Insurance companies can use many elements of project management (see the Project Management Institute’s site for more details) to improve their operations and projects. The CONTROL area should be a particular area of focus for insurance company actuaries.
Control is the partner of Planning. This is another area where strong actuarial support is important. Although control is often criticized for being too strict or imposing punitive measures, it is an essential part of planning. Control checks plans to determine what you will do and when. It can also suggest corrective actions if plans go awry as they often do.
There are three types: (1) Feedback Control; (2) Concurrent Control; and (3) Feed Forward Control.
Insurance companies often use feedback control. In insurance companies, actuaries often use Feedback Control to study rate levels, unallocated expense allocation, projected expenses, and loss reserve calculations. They base future projections on historical data. Feedback Control is the least effective control method in project management because the unfavorable events have occurred long before the control function is initiated. Insurance departments are very fond on projections that are based upon historical events. They often require explanations as to why your projections were based on something else.
Concurrent Control is a type control that is performed when a process is about. Final checking before sending rate files, Annual Statement reports and agent’s bonuses. Large claim settlement reports. Concurrent Control is another form. Concurrent Control also includes periodic checks of employees’ work and training.
This last type of control is interesting. This is an area of control that actuaries are increasingly involved with. Feed-Forward Control is a type of control function that aims to incite corrective action before any deviation from the plan is taken. It’s what Actuaries call “modeling”. They have used it to predict future profitability, premium levels, claim cost for specific lines of business, enterprise risks management, and dynamic financial analysis.
These are the steps of Feed Forward Control
- Identify all input variables. These variables are important for project management. They relate to the time, quantity, and money (or cost of the project). Variables for actuarial work in insurance companies might include premiums, loss cost, expenses, investment income, risk of different company functions, or other operations.
- Create a dynamic model of the process and keep it up-to-date.
- Collect data, then enter it into your model. Most projects I work on involve data collection before, during, or after the build.
- Regularly assess the path projected and any deviations from the plan. Is the range of loss costs too high? Are the planned values being exceeded by persistency? Is the level of risk for a type of insured/coverage/policy unacceptably high? Is the plan for claims and policies being canceled?
- Get involved – Feed Forward Control gives you the opportunity to act before things get out of control.
The Feedback Control type is the most commonly used in actuarial work for insurance companies, but Feed Forward methods can have a greater impact on the company’s profitability.
Insurance companies face a major problem with the complicated state approval application filing and approval process. However, this can be overcome by clear actuarial memos as well as an education process. It is worth the effort to avoid any deviations from your insurance company’s plan. Rating agencies appreciate Feed-Forward Controls for their added stability and evidence of planning.
Kimberley A. Ward, FCAS. MAAA. FCA – Kimberley is a Partner at Windsor Strategy Partners. She can be found at their satellite office, Newark, IL. Kimberley was previously Chief Actuary at AAIS before joining Windsor Strategy Partners.
Kimberley is a Fellow in the Casualty Actuarial Society. She holds memberships in the American Academy of Actuaries Conference of Consulting Actuaries Project Management Institute, Association of Insurance Compliance Professionals, and the Conference of Consulting Actuaries.
Kimberley’s core expertise is in property-casualty pricing, reserving and product development. She also has experience with mentoring, strategic planning and education.