The co-sourcing solution: the changing environment makes it a top priority to optimize the activities of actuaries.

The dynamics and volatility of the current business environment are placing increasing pressure on the actuarial departments of insurance organizations. Pressure to increase efficiency and accountability and to produce lean budgets, the accelerated valuation and reporting timelines, and increasingly complex accounting and regulatory requirements place more demands on actuaries' time and resources--all of which can lead to a scrambling to deliver even some of the most basic needs on time. Actuaries often get bogged down in compliance requirements and dealing with details that, although sometimes tedious, cannot be neglected.

At the same time, risk management and risk measurement are gaining increased importance, landing ultimately in the lap of the chief financial officer who is expected to return value to shareholders mad meet the expectations of policyholders. Consequently, CFOs are turning to their actuarial departments to contribute to the understanding of the key drivers of the business and deliver fact-based answers to strategic questions.

With about 15,000 qualified actuaries throughout North America, talent and experience are at an all-time premium. The specialized education, training and skills that actuaries enjoy provide them with both highly compensated positions and mobility. Adding to the resource constraints, there's a need for an evolution of actuarial skills that is critical in today's marketplace. The quantitative and financial modeling skills of the actuarial department are increasingly being sought to support company strategy and decision-making--including efforts to measure and manage risk, performance and capital efficiency and to develop and establish profitable new products and distribution channels. With all hands full with the day-to-day tactical and compliance-oriented tasks, the challenge of meeting changing organizational demands mad developing these needed skills is difficult.

This is where the concept of actuarial co-sourcing can help. Unlike traditional outsourcing models, which send entire business functions to non-company staff, co-sourcing combines an in-house department with the resources of a dedicated outside pool of experts. Rather than allocating assets necessary to hire additional actuaries to keep daily functions moving, co-sourcing frees up talent to perform the crucial strategic activities that meet the needs of senior management.

Process-oriented responsibilities are handled by a third party possessing the tools, knowledge-sharing capabilities, methods and processes. The co-sourced external team focuses on the nuts and bolts, and is charged with delivering the financial statements and calculating valuation results accurately and efficiently. Appropriate review and control protocols are employed to ensure that the in-house actuary is able to efficiently and effectively review the results. In-house actuaries can then concentrate on the activities that add the greatest strategic value, such as establishing new products, performance measurement, capital management and forecasting.

Historically, optimizing the activities of actuaries has not been a top priority. The changing environment now makes tiffs a necessity. Insurers willing to embrace change and address the related organizational issues can reap such significant benefits as reducing the high cost of actuarial recruiting/turnover; introducing the newest technologies, methods and high-level thinking; eliminating capacity constraints and carrying costs; and reducing actuarial human resources demands.

Co-sourcing service models can vary in form, but the one that aligns the interests of all parties is optimal. A typical structure may include the insurer's chief actuary with a liaison from the co-sourcing firm as well as a team leader to manage the day-to-day core delivery team.

Ideally, a co-sourcing strategy should maximize the development and dissemination of leading edge thinking, growing the capabilities of internal actuaries and improving processes. Training and leadership conferences by the co-sourcing partner can aid this, resulting in an increased breadth of industry knowledge, development of broader skill sets, improved ability to apply technology to existing processes, and greater ability, to leverage existing knowledge.

Ultimately, it is tip to each insurance company to take the time to evaluate its existing actuarial department--its strengths, weaknesses, and ability to accomplish the daily operations as well as help form the big picture. If a chief actuary or CFO decides that external environment and internal capabilities don't match, co-sourcing might prove to be die right option to meet the daily challenges and surpass the competition.

Doug French is global director of Insurance and Actuarial Services at Ernst & Young. He can be reached at [e-mail].