In this episode, Holly Layton is joined by Alessandro Pesci and Friederike Gutjahr to discuss how reserving functions differ across Europe, and what trends and observations they have seen in their respective regions.
HOLLY LAYTON: Given what we've said, it feels like there is a lot of pressure and difficulty on reserving teams. So it feels like it's a no-brainer that people should be making changes and looking at automation.
SPEAKER: You're listening to "Rethinking Insurance," a podcast series from WTW, where we discuss the issues facing P&C, life, and composite insurers around the globe, as well as exploring the latest tools, techniques, and innovations that will help you rethink insurance.
It feels like there is a lot of pressure and difficulty on reserving teams. So it feels like it's a no-brainer that people should be making changes and looking at automation”Holly Layton Director, WTW
HOLLY LAYTON: Hi, and welcome to another episode of WTW's "Rethinking Insurance" podcast. My name is Holly Layton and I lead the reserve transformation proposition in the UK. I'll be hosting this session today to talk about how reserving functions are being transformed across the European market.
We're going to cover the challenges that reserving teams are facing, as well as transformations that are being made, to really unlock value from the reserving function. And we'll talk a little bit about how that differs across the market.
Our guests today are Frieda Gutjahr and Alessandro Pesci. Before we get started, could you both introduce yourselves? Alessandro.
ALESSANDRO PESCI: Yeah, my name is Alessandro, and I mainly focus on reserving stuff around Europe.
FRIEDERIKE GUTJAHR: My name is Friederike Gutjahr. I'm with WTW since 2019. I come from an audit firm, previously. So I have an audit background, which gives me a focus on the governance, also from reserving processes, and support a lot in reserving processes and transformation projects in Germany.
HOLLY LAYTON: Great. Thanks, both. So to kick off, I'm interested in your thoughts on what the main challenges reserving teams are facing. And Frieda?
FRIEDERIKE GUTJAHR: I think the challenges are probably not unique, for example, for Germany, but are overall challenges. And to start off, to answer your questions, there is definitely a challenge around resources and timing. So there's a lot more to do, in comparison to, I think, a few years ago, with sometimes even a smaller team. Because there are little resources because of the high demand on the market.
Additionally, there are new responsibilities and, therefore, a new focus on what actuaries and reserve and actuaries actually do in a company, with a lot more complexity. And to top everything off, we have a challenging economic environment, with inflation and also interest rates and everything, coming with that.
Alessandro, do you want to add something?
ALESSANDRO PESCI: No. No, absolutely agree. Also in Italy and Spain. I think, also, there are a lot of new tasks and new topics related to reserving. Like a lot of companies have to produce IFRS 17 results that are more rigorous, in terms of calculations.
So the timing for producing results is very challenging for the companies. And also, inflation, as you mentioned, are really, really a hot topic, mainly for Spain and Italy. Spain is linked to the barimo scale system, in Spain. So this is linked to the pension increase.
And also, for Italy, the bodily injury claims in the indemnity table and how the court is going to apply this in the future for the severe claims.
HOLLY LAYTON: Yeah, I mean, it sounds like there's a lot of external market pressures, but that's almost inflated by internal pressures, as well, and regulatory pressures on top of that. So add it all together, and it feels reserving teams are really at a point where they're not able to cope and not really able to deliver, necessarily.
And how do you think that's kind changed over the last three to five years? Are we in a very different situation to where we were five years ago, Alessandro?
ALESSANDRO PESCI: Yeah, and compared to two, three, five years, I think the companies has improved the sophistication of the calculation. And they've also improved the quality of the data due to the IFRS 17 regulator. And this is the two main points.
The companies have invested a lot of time to calculate the IFRS 17 results and to understand which is the impact on the P&L.
FRIEDERIKE GUTJAHR: Yeah, I also think that as the focus has shifted a little bit more towards the actual departments and to the actual reserving actuaries, that also the focus of the management is more of the results from the actuarial reserving team. And so speaking the same language is sometimes, well, it gets more transparent that that can be a challenge.
And also, having the right balance between steering the results and incorporating the actuarial view is getting more challenging, I think, or has become more challenging, because of the additional focus on the subject.
HOLLY LAYTON: Yes, definitely. And I think what we were saying earlier, about the external market pressures as well, often that is the time when people look to the actuaries for certainty on things that are very, very uncertain. So yeah, that focus is there and yeah, again, with the increases in the volume of data and the amount we need to process. Yeah, it feels things have definitely changed, and not for the better.
So with all those challenges in mind, how have you seen people in the market really, really deal with them and any kind of changes that they're making?
FRIEDERIKE GUTJAHR: Well, I think there is a lot of investment in IT system and structures. Because there are a lot of historically grown processes, especially coming from Germany, having seen a lot of German companies, obviously. So a lot of the processes are quite manually done by one person or a very small group of people.
So there is, in Germany, we say had monopolies. I'm not sure if that is an English term.
And I think going away from that, having more automatization, being able to include more people and actually doing the work, is something we see but not everyone is on the same level. So we have also people who are kind of hoping for the best. We have people who try working with interim solution.
And some people who try to use that as an opportunity, the situation right now, to really evolve their reserving processes and use the push externally, which is coming mostly from externally, to transform their reserving processes.
HOLLY LAYTON: Yes. I've definitely seen people think that if it's not broken, there's no point on fixing it. Until the point where they're in panic mode and then need to do something.
FRIEDERIKE GUTJAHR: I mean, it worked before. Why should we change that, right? Never change a running system.
HOLLY LAYTON: And Alessandro, how about in Italy in Spain? How are people dealing with those challenges?
ALESSANDRO PESCI: Mainly recruiting new people. This is a very short term actions that companies are doing. Obviously, this is not very easy, since technical people are not easy to find. Also, after the COVID, a lot of people are rethinking their work life balance.
So are not ready to push or invest a lot of time on their work or only on their work. So they greet people, but this is very, very difficult.
And then and another one is the automation, even if it's not the majority of the companies doing it. But all is realizing that automation is the near future. So they have to automate the task. The manual task cannot be performed by skilled people because it's very boring. And this is also a way to maintain the skilled and the talented people.
So those are the two main one, short term and medium, long term. I think automation is a little bit behind schedule. But IFRS 17 has impacted the process. So companies are now reviewing the process and then they would like to have a perfect process before to automate. This is an approach that we have seen in the market.
FRIEDERIKE GUTJAHR: Yeah, especially IFRS 17, also with the quarterly reporting, is a big driver in Germany, as well. Because some companies have only done annual reporting so far, besides forecast planning, obviously. And now they go to quarterly reporting, and that just adds a lot of to dos, a lot of business as usual, they haven't had to cope with before.
HOLLY LAYTON: Yeah. Yeah, exactly. It's that increased pressure, again, isn't it?
FRIEDERIKE GUTJAHR: Yeah.
HOLLY LAYTON: So for those people who are kind of thinking about automation and new technology, then, like, what is the catalyst that makes them actually make that change? We've talked about a lot of challenges, but what takes someone from just struggling, to actually then, I need to do something. I need new technology. Alessandro?
ALESSANDRO PESCI: I think new data, and more granular data, are the most important things. In my opinion, at least in my experience, is having work is seen as a mandatory evaluation. So without providing very adding value. But at the moment, this is going to change because reserving is not just a statutory evaluation.
So granular data, new techniques, investing on automation, since, obviously, new techniques needs very skilled people and, obviously, we have to find the right resource and free, and make the most skilled people free to adopt and try those techniques. Those are the main one.
HOLLY LAYTON: Yeah, so it's kind of, it's companies who now have this new big data set and they aren't really able to get the value out of it. So they hear new data, they're expecting new insights off the back of it, and actually, they don't have the technology in place and that that's one of the drivers. Definitely agree with that.
ALESSANDRO PESCI: And this is also really important because, at the moment, there is no connection between reserving and the other departments, like pricing. And, obviously, this is something that should be changed in the future. So having one target operating model and the reserving function connected to the business planning, to the pricing, reserving capital, and so on.
FRIEDERIKE GUTJAHR: I think also that some people, I mean, we've said it again and again already, but the external justification, the external push is very important. And I do know some insurers who really want to actually move forward, to invest, but they can't because just using one technology, just for the actual department, sometimes the insurance company don't see the value to just buy one technology for one department, even if they are maybe a little bit more pricey.
And now they have a reason they can say, well, we need it because there is an external justification, in terms of reporting and producing disclosures, and being able for you to actually, produce a closing at the end of the quarter.
HOLLY LAYTON: Yeah. Yeah, so they kind of each siloed. Part of the company can now make its own requests, given the challenges it's facing. But, you know, given what we've said, it feels like there is a lot of pressure and difficulty on reserving teams. So it feels like it's a no-brainer that people should be making changes and looking at automation.
But why do you think companies are resistant to change? What's stopping them making these differences?
FRIEDERIKE GUTJAHR: Well, I mean you have to invest a lot of money and a lot of time to do the transformation. And I think for some people, they are a little bit scared because they see the big plan, what has to happen in order to have a really transformed reserving process. And so some people just don't start because it's just too big of a picture for them.
I think that is one point, actually. Then the tight budgets, because every company, not only in the insurance world, but every company tries to save money. So the budgets are being watched more closely than maybe a few years ago. Then you have the so-said had monopolies in Germany, for example. So people are actually, single people are against the change because they are for 20 to 30 years in the company they have worked the same way for 20 to 30 years.
And now, changing their way of working and being confronted with a lot of new technology and new ways to work, it's just also a little bit scary. And I can understand that. And they kind of fear their position in the company, seeing all those young hotshots riding in the company and maybe taking over their part.
One other thing is actually overestimating their own capabilities. Oh, we can do it. We've done it before. Why can't we do it now?
HOLLY LAYTON: Yeah, definitely. I mean, firstly, I think yeah, humans, we are resistant to change, naturally. So it is hard when you have someone coming in and saying you need to adopt a totally new solution. But, you know, now's the time when things are getting very difficult. Alessandro, anything else to add?
ALESSANDRO PESCI: No, I fully, I full agree on Frieda. I think, also, they would like to change everything as fast as possible, but obviously, the change is a slow exercise. So we have to, I mean, big changes starting from small things. So they would like to have the magic wizard and change everything, but it's not possible.
So they are scared about big change. But I think if you take your old stuff of your work, and say, I can start from this one and then change that one, and the second one, and so on. So start to prioritize the things and starting from something, instead of changing everything from scratch.
So I think this is a good compromise that can provide a very big change in the near future, instead of changing everything sooner, as soon as possible. And obviously, I think, as I said before, data and granularity are the most important things, adding value to the company, so to the different departments.
HOLLY LAYTON: Yeah, absolutely. The kind of iterative change process, I think, is really important. Because it helps embed the skills and knowledge of the new technology a lot sooner in the team that are then using them. And you start to get the benefits of having those small transformations, rather than waiting for a whole full solution to be developed. So completely agree with that.
FRIEDERIKE GUTJAHR: And I think it's also hard, if setting up the whole process without actually going into the process and seeing some challenges you haven't seen before. So having this iterative process is very, very reawrding, I think. Because then you can avoid some problems you might have, if you set up the whole process at once, implement everything, and then test it after everything is finished.
HOLLY LAYTON: Yeah, exactly. There'll be some unknown thing that pops up at the end when you are least expecting it.
FRIEDERIKE GUTJAHR: Absolutely. Yes.
HOLLY LAYTON: So it's all been quite negative, so far, on the difficulties that people have. So on a positive note, what do you think your markets are doing well? How are reserving teams actually excelling in this environment?
FRIEDERIKE GUTJAHR: Well, I think, speaking from Germany, if we, I mean, we Germans are very punctual and if we do things, we actually do them quite well, I would say, saying as a German. But I think the focus, really, is on setting up very robust processes, if we already start on transforming processes.
So they're very well thought through. They are with a lot of governance. And they try to use the best technology there is.
And I think what they also do very well is now using IFRS 17 actually kind of as a excuse to start transformation. So they're seizing the opportunity to actually go right into the transformation.
HOLLY LAYTON: Great. Yeah, I mean, I think we can probably learn a thing or two from the Germans because we have a very scattergun approach to transformation sometimes. And you think someone random in the team has gone away and done something that no one else approved so. That's great, yeah, to have that robust governance already in what you're doing, is important. Alessandro?
ALESSANDRO PESCI: Yeah, I think Italy, Spain, I think they are very, very technical teams. So they are pushing for improving their techniques, and also the justification between the different results. So the different bridge between the different exercise. And that's it, the methodology.
So like for inflation, they are looking for very complex approaches to estimate the diffusion inflation, the volatility around the inflation. So they are very technical and sometimes are less pragmatic than I've seen in the other markets. There is not a best way, but just different culture, I would say.
HOLLY LAYTON: Yeah, so the focus is on getting the technical, like the methodology side, right. And then sometimes that means that you can not realize that you're using terrible processes, but even if you're getting great results out of it.
ALESSANDRO PESCI: Yeah, yeah, yeah. They are mainly pushing for having the best methodology and the best approach for addressing the hot topics, like the inflation, like new techniques, new approaches. Yeah.
HOLLY LAYTON: Yeah, great. Great. So if you were out in the market working in a reserving team and there was one thing you wanted them to do immediately, what would you opt that they do? Alessandro?
ALESSANDRO PESCI: Without any constraint, I would say the possibility to have a results by any level of details. Since I've seen a very big disconnection between the reserving functions and the pricing functions, that sometimes pricing function is redoing the calculation of reserves, but their own. So companies have two results.
They try to bridge and to have the same total results. But, obviously, you are losing a lot of benefit from the reserving team. I think this is really important, also, for budgeting. So the business planning. For example, with IFRS 17 has to struggle with the segmentation. So the segmentation between reserving and business plan is totally different. And, obviously, this is very tricky.
And also, I think the business plan should improve the technicality for producing the results. And so, actually, it's more involved into the business planning process. But, obviously, the aggregate, the aggregation at the level of reserve is very difficult. So it's very different. So I think this is really adding value to the companies and to the reserving team.
FRIEDERIKE GUTJAHR: I would say automate, as much as possible, to free up resources to let the creativity loose. Think outside the box. Try something else than the traditional chain letter [INAUDIBLE] maybe.
And as Alessandro said, maybe to try to leverage synergies within the companies. Let pricing and reserving actuaries work together to see benefits from either results or either analysis. And maybe also show management that there is more value added from a reserving actuary than just reporting.
HOLLY LAYTON: I completely agree. More automation wherever you can find it. Anything that feels manual and rule based, get rid of it. Automate it away. And really trying to push to get results at that granular level.
I mean, if we manage to get good results that you can rely on at a very, very low granularity, when we get the next IFRS, 17 or the next big market change our lives will be a lot easier. So yeah, definitely agree with you on that.
FRIEDERIKE GUTJAHR: Yeah, focus on the fun stuff.
HOLLY LAYTON: Yes. Do you want do you want to do, [INAUDIBLE]
FRIEDERIKE GUTJAHR: Absolutely.
HOLLY LAYTON: OK. So we've got time for one more question. So I want to end on a high, and ask you what your opinions are about the benefits that people can actually get from starting to invest in transforming their reserving process. Frieda?
FRIEDERIKE GUTJAHR: Actually, I think with that question, I kind want to dip into my answer from the last question. Because I think if you invest in transforming your reserving process, you can actually create information that add value for other parts of the business, for example, for pricing.
You can free resources to use them for deeper analysis, to get a better understanding of your business. You can give management a better and deeper understanding of what actually happens.
HOLLY LAYTON: Yeah. Yeah, great.
ALESSANDRO PESCI: Yeah. I think, I mean, be 100% sure to meet the deadline requested by the PMO without any extraordinary human work. Because at the moment, when something is not going very well, everyone is pushing to the human resource. And this is very, very challenging upset.
And another one is also having the time to check and redo the calculation. So you are very prepared to answer to the challenging coming from the CFO. So the internal challenge and the external challenge, since with IFRS 17 the calculation are more technical. And we have to explain the results to the C-level, that probably they don't have the same capabilities that actuaries have.
And we have to find very easy way to explain the results. And, obviously, so you are able to explain the results without any panic, extra panic, I would say. Panic, reasonable panic is OK. Extraordinary panic is not OK.
FRIEDERIKE GUTJAHR: Well, that's actually an excellent point. Add security to your results, right, so you can be more sure that your results are actually challengeable. In terms of governance, but also interpretation of data. Absolutely agree.
HOLLY LAYTON: Yeah, definitely. Definitely. Better results, more accurate results, and a team with their evenings and weekends back. That's what we're looking for.
FRIEDERIKE GUTJAHR: That sounds lovely.
HOLLY LAYTON: OK. So we've come to the end of our session. So thank you, Frieda and Alessandro for sharing your insights on the market. And join us next time for another episode of "Rethinking Insurance".
SPEAKER: Thank you for joining us for this WTW podcast, featuring the latest perspectives on the intersection of people, capital, and risk. For more information, visit the Insights section of wcco.com.
Holly is a Director within Insurance Consulting and Technology at WTW and leads the Reserve Transformation proposition in the UK. She has a wide range of experience leading reserve transformation work in the market, and specialises in designing and coding workflows to automate Actuarial processes.
Alessandro has gained 20 years of experience in the insurance sector working for one of the biggest European groups, and at WTW as a consultant. He recently re-joined WTW in 2022 as a subject matter expert for Reserving and Capital topics including Reinsurance, Solvency II and IFRS17.
Friederike is a member of the German Actuarial Society and has almost nine years of experience in actuarial consulting, specialising in reserve reviews and in implementation of automated reserving processes for non-life business.