Tradecraft DAVE CZERNICKI, KUSH KOTECHA, AND DAVE CONSENTINO
Actuarial Managed Services:
Business Case and Leading Practices
OVER THE PAST FEW DECADES, insurers—like companies in other industries—have fundamentally changed their sourcing approach for
many important operations, turning to managed services as a solution. Managed services, such as outsourcing and software-as-a-service
(SaaS) initiatives, have reshaped the information technology (IT) function
at many companies.
Third-party administrators (TPAs)
took on many billing, accounting, and
claims management tasks for insurers.
These companies also took on broader
roles within the life insurance and annuity sectors, such as assuming greater
responsibility for the administration of
closed blocks, thereby creating a new
sourcing model in the process. Some
insurers have also outsourced functions
that require a heavy, upfront investment
in infrastructure and people, such as
variable annuity hedging programs.
Traditionally, insurers have viewed
the actuarial function as a core competency, and for the most part, it has not
been sourced to third-party providers.
Today, however, market complexity, cost
pressures, and a shortage of talent are
causing many insurers to rethink the best
approach for all kinds of work and functions—including actuarial.
This article examines the emergence
of actuarial managed services as a viable component of an insurer’s operating
model in a broader context. Specifically,
it will outline the foundational business
case, highlight processes that are good
candidates for migration to managed
services, and suggest a few effective first
steps for insurers considering moving
forward with a new sourcing approach
to actuarial processes.
Key alternative sourcing options:
managed services versus
Why actuarial managed services?
In a time of considerable industry
change, multiple catalysts are driving
insurers to consider new sourcing mod-
els as a means to drive efficiency gains
and boost performance. At a macro level,
the entry of nontraditional market par-
ticipants—such as private-equity firms
and start-up reinsurers that lack infra-
structure and operational expertise—has
necessitated new sourcing models. Then
there are the perennial internal cost
pressures on finance, risk, and related
functions for more established providers.
Executives must always find ways
to do more with less. And doing more
is very much an issue for actuarial leaders, as new market pressures, operational
demands, and changing regulatory requirements are increasing the actuarial
workload. Most insurers simply do not
have enough actuarial bandwidth and expertise to handle all of the required work.
Outdated legacy systems are prevalent
and driving the need for actuarial transformation; the resulting transition to a
transformed operating model also places
near-term constraints on in-house actuarial resources. Even if there were enough
actuaries to go around, hiring them full
time might not make economic sense,
given the need for flexibility to meet seasonal demand spikes.
The talent gap pinches insurers in other ways, too: Senior actuaries are spending
a significant amount of time on administrative processes and relatively low-value
tasks, while the high training costs for
new recruits have long payback periods.
There is also the issue of retaining and recruiting staff in select geographies.
At the same time, increasing product
and business complexities have raised the
bar for sophisticated actuarial analysis,
Local third-party providers
are contracted to give
partial or complete
actuarial support for
selected actuarial functions
on an ongoing basis
Offshoring Large global companies
create their own offshore
actuarial teams, often in
for overhead related to
and resource management