Insurance Industry Struggling To Meet Heightened Data Management Demand According To Ernst & Young Actuarial Transformation Roundtable
Looking to Reduce Reliance on Spreadsheets in Financial Reporting
New York - The Insurance and Actuarial Advisory Services (IAAS) practice of Ernst & Young LLP today announced highlights from its third Actuarial Transformation Roundtable, a forum in which senior insurance executives discuss key issues, challenges and best practices. The roundtable uncovered growing concerns around the governance and management of the increasing amount of data the industry is required to maintain, particularly in light of enhanced financial reporting requirements.
A survey of participants revealed 88% of attendees agree that, "data management issues currently impact the ability to provide reliable, valid financial data." At the same time, more than half (56%) say they do not have a dedicated data governance team in place and 67% do not have a formal data management program.
"Companies need to engineer a culture shift," explains Steve Goren, roundtable moderator and leader of the Ernst & Young IAAS Actuarial Transformation practice. "It is crucial to get everyone to acknowledge data governance and quality as key corporate priorities, and reflect this in their operating practices and processes. Recognizing that old problems will only multiply over time, insurers must clean up existing data and change their processes going forward. We have termed the data management evolution ‘Actuarial Transformation' and it includes the move to an automated, controlled, yet flexible technology-based environment."
Following are key highlights from the roundtable dialogue and survey:
Harnessing Data to Improve Quality
Nearly three-quarters (73%) of participants say the quality of their data needs at least some improvement and half (50%) acknowledge that their actuarial team spends between three and five "person days" per month correcting data quality issues.
Having acquired vast sums of data, typically spread over numerous legacy administration systems, companies are now struggling with the related integration issues. Preparing data for input into the valuation and modeling engines used in actuarial processes has become time consuming as insurers struggle with inconsistency stemming from the various systems using different definitions. One participant suggested companies invest in building a data dictionary, which may slow the process in the short term, but eliminate future quality struggles.
Another issue addressed was the heightened compliance expectations. The vast majority of participants (93%) agreed that the assumptions they use in their actuarial models constitute data that must be stored and managed. In fact, many acknowledged they are building meta-data repositories to hold information about existing data, such as how they develop their assumptions, in order to satisfy auditors.
"Insurers are fighting an ongoing data battle as they look to address who owns the data, how it should be maintained, who should have access to it and, most importantly, how to bring it together and integrate it in a way that will make it useful," adds Goren. "All of these issues relate to basic decision making and overall financial reporting and, if positioned appropriately, should gain C-suite attention."
Data Governance… a C-Suite Imperative
The group agreed the data management challenges the industry is facing today require organizational change. Data governance, the process and organizational structure developed to create control, was offered as the solution. However, the group cautioned that governance must be addressed from the top down and have strong C-suite commitment to be successful.
One data governance concept beginning to gain favor is the addition of a full-time Data Management Organization (DMO) between the corporate C-suite and the business line operations level. This concept was well received by the roundtable participants and some have already moved in this direction.
The DMO is guided by the C-suite and, in some cases, an executive-level Data Governance Committee. The DMO needs to build strong partnerships with the lines of business – the operations, accounting, IT, and actuarial teams – in order to bridge the gap and assure that the crucial communication needed between these groups is achieved. The DMO is also responsible for putting rules in place about managing data, maintaining legacy data, and handling data from new products in order to enhance quality.
"Creating a DMO is a strategic investment," continues Goren. "Too often, companies avoid taking a strategic view of data management because it is too painful, but the initiative more than pays for itself in the long-run."
Breaking the Love/Hate Relationship with Spreadsheets
Considerable time was spent discussing the use of spreadsheets in a Sarbanes-Oxley (SOX) world. Currently spreadsheets are used extensively in actuarial valuation departments with more than half (51%) saying they use between 10 and 50 spreadsheets to determine financial statement transaction amounts each quarter.
Participants agreed the flexibility and transparency of spreadsheets will be difficult to forgo, particularly for quick analysis, top-side adjustments, and system testing, driving the hesitation to convert to models. At the same time, they recognize that new regulations and added compliance hurdles make this a necessary step and some even acknowledge that they are barely passing the SOX requirements. In fact, some point out that the required documentation and version control required today has eliminated a lot of the spreadsheet flexibility, decreasing their appeal.
There was a general consensus that while it would be nearly impossible to eliminate the use of spreadsheets there is a significant need to pare down. Most participants say they are already moving in this direction and some point to a goal of cutting out 80% to 90% of spreadsheets.
In order to successfully transfer spreadsheet calculations to formal technology applications, it was agreed that actuaries must team up with IT. Companies must also expand and enhance their valuation data warehouses.
Business Intelligence… The Brass Ring
There was an overwhelming consensus among participants that valuation actuaries have become too tied up in data management activities such as the updating, maintaining and controlling of spreadsheets, keeping them from focusing on delivering appropriate business intelligence.
The group expressed significant frustration about the time left in the financial reporting process for analyzing and explaining results. Many expressed considerable concerns about being able to meet new hurdles such as principles-based reporting without making significant changes to their current practices.
"Just as critical as data input is output for analysis," adds Goren. "There is a significant opportunity for companies who transform their processes. They will not only enhance their data quality, but free up their actuarial department to focus on the area where they can truly add value… business decision support."
SOURCE: Ernst & Young IAAS