Outsourcing Actuarial Work – A Discussion - Actuary.com

Outsourcing ActuarialWork – A Discussion•Southeastern Actuaries Conference•Steve Marco•June 20, 2008©2008 Genworth Financial, Inc. All rights reserved.Company Confidential

Why Outsource?Allows For Additional Resources At Less Than Market Costs– Enables Development of Needed Skills for:• Routine, Repeating Processes• Analytics, Both Elementary and Advanced• Surge Resources, Special Projects• Can Provide Expertise In Targeted Areas Once COEs Are Developed• Helps Organization Remain Competitive• Can Contribute To A Better Work/Life Balance• Advanced Math And Statistics Skills Available• English SpeakingOutsourcing Actuarial WorkCompany Confidential1

Comparative CostsINDIAUS ANALYST122,563118,063110,250US NEW ASA98,25075,00043,50040,00065,50050,00015,5004,5007,81312,00023,250Average Costs Per FTEAverage Costs Per US Analyst and Actuary (New ASA)Billed Amount per FTEBase SalaryEstimated Training and T/LBenefitsRelocationEstimated Training and T/L, Relocation and Recruitment values linearly amortized over 5 yearsTraining/Study TimeRecruitment FeeOutsourcing Actuarial WorkCompany Confidential2

What’s Needed Internally?Full Support From Senior Actuaries– They can’t sit on the sidelines– Must help drive the processes• Offshore Associates Must Be Thought Of As Actual EE’s– Can’t be thought of as “Us” vs. “Them”• Long Range Goal MUST Be A True COE– A full-functioning consulting firm supporting your actuaries– All areas should be addressed• Pricing• Valuation• ProjectionsOutsourcing Actuarial WorkCompany Confidential3

What’s Needed Externally?Controllership And Management By Outsourcing Group– Consistency in hiring process– Install appropriate performance metrics– Advertise capabilities to your in-house actuaries• Implement Training To Target Needs– Apply existing skills where possible– Develop additional ones where needed• Look To Be Fully Utilized Throughout Enterprise– Help your actuaries realize cost efficiencies– Allow projects on “back burner” to be addressed– Take advantage of exclusion of headcountOutsourcing Actuarial WorkCompany Confidential4

Requirements for Outsourcing WorkMore Cost Efficient Than If Performed In The USQuality Of Work Product Must Be Equal To US StandardsAccurate And Reliable OutputTimely Delivery / Quick TurnaroundWell Understood Processes That Work– Backed up and documented thoroughly– Easily recoverable back to the US• Effective Communications Network Needs To Be EstablishedOutsourcing Actuarial WorkCompany Confidential5

Implementation TimetableTimelineIndiaProposalStudyPhase IManageRepetitive Tasks/ MetricsMulti- Generational ApproachPhase IITrainHigher Level Jobs/ SkillsPhase III4-6 Months TollgateTollgate12-18 Months 12-24 MonthsBuildTrue COE-Establish HQ roles and responsibilitiesfor overall India success-Install monitoring procedure to gaugeproject performance.-Establish consistent procedure bywhich sites select associates-Work with India to refine taskmanagement-Involve India as an actuarial entity forInitiative reviews-Understand where we are underutilizingresources/ ensure fully deployed-Set appropriate performance metricsand enforce accountability. Removenon-performers.-Consider India student actuarial leadershipprogram- establish rotations in US-Provide incentives for students to take USactuarial exams for product and valuation topicsIf not practical, provide targeted training for thosetopics-Mentoring within Outsourcing Operationsupplemented with US resources as well, possiblyon site in India with US Actuary-Target resident skills that can be leveragedthroughout your organization.-Examine opportunities for sharing resources withother parts of your organization (Risk, Finance?)-Promote active business relationships betweenoutsourcing leaders and site users. Includemanagers in the Annual Leadership Meeting. Thiswould result in higher visibility and increasedcontact on both professional and personal levels.-Determine which functions are wellestablished and utilized in multiple sites- Designate which are suitable fordevelopment into enterprise wide “Centers ofExcellence”. This concept is meant to denotea “wing to wing” process whereby all aspectsof a project would be addressed, ranging frombasic data “scrubbing” to advanced actuarialanalysis.-Add/Develop any additional intellectualcapital resources needed to achieve COEcapability.-Actively promote wholesale use across allsites.-Expand number of COE’s, adding whenpractical and cost effectiveOutsourcing Actuarial WorkCompany Confidential612

Phase II RefinementsIncrease TrainingFind US Actuary To Spend 2-3Years In India OR Several USActuaries Travel To India Per Year– 1-2 month stays– Selected to target specific actuarialareas deemed weak– Builds familiarity and long-termrelationships among senior actuaries•Develop Targeted TrainingMaterials– Possibly for on-line use•Include In ALDP, SWAT•Develop US/India MentoringProgram•Attend Selected SOA Functions•Encourage Participation in SOAExam Syllabus•Develop Effective Student ProgramExpand UsageIdentify Skill Sets That Can BeLeveraged Throughout TheOrganization– Catalog of tasks– Individual skill sets•Extend Process To IncludeExamination Of ResponsibilitiesNot Currently Transferred ThatCould Be Considered•Encourage/Facilitate Transfer OfAdditional Tasks– Allow US actuaries to focus onbusiness issues instead of proceduralor computational onesOutsourcing Actuarial WorkCompany Confidential7

Phase II RefinementsIncrease CommunicationContinue Phase I Process ControlReviews– No less frequent than quarterly•Distribute High Level Dashboard ToSenior Site Actuarial Leadership•Continue Actuarial InitiativeReviews With India•Consider Participation In TheAnnual Leadership MeetingOtherLook for Opportunities To TeamUp With Other Areas– Finance– Risk•Incorporate Specific India UseTargets In Each Site’s SLA AndEmphasize During Review•Limit Ability Of Sites To HireAdditional Domestic Resources– Do not penalize for outsource usageOutsourcing Actuarial WorkCompany Confidential8

Current Assignments (Group Incl. For Illustration)Experience StudiesValuationTerm/UL Annuities Group LTC CorpExp AnalysisValuationExp AnalysisValuationPreparationOfReportsC F TestingValuationReportingExp AnalysisStat ReportingInternationalClaims ReservingProjectionsMG-ALFADevelopmentFinancialProjectionsMG-ALFADevelopmentProduct DevelopmentProductDevelopmentIllustrationSoftwareSpecialStudiesOBVOBV AnalysisRisk ManagementEC SupportAssociates 6 5 2 2 42Outsourcing Actuarial WorkCompany Confidential92

Other ConsiderationsBack-Up Planning & Cross-TrainingObjectiveCreation Of Back-Up For ActuarialProcesses And Cross-Training OfIndividuals To Ensure– Knowledge retention– Continuity of processes during absenceof individual– Enhancement of individuals’ technicalcapabilities•Design Of A Peer ReviewMechanism To Ensure OutputQuality In Terms Of– Data accuracy– Validity of the inputs, logic, andmethodology usedCompetency MappingIdentify the Parameters RequiredFor Flawless Process ExecutionMap Individuals Against EachProcess In Terms Of Their CurrentAbility To Work On A Process AndThe Level Of Additional TrainingRequired To Do The ProcessAssess The Individual’s SoftwareKnowledge And The Level OfTraining Required In The RelevantAreaCreation Of Back-Up For EachProcess Taking Into Account TheCompetency Of The IndividualsOutsourcing Actuarial WorkCompany Confidential10

Other ConsiderationsBack-Up Planning & Cross-TrainingCurrent StatusAnnuity Product Development Process– Three-member team– Back-ups in place•HQ Projection Team– One member– Needs immediate consideration•Life Experience Studies– Two-member team handling commonprocesses– Natural back-up•Other Experience Processes– Need for back-up creationProposed Road MapBuy-In From The Site Actuarial Leaders OnThe ProposalIdentify Back-Ups Based On TechnicalCapability And Current WorkloadEstablish System CapabilityEstablish Timelines for Cross-TrainingDraw Up Individual Training Plans ForIndividualsDocument the Processes; Prepare TrainingMaterialEstablish The Metrics For SuccessfulCross-Training And Back-Up CreationDesign A Peer Review Mechanism UsingThe Trained Individuals For Each ProcessOutsourcing Actuarial WorkCompany Confidential11

Other ConsiderationsCompetency Mapping For Selected ProcessesSr.No Business Process Task Assoc 1 Assoc 2 Assoc 3 Assoc 41 Life Projections Building Model Populations2 Life Projections Building projection models in PTS3 Life Projections Building projection models in ALFA4 Life Projections Datamining PTS Reports5 Life Projections Updating Report Templates6 Life Projections PV of Future Commissions7 Life Valuation Average Credited Report8 Life Valuation Diabaility Reserve valuation - Product Line 19 Life Valuation Disability Reserve valuation - Product Line 210 Life Valuation Interpolated Terminal Reserve quotes11 Life Valuation VPL Illustrations12 Life Valuation Stat Strain Monitors13 Life Product Development Inforce & Sales Illustrations14 Life Product Development Building pricing models in ALFA15 Life Product Development Building pricing models in PTS16 Life Product Development APL Illustrations17 Life Experience Studies Policy 6.018 Life Experience Studies Death Claim Variance Reports19 Life Experience Studies Experience System - Product Line 120 Corporate Actuarial VBA21 Corporate Actuarial OBV22 Corporate Actuarial RBC23 Other Valuation Daily Reporting of Premium Received and Claims Paid24 Other Valuation Lapse Reporting25 Other Valuation Earnings by Source Report, Quarterly26 Other Valuation Cash flow Testing27 Other Valuation LTD Reserve Calculation28 Other Valuation Reserve Analysis (Manual Adjustments, Margins)29 Other Valuation Quarterly Updating of Reserve Rollforwards30 Other Valuation Running Reports and Update Premium Waiver Reserve31 Other Valuation Annual Statement/ State Reporting32 Other Valuation RBC Analysis33 Other Valuation Monitoring Asset Portfolio Earnings Rates34 Other Valuation Capital Gains Impact Report35 Other Valuation Actuarial Review Presentation36 Other Valuation Green Belt Project - Reserve MarginsLegendsWorking knowledgeModerate training requiredComprehensive training requiredMapping based on: Actuarial KnowledgeCurrent Job ResponsibilityProcess KnowledgeOutsourcing Actuarial WorkCompany Confidential12

Other ConsiderationsPeer Review MechanismMethodologyEstablish The Back-Ups For AllProcesses And Complete The CrossTrainingThe Individual Back-Ups For EachProcess Would Be The Natural PeerReviewersFrequency Of Review To Depend OnWork TypeIdentify The Sub-Processes That NeedTo Be Reviewed—Critical / Non-CriticalPeer Review Process:– Documentation of procedures forperforming the process and acceptablestandard of work– Completeness of the required inputs– Reasonableness of the results obtained– Accuracy of data and methodologyused– Feedback to the individualConcernsLevel And Seasonality Of Workload OfIndividuals Will Determine The SuccessOf Peer Review MechanismVaried Level Of Expertise Of TeamMembers May Increase The Time TakenFor Peer Review ProcessNeed To Decide On The Time That AnIndividual May Spend On Peer ReviewOn A Regular BasisNeed To Make The Peer Review Process“Independent”Need To Track The Effectiveness ofPeer ReviewingOutsourcing Actuarial WorkCompany Confidential13

Other ConsiderationsConstraintsSystem RequirementsObtain The System AccessRequired For Each Process– Access to Mainframe– Access to Local servers•List The Software Used ForPerforming Each Process And ListAny Additional Requirements– PTS– MG-ALFA(Currently India Actuarial Team has 10MG-ALFA Licenses and Site Licensefor PTS)Other QuestionsTime To Cross Train Will DependOn The Workload Of The Individual– How do we address this?•There May Be Additional CostIncurred Due To SystemRequirements•Should We Back Up Only TheBusiness Critical Processes? CanWe Pilot the Initiative With A FewCritical Processes And ReplicateThe Same For The Remaining?•How Do We Identify The Metrics ForSuccessful Cross-Training AndBack-Up Creation?Outsourcing Actuarial WorkCompany Confidential14

Other ConsiderationsAssociate Not Able To Work Alongside US Process ManagerLarge Time Difference– 9 ½ hours for standard time– 10 ½ hours for daylight time• English Is Not Always English• Some Cultural Differences– Work ethic is there - BUT• Little familiarity with US Actuarial Practices (ASI is not the SOA)• Little or NO understanding of how Americans think• Reluctance to disagree—even though they actually do• Retention A Problem• Market In India Is Booming– Salary increases of 75% not uncommonOutsourcing Actuarial WorkCompany Confidential15

Other Possible LocationsWest Indies– The University of the West Indies has an Actuarial Program– Approximately 20 students are admitted each year• Advantages– Close to home (Eastern Time Zone)– English spoken that is more easily understood– Many take SOA exams• Unknowns– Cost Differential– Feasibility / Cost of starting a dedicated practiceOutsourcing Actuarial WorkCompany Confidential16

Some Final Thoughts(My Own, Not Genworth’s)Outsourcing CAN Work, BUT There Are LimitationsAbility To Send Advanced Actuarial Work Questionable– Pre ASA work predominantly sent– Need significant training to raise level of assignment• Turnover And Continuity Will Continue To Be A Problem• Cost Savings May Not Last Much Longer– Weakening dollar– Rapidly growing Indian insurance market• Constant “Push Back” From Front Line Actuaries– Voiced in terms of poor performance BUT– In many cases, a concern about job securityOutsourcing Actuarial WorkCompany Confidential17

AppendixOutsourcing Actuarial WorkCompany Confidential18

Development of Domestic Actuarial CostsCost ItemsNEW ACTUARIALHIRENEWASSOCIATENEWFELLOWEXPERIENCEDASSICIATEACTUARIALANALYST1 Base Compensation 45,000 75,000 100,000 87,500 50,0002 Benefits @ 31% of Salary 13,950 23,250 31,000 27,125 15,5003 Training (Opportunity)Cost 4,688 7,813 0 9,115 04 Relocation Expense 2,200 12,000 12,000 12,000 05 Recruitment Fee 0 4,500 6,000 5,250 06 Incentive Comp 0 0 10,000 0 0TOTAL COST 65,838 122,563 159,000 140,990 65,500Training Cost based on assumed 200 hours per year study time, proportional to salary.Benefit gross up @ 31%Relocation expense based on 2003 budgeted amount amortized linearly over 5 years - $11,000 for renter, $60,000 for homeownerRecruitment fee at 30% of salary, amortized linearly over 5 yearsActuarial Analyst assumed to be skilled actuarial resource not on an exam trackOutsourcing Actuarial WorkCompany Confidential19