurance and Actuarial Services practice, agrees. "There needs to be more recognition on how to maintain the models effectively," he says.

Hindering this is actuaries' limited adherence to software development life cycles. Although 63 percent of participants said that they were aware of the standard IT software development life cycle, only 12 percent said their model development and maintenance protocols adhere to the process.

Actuaries will have to communicate more with IT in order to maintain best practices and conduct more audits on financial modeling to meet regulatory requirements, says E&Y's Hughes. One approach is the installation of dedicated resources, such as designated meetings between the groups or placing an IT employee inside the actuary department, according to Goren. "Right now companies are in the process of migrating older generations of their financial models to newer generations, but many are also creating more 'productionized' processes and structured protocols for modeling to satisfy the quality expectations and demands of Sarbanes-Oxley," he says.

Come Together, Right Now

Nevertheless, observers agree that the industry is some distance away from consistent collaboration between IT and actuarial. "We are seeing everything from complete integration of IT and actuary departments to the two departments being in separate buildings and not dealing with each other on a daily basis. These entities need close alignment and data ownership because the data overlaps with Sarbanes-Oxley requirements," says Mark Charron, principal, Deloitte Consulting (New York).

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