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Developing market practice for UK P&C Actuarial Functions

August 15, 2018

Sanjiv Chandaria, Lucy Briggs and Li Ee Ng explore findings from a survey conducted by Willis Towers Watson, providing a useful barometer of current market practice and indicating where more guidance is still needed. The survey also highlights the challenges actuaries are to overcome in order to effectively engage with increasingly complex and recurring regulatory demands.
Casualty|Property|Insurance Consulting and Technology

Solvency II has now been in force for over two years and during that time the Actuarial Function has significantly evolved. While the Standard Formula Solvency Capital Requirement (SCR) and the technical provisions (TP) calculations are well set out in the Solvency II regulations, there remains considerable uncertainty in the regulatory requirements for Actuarial Functions in relation to other key areas; namely the underwriting and reinsurance opinions, as well as contribution to risk management.

We conducted a comprehensive survey of 39 property and casualty (P&C) insurers in the UK, with a combined underwriting value of over £10 billion of premiums and over £24 billion of reserves, in order to gauge progress made by the market in dealing with the Solvency II requirements since the regulation came into effect in 2016. These included 31 solo entities, 8 group entities and of the 39 participants, 21 had a presence at Lloyd's, either in their own right as a managing agent or as part of a group.

Technical provisions and Standard Formula SCR

The TP and Standard Formula SCR calculations are areas that Actuarial Functions have invested significant time and effort in over the last few years, and are where we have seen Actuarial Functions adding most value to date. This has included the initial set up of the calculations and processes required to meet regulatory requirements, with the focus now turning to process improvements in both these areas, as well as refining the methodology and assumptions that feed into the calculations.

In our survey, we asked participants what has been the biggest challenge so far in carrying out the TP calculations. They could select from the following options: meeting the reporting timetable, lack of data, data quality, data granularity, documenting expert judgement, or actual versus expected cashflows.

As can be seen in Figure 1, both Lloyd’s (over 80%) and Non-Lloyd’s (over 50%) survey respondents found meeting the reporting timetable to have been by far the greatest challenge, which we understand is one of the drivers for process improvements. We expect this pressure on insurers will continue and most likely intensify with IFRS 17 fast approaching and timetables continuing to be squeezed.

Unsurprisingly, when asked where the Actuarial Function is looking to add value in the future, 64% of respondents pointed to the need for improved efficiency of processes and calculations in order to meet regulatory requirements, most likely driven by current reporting timetable challenges and further timetable reductions in the future. The survey showed that processes used to carry out TP and SCR calculations are still predominantly spreadsheet based, which is unlikely to help meet reporting timescales. As a result, professional, third party software and technology is likely to play an increasing role in addressing this efficiency gap.

For example, one way that current processes can be made more efficient is through the use of workflow management tools, which can help support better governance as well as process automation. We have seen a real push in the market towards the use of these tools as well as robotic process automation (RPA).

Figure 1: Challenges faced when carrying out TP calculations

graph showing the percentage of respondents for both lloyds and non lloyds challenges with TP calculations

Figure 1 also highlights a significant gap between the two groups of respondents concerning documentation of expert judgement. A much greater number of non-Lloyd’s syndicates identified this as their primary challenge, which is most likely due to their Lloyd’s peers benefiting from more feedback and guidance in this area.

In relation to the Standard Formula SCR, one area of potential concern is the ability of insurers to ensure their calculations remain up-to-date in response to future changes to the EIOPA technical specification. In particular, EIOPA published its final set of advice in 2018 on proposed changes to the Standard Formula SCR, which is currently waiting to go through European Commission approval. Time and resources will need to be invested across the market when this is implemented in order to understand the changes and subsequently update existing calculations and processes.

Underwriting opinion

Since the regulation came into force on 1 January 2016, there has been industry-wide uncertainty concerning the approach to key Solvency II requirements which can be seen in Figure 2. For example, 83% of respondents agreed more clarity is needed regarding regulatory requirements affecting the underwriting opinion. In particular, whether work done by other functions can be referred to, or whether work needs to be duplicated, and whether the opinion itself is a formal Opinion (with a capital “O”).

Figure 2: Are the regulatory requirements clear?

two charts showing regulatory requirement clarity. one for underwriting opinion, the second for reinsurance opinion with colour coded responses underneath

With this being the case, one would have expected insurers to have sought external advice in this area. While technical provisions and best estimate reserving are two of the most popular areas where companies have sought external assistance, Figure 3 shows only 18% of companies have sought external advice on their underwriting opinion, which is surprising given the current lack of clarity around what is still a relatively new requirement and area for actuaries. A similar situation also exists on the reinsurance opinion. 

Figure 3: Have you sought external assistance?

graph showing the percentages of those who have received assistance externally and they type of assistance

The findings also showed that a significant number of respondents (13%) do not consider the underwriting policy or process when producing the underwriting opinion, which is viewed by Willis Towers Watson as a fundamental element of the work. In addition, 21% do not consider the underlying pricing model, which could help verify how the technical pricing has been implemented. We also see pricing model reviews as an area where Actuarial Functions could potentially add value by identifying elements of the model that could be improved, especially where models have been built and developed without actuarial input. 

These findings highlight the underwriting opinion as an area that the Actuarial Function can really add more value by providing independent challenge and giving a different perspective into pricing and underwriting forums.

Adding Value

In the survey, we asked where the Actuarial Function has added value in the past, giving respondents the following six options: increasing the rigour of the TP and SCR calculation, improving the robustness of assumptions and methodologies, improving underwriting strategy, improving the reinsurance strategy, improving risk management or developing more efficient processes to complete the regulatory requirements.

Respondents said that in the past, technical calculations had been the area where most value was added. Based on the responses shown in Figure 4, however, it is clear that this focus is set to change, with underwriting, reinsurance and risk management considered to be areas where actuaries will be expected to add a marked increase in value going forward, alongside efficiency. For those in or involved with the Actuarial Function, this then demands the question as to how are they going to live up to and deliver on these expectations?

Figure 4: Past vs Future

graph showing colour coded comparisons of each segment that has added value and how much added value is expected in the future ranging between 0-80 percent

The survey also considered the Board’s view of the Actuarial Function, comparing their view now with that in 12 months’ time. The current view of most respondents is that their Board sees the Actuarial Function as adding value, with just 3% disagreeing, and that this view on the Actuarial Function’s value will either be maintained or improve in the future.

As we saw in the “Dear Chief Actuary” letter, published in February 2018, the PRA considers the Actuarial Function to be an integral part of the systems of governance. The regulator also states that the Actuarial Function report (AFR) is a Board report, yet just 67% of survey respondents present the AFR to the Board. Potentially linked to the Actuarial Function’s access (or lack of it) to the Board, only 28% of respondents think the Board has a good understanding of the requirements of Solvency II and the Actuarial Function, which is surprising as this suggests 72% could be doing far better than they are at the moment.


The key message to come out of the survey is that the market would strongly welcome more guidance on the underwriting and reinsurance opinions. In contrast to reserving, which is a mature process and already well understood by actuaries, underwriting and reinsurance opinions are still relatively new areas where guidance and training are needed.

The combination of short timelines, complexities and frequency of the various reporting requirements makes this challenge even more acute. Insurers are not only having to deal with Solvency II, but other reporting challenges as well, including GAAP and IFRS 17.

The key challenge for insurance companies right now is to embed or implement a solution that best fits their needs to ensure they are able to address the increasingly complex and recurring reporting and financial demands from regulators. In order to make the best use of the latest technologies and software, a clear understanding of your requirements is a critical first step. You will then be in a better position to implement a more strategic approach to reduce operational costs of IT solutions in the long term and fundamentally address today’s challenges of speed, frequency and greater business insight.

Why Willis Towers Watson

Market forces mean that insurers are constantly having to find ways to do things better, smarter, quicker and cheaper.

And with drivers for change including regulation, evolving customer needs, consumer service expectations and process efficiency, every aspect of the business needs to be kept under review.

Insurers need a partner like Willis Towers Watson to help them. This can come through advice about the way they are conducting business, about how they can grow, new strategies they might employ, and also how this can be done more efficiently.

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Our unwavering focus on the needs of our customers has made us one of the largest providers of insurance technology – and the world’s largest provider of actuarial software.

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