Challenges faced by actuaries in expanding in non-life insurance industry in Pakistan

The first challenge is lack of regulations currently asking for actuarial involvement in non-life insurance sector of Pakistan. SECP has draft Ordinance 2020 and Risk Based Capital RBC Concept Paper but these are draft and no one knows when it will be final. The regulations are made after too many delays and the depth covered is quite shallow with regards to actuarial involvement. In the same time, other countries in the region introduce far more regulations so the gap is only increasing over time. Pakistan is considerably behind IFRS17 implementation as well as till 2023 June, only Gap Analysis Phase 1 and Financial Impact Assessment Phase 2 has been done so far. IFRS9 is also set to be implemented when IFRS17 gets operational so it is in delay as well.

Without the prerequisite of regulatory obligation, business stake holders are weary to increase their cost base by hiring actuaries. While a lot of insight and technical efficiency can be gained by hiring actuaries even without the regulations, the lack of regulation allows non-life insurers to focus only on the bare minimum and exclude building the analytical regime that actuaries build otherwise. This is a general worldwide trend that as markets develop, actuarial involvement gains regulatory obligation then over the years, the non-regulatory actuarial involvement in continuously increasing markets becomes more profound. One builds on the other in a snowballing manner.

This does not mean that having actuaries is essentially crucial to the survival of an insurer. Many insurers in many markets have never had an internal actuarial employee and minimum consulting. Insurers take the view that since we are profitable and are surviving and doing fine without actuaries in the first place, we don’t need them and our focus on fundamentals alone is good enough. We need to convey a key message here that suppose there are two students; both have never failed but one has D grades and one has A grades. The two are not equal. So, an insurer who stays ahead of the curve, follows best practices and keeps improving through actuarial involvement is not the same as some insurer who still survives but has no interest in doing anything other than the bare minimum. Left to their own devices, insurers will focus not increasing costs by hiring actuaries and that is why the push from regulations is a necessary pre-requisite.

The second challenge is sales function being weary of actuarial involvement in non-life lines of business like in motor, medical, fire and marine. This is because price is largely determined as a function of commercial considerations and inducing technical underwriting discipline by quoting prices given by actuaries is something that is very difficult to do so, especially if it’s unilaterally done by an insurer in isolation and not market wide. Commercial pressure is specially most profound in the loss-leader health line of business where loss ratios are usually high and even small price changes can lead to losing business.

There are of-course structural challenges as well. Such as general insurance sector size being very limited in Pakistan as only mostly the top large companies avail general insurance and SME companies which form the bedrock of the business landscape as well as retail segment for motor medical and fire/home insurance being largely in abysmal state. Although Motor TPL legislation has been there, enforcing it is non-existent in practice. Awareness levels in consumers is extremely low and insurers lack innovative products, value for money, marketing approach and operations to attract even many of those consumers who have the awareness.? This brings us to the other challenge which is lack of trust in insurance institution in consumers. “Beema waley ullu banatey hain” (insurance salespeople make a fool out of us) is a common perception in consumers and much steps are needed to overcome this trust deficit.

Although it is difficult to introduce compulsory motor and medical insurance like done in Saudi and UAE due to low level of income per person or low GDP per capita, lack of purchasing power, macroeconomic challenges, and lack of enforcement capacity, one silver lining emerging is the universal healthcare of Sehat Sahulat in Pakistan that has covered 157 million out of total circa 230 million citizens of Pakistan in just over 7 years and continues towards the vision to provide universal health coverage to all Pakistanis[1]. Actuaries in Pakistan can play a huge role towards implementing this vision. The scope is unlimited here such as detailed reports on big disease/bio-statistics/epidemiological categories like cancer, cardiovascular, infections, fraud wastage and abuse (FWA), providers analysis and other detailed reports like done by PM-JAY Social insurance in India and Insurance Information Bureau of India (IIB).

Challenges faced by actuaries in adopting more sophisticated methods

There are multiple challenges but let’s first state that we are not trying to blame any one party or portraying ourselves as victims of external circumstances but trying to understand the root causes of challenges so that we can take actions on those aspects that are within out control. It is only through proper understanding of the problems that we can arrive at durable solutions.

The first is obviously development of the market. A single large company in the UK can have more actuaries than the whole region of GCC and Pakistan. Our markets are still developing and if we try to follow the ultra-specialized market structure with huge actuarial human resources and budgets, we will just become idealistic and frustrate ourselves over achieving nothing on the ground. That’s why we need to adapt and focus our energies where they are needed in the first place where the market values it. The current state of market is that their focus is still on the basics and fundamentals. Any sophistication is given zero incentive, Research & Development is seen as waste of time because it takes lots of efforts with no guaranteed results and there is always a flood of current work for actuaries to dedicate their time to so handling daily work life leaves little room for any side hobbies of introducing sophistication. If there is no financial incentive to do sophistication but if it’s rather seen as a distraction, then any actuary risks being labelled a mis fit if he does not go with the flow and if he chooses the path less taken (group peer pressure). Companies will only pay for the regulatory burden of let’s say reserving and not any extra dime for stochastic loss reserving so why bother? On top of that, achieving work life balance is a big challenge for majority of actuaries plus actuaries have to find time for studying as well as for up-skilling as new niches keep emerging globally.

Secondly, even if one individual tries to do something different, it mostly fails to make a ripple because change needs to be a team effort with budgets and backed by the senior leadership with moral and financial support and insurers and clients must be willing to pay. An individual can dabble in open-source coding but putting anything into production is 10 times more difficult than piloting. For instance, I have coded GLM and multiple ML models in R but it’s not just inputting data, modeling then showing results but a host of other business requirements that need to be met. For instance, business stakeholders need to know how changing one variable effects the price and trusting on black boxes is too difficult. Secondly, there needs to be visibility, tests of model reasonability, acceptance by the stakeholders in the first place and any GLM work needs to follow the same regulatory compliance instructions as the burning cost analysis. The work needs to be replicable by other team members too and that too quickly, consistently and within the stated deadlines and open source is terrible in regards of meeting business requirements because it is more of an open journey and the Unique Selling Point (USP) of paid software is that everything A to Z is visible, easy to learn, reliable and accurate. It won’t lead to whole modeling collapsing from just minor coding mistakes like GLM gives error in R if I write “gamma” instead of “Gamma” in the distribution. And the individual actuary’s time is not decided by him/herself; it’s decided by his consulting or insurance employer so it’s again very difficult to find spare time for it. The individual actuary also risks leaving a lot of money on the table if he starts focusing on sophistication instead of the core requirements of standard work skills as in the same time, the actuary can do 2 burning cost projects instead of 1 BC+GLM pricing project. As markets develop, technologies improve and clients become more receptive, actuaries will then simply follow the money and start enhancing their work at that time when needed.

That is not to state that everything is hopeless. Consultants are gradually partnering with paid ready to deploy GLM software, with IFRS17 software vendors, putting out notices for hiring data scientists and data analysts but change is slow and gradual so a lot of patience needs to be kept and any change will be over the long term instead of a sudden miracle. Leapfrogging seems unlikely so Pakistan innovation will likely remain miles behind the global scene in the future as well.

Guidance to actuaries on approaches for embedding actuarial analysis without regulatory backing

We have to be very clear on the onset here. There is no simplistic list of 10 recommendations that if followed will lead to widespread actuarial adoption in non-life business industry of Pakistan. It is a long tough road filled with uncertainties and a lot of consistent efforts and patience are required in order to make any noticeable inroads into general insurance in Pakistan. When we make a list, it does not mean to imply that shortcuts will work, or a magic route will appear to give us a false sense of comfort or induce over-optimism in us.

Having said that, although it is tough but it’s not impossible. Many times, change never happens over many years but then suddenly in a very short span of time, a paradigm shift occurs and change rapidly happens. So, we should not be pessimistic as we can over-estimate the change that happens in the short-term but under-estimate the change that can happen over the long term. The correct approach, if any, would be cautious optimistic pragmatism.

Onboarding sales function to accept more actuaries into their companies is paramount and we have to raise awareness that highlights what both functions can gain by having actuaries in a win-win situation instead of portraying it as a zero-sum game where it is either actuaries giving the price or the sales function in perpetual conflict. We can highlight those actuaries are not here to take the ultimate responsibility for the final prices because we only look at the technical risk considerations and the final price takes into commercial considerations too (which are as important as technical considerations if not more). The technical price given by the actuary is not something that has to be compulsorily followed. It is just a benchmark of technical pricing which can be used like in Saudi for benchmarking and comparison purposes. In Saudi, there is price adequacy ratio which is commercial actual premium/technical risk premium where commercial actual premium is the final quoted premium that takes commercial considerations into account and the technical risk premium which is the premium quoted by the actuary that takes only risk considerations into account. In that way, we can have a benchmark as well as technical transparency into the mechanics of pricing which can add value for sales function as well. Sales function can also utilize analytics in detailed slice and dice surgical manner where when and in which segment, they are making more losses and which areas are more profitable etc. Thus, analytics can be non-obligatory and open up the black box of their business books so that both sales and actuarial function can have a win-win from having each other.

Another role that actuaries can take to make inroads is greater involvement in product development side. If we can show to the senior management that we are not just a cost center but a potential partner in strategic management than it starts with showcasing that we can also lead to revenue generation as sales function is given the most importance by any company. Through growth mindset and an agile approach, we can create better products and also better behind-the-scenes operational processes to provide a better customer experience, remove pain points and improve the trust and perception of insurance to customers. Marketing can be an exercise not just about experimenting in the dark, but with analytics lead to a culture which is data driven decision making. Developing our skills in the latest technology trends and insuretech, while staying humble and not over-promising can mean that we can be seen as a partner instead of only a technical resource cost center necessary evil.

Epidemiology can be done by actuarial as part of pricing analytics in collaboration with medical team to know various trends like for example what is average burden of disease of Pakistan, why is our portfolio statistic different? why is our jumbo client's experience different than our overall portfolio experience? why is one hospital's experience different? what are our claims trends as per ICD10 medical coding for diagnosis etc.?? To give just one example from an endless list of questions, if for example, our C-section maternity claims are 60% of total maternity claims but Pakistan's average C-section ratio is 23% than why this difference?

Pakistan has higher retention by insurers of general lines other than motor and medical than in the GCC too so doing analysis for these is important as well such as fire property marine engineering. Pakistan, like many other developing countries, relies heavily on port so marine insurance is a larger proportion of insurance than in the GCC too. Pakistan also has higher natural catastrophe risks of earthquakes, floods, cyclone, effects of climate change like Smog season, dengue season, heatwaves, cold waves, extreme rainfall, glacial outbursts as well as man-made like large fire, terrorism activities, civil strife and so on. Thus, actuaries can get involved more and play a vital role in optimizing reinsurance arrangements for general insurance as well as by carrying out catastrophe modeling.

Dashboard reports can made by IT in consultation with various departments such as sales and domain knowledge from actuaries. Given modern and new methods, there is a lot of room for analytical data driven decision especially when negotiating with jumbo clients based on data and negotiating with hospitals by medical teams through data. For example, the insurer’s portfolio frequency was 6%-9% but jumbo client was 10%-12% that’s why it had high loss ratio. Another jumbo client gave losses from parents’ segment, one jumbo client lives visited top tier hospitals 80% and so losses were high as these hospitals are expensive and so on. Currently, reports are scattered across departments and available only on demand. not widely shared across different functions to reach a common consensus and not real time. ?That’s why analytics cannot be done within strict timelines of renewals and that’s why different functions are on different pages and lack of common quantitative consensus. The most common example is that in meeting of review of jumbo client, 5 functions will have 5 different numbers for loss ratio and will debate on that instead of evaluating experience and what strategy to keep at renewal time. The BI layer can lead to a single point of truth so that such time-wasting inefficiencies are avoided.

This different set of priorities is seen most profoundly in the split between an insurance company actuary and a consulting actuary. When in a company, the senior management will set different criteria for the company actuary than if that actuary was in consulting environment. The senior management will tell the company actuary that we can do basic analysis quantitative but what can you do as a value addition? How can you increase transparency in our portfolio? What efforts can you do to increase revenues and decrease costs? Because all regulatory work we can give to the consulting actuary so what is your Unique Selling Proposition (USP)? In contrast, the consulting actuary sells technical regulatory services like IFRS17 consulting, reserving, pricing, reinsurance optimization, FCR, ALM etc. so their objectives are different.

While in this piece we write much about how the actuary can add value to the insurer, it’s also useful to take note to avoid the other extreme end of the spectrum which we will call the rockstar/stalwart area. In this, individual actuary or consulting firm over-promises but under-delivers. Marketing efforts should not be unrealistically high as it’s not possible for let’s say one individual actuary to know it all or implement it all. Active management that encourages and lets people grow along with proper budgets are still the key to sustainable success. An individual actuary cannot just come and through the magical power of science, analytics and high energy solve all the current ills of the company and propel it exponentially ahead of the curve. That is na?ve thinking and expectation. Even the best of actuary, if given a restrictive environment where his suggestions are not heeded or implemented, and is relegated to majority operational or clerical work will end up getting frustrated. That is why the wrong environment can make even a giant actuary a midget (culture can eat all the strategy that actuary brings before noon in breakfast) whereas the right culture and budgets can make even mediocre actuaries shine out to achieve their true potential and become giants in the process.? The other experience can be that the over-promised deliverables never get to see the light of the day and then the actuary gets blamed for all the structural flaws and restrictive culture in the company and that scar remains within the senior management to not trust actuaries in the future as well. So, selling that rockstar persona can open some doors but only in the short term and can potentially lead to far more damaging long-term damages.

Another area which we can internally control (even though it is has become a cliché now with highlighting its importance over and over again) is improving our soft skills. Yes, we are not professional speakers or content writers or motivation speakers, and it is technical skill that acts as a pre-requisite to establishing our track record and reputation in the actuarial and insurance circles, but the rest is also up to our communication skills. Whether it is with communicating with other actuaries or communicating with non-actuaries (that is tough because they don’t have the same technical expertise plus they have vested interests so communicating in an understandable way while being firm but fair is all the more difficult), it is essential for us to communicate effectively. What is not often emphasized in this blanket mantra of soft skills is that communication without the proper mindset and backing them up through our actions can only act as poor band aid.

Nowhere is this soft skill more needed than when implementing enterprise risk management ERM exercises. Risk registers can quickly become compliant feedback and become political and showing stress testing to management can be very demotivating. Management exists on optimism about the future and if we tell them that think about the worst-case scenario, they will shun that and be sensitive about any criticism or weak points that company has (same shunning attitude when auditors point out shortcomings in the business). We have to stay diplomatic, cautious, yet not be superficial and tell them the advantages that we can improve by resolving our shortcomings over time. It is through thinking about stressed scenarios, that we can better prepare for it so that we a) never reach such situation in the first place or b) even if we do, we are better prepared to handle it like a fire drill. Similarly, with reserving, an actuary has pressure from management because it has the vested interest to keep reserves as minimum as possible so that net profits are maximized but this is a balancing act because on the other side, the actuary also has to satisfy the auditor’s actuary as well as the regulator that the reserves determined are adequate and are under-reserved. So, it’s always a balancing act for actuaries between different competing stakeholders and being sandwiched between the two.

The mindset has to be to see everyone as customer including our colleagues, people from other departments and not just our immediate reporting boss as the person to manage our impression with. It is by helping others get ahead through our efforts, that others respect us and then collectively push up upwards as well. If a person has a vision, it’s important to stick to it and back it up through his/her actions. The opposite is not walking the talk and staying territorial by taking an entitled attitude of a zero-sum game (their loss is my gain, my gain is their loss) instead of trying to create a win-win attitude. It is true that corporate political culture can many times force us to become more political than otherwise, but in order to make inroads in unchartered territory of Pakistan General insurance market, it is far more important to first establish trust and relationship primarily and understand technical proficiency to be secondary[2]. While reference for this assertion is given to an article in the Harvard Business Review, this is not just some bookish mantra taught in MBAs but something that we know true in our experiences as well as any idea stays bookish as long as we don’t implement it; when we do, it doesn’t stay bookish.

So, if there is one takeaway that we can get from this article, it is that yes while soft skills are important, it is far more important to understand the structures that surround us and mold ourselves accordingly. Structures can seem theoretical and not important because they aren’t personal or tied to a physical tangible human being, but this invisible hand of structural play are far more important than we give them credit to.? When we understand things structurally, we can see from where they are coming from (different people have different vested interests, educational background, which effects how they understand things) and so we can untangle these messed up strings to reach the core of the root problem and address the source. If we only give importance to technical expertise like being able to do reserving, pricing etc. we miss all the elements of psychology that everyday interaction with other people can teach us and treat this social play as mere nuisance or white noise interruption rather than teaching us lessons on the vibrant colors of perception and social play. It is this structural understanding that can show to us the nuance behind many fundamental sayings or principles. For instance, it’s an ancient saying that moderation is the key to success, but in structural understanding we can know that every person has his/her own moderate point of reference and that is why due to having different moderate points, there can be considerable divergence in opinions.

So, another related takeaway is that while we all have the technical skills (courtesy of our day jobs in Pakistan or the GCC where we practice general insurance actuarial work on a daily basis), it is training of our attitude that is also very important for us in order to make any sustainable inroads in the relatively unchartered Pakistani General Insurance industry.

[1] https://statehealth.com.pk/

[2] https://hbr.org/2020/05/begin-with-trust