Scalability and the Plight of Insurance

Estimated Reading Time: 5 minutes

Managing an insurance organization is extremely difficult. We sell liabilities that we must track for 50 years or more. Each product can have complex features that must be managed and maintained during that time to know the extent of reserves and capital to hold. Insurance organizations are essentially technology companies that sell promises for future adverse events. This article will examine the difficulties of building a scalable insurance organization, especially surrounding actuarial processes and their modernization.

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The Need for Speed

As time has progressed, the products have become more intricate as computing power has increased. Hence, the regulation and accounting of insurance have become ever more complicated in a positive feedback loop. We need to add new requirements to old processes or create separate new ones. Given the length of products hanging around, there can be a plethora of methods developed by many people over many years. As computing power has become faster, management, regulators, and other stakeholders have wanted results faster, but this has become increasingly difficult.

Modernization is All the Rage

The hot topic of the day is Modernization. If we could update our systems and processes, we would surely be able to move faster. It is old technology that causes the problems. If we just made or bought some wis-bang-thing-a-ma-jig, we would solve all our problems. These projects are expensive and time-consuming because they try to overhaul what currently exists. If you were to quiz participants in the project, I bet they would rarely report any satisfaction with the results. How do we create scalable, long-lasting organizations that can handle the chaos of battle?

How to Build a Scalable Organization

For a Microsoft virtual conference, Brandon Burns' phenomenal presentation, Why You Should Care About Microservices, explains how to create scalable organizations. The solution isn't microservices but the fundamental principles and methodologies they bring to designing and coordinating extensive processes that need reliable scaling across large organizations and teams. Our actuarial services must be scalable to provide stakeholders with the best, most timely reporting. It is crucial not only to deliver the solution once but also to improve iteratively. We need to care not only about our stakeholders but also our teams. We cannot burn the teams out because they will stop caring and/ or quit, ultimately costing the organization more time, money, and effort.

Scaling processes are about scaling teams because technology and processes change faster than people. Coordination across multiple teams with multiple geographies, cultures, priorities, skills, and problem approaches only exacerbates the difficulties. Teams must stay a manageable size so that the team understands processes completely. If processes get too large or complicated, it is easy to rubberstamp their review and signoff because they get too difficult to manage in their mind's eye.

Software and actuarial processes do not work within a traditional hierarchy because they are complex systems. People need trust and autonomy to spot problems and self-organize to deal with their local issues. The source of problems can look quite different at different scales, so adapting and changing direction locally is vital. It is impossible to know all the requirements by looking solely from the top of the hierarchy. The key is to have loosely decoupled, modular services with well-documented, clear boundaries and predictable, easy-to-use interfaces. The interfaces need contracts that state precisely what the services require to receive so that the service can provide exactly what the user should expect.

Brandon implies that if you fail to plan for scaling, prepare to fail! When planning to scale your processes, are you planning to scale your teams? Are you training leaders, reviewers, and process maintenance? Or is it only focusing on how to get it done? If you build scalable teams, they will create scalable processes, but the converse is false. The misperception that scaling processes are easier than scaling teams gets actuaries into so many modernization problems. Milliman's research gives excellent insight into how actuarial modernization often fails.

The Problem

In January 2023, Milliman published its research, Fostering Innovation: A Guide for the Actuarial Profession, a perfect example of fearing change.

[1. Killed by coordination and inability to collaborate across teams]

However, it is interesting to note that the stability and predictability of cyclic work may also be seen as a negative by workplace employees, especially concerning creativity and innovation. When participants described some of the negative aspects of working in traditional roles and organizations, a common complaint was that they are highly regulated and structured, limiting effective communication between the project stakeholders.

[2. Managers fear change]

Further, interviewees said there was a high tendency to follow rubrics and pre-established factors in traditional roles and organizations. Instead of thinking about improving processes, employees were expected to follow protocol and complete tasks as they had always been done. The actuaries' supervisors and senior managers were not looking for risky innovation that might conflict with the interests of other key company stakeholders.

[3. Lack of trust and autonomy in decision-making]

Many shared that they found the company hierarchy frustrating because their bosses lacked the foresight and authority to utilize their new ideas to enhance existing processes. In the same vein, participants expressed that it was difficult to innovate in their traditional actuarial workplaces because company leadership must be the ones to mandate change, not the employees. Even further, if a conventional actuary were to try to innovate independently from their supervisors, they risked overstepping authority and creating friction with coworkers and leadership.

Milliman's report is 16 pages, but these three paragraphs specify why actuarial departments are terrible at innovation. The key to scaling teams is to encourage collaboration. Collaboration is the grease that makes miracles happen. Therefore,

1. Over-reliance on coordination kills innovation because it implies tightly coupled teams.

2. When managers fear changing processes, they do not plan to scale or create scalable teams. They are not teaching future leadership or their reports to handle their workload so that it is maintainable.

3. A lack of trust and autonomy in decision-making means upper managers must make exact correct decisions. People will become well-trained monkeys mindlessly following orders. They will not have the authority to fix the problems at the local scale.

I hope you can see a cultural problem we must fix before moving on to bigger, better, more reliable processes for our stakeholders. The culture must become before technology.

The Reconciliation

As actuaries, we know it is always essential to reconcile from another source. Our economic training taught us to think of the world in terms of linear systems, i.e., the whole is equal to the sum of its parts, and the interaction between the parts is immaterial. Alternatively, if I put in x, I should get out y. Unfortunately, the world does not work this way in most situations. We must reconcile with complex systems theory.

Introducing Complex Systems

We must consider an organization as an extensive multi-layer network in which all employees, teams, and departments are interconnected. When viewed through the lens of networks, complex systems are composed of many interconnected and interacting parts (called nodes) whose collective behavior is challenging to infer from the behavior of the individual components.

To further break down the properties of complex systems:

1. The structure of connections significantly influences the system's dynamics.

2. The interactions are often nonlinear, meaning small changes can lead to disproportionate effects.

3. Emergent properties arise—features of the system that are not present in any single part but result from the interactions.

4. The system exhibits adaptivity, self-organization, and robustness.

5. The whole equals the sum of the parts and their interactions 1.

Risk and Uncertainty

Edgar E. Peters explains in "Complexity, Risk and Financial Markets" that risk and uncertainty are not synonymous. Risk is a need to protect from loss. Uncertainty is a lack of certainty and predictability. But Edgar points out that uncertainty and randomness can reduce risk, not increase it!

Furthermore, complex systems reside within a spectrum in one of three states: static to dynamic and self-organizing to chaotic. As we try to increase predictability to reduce loss, we create highly structured, static systems that are difficult to change. This desire makes sense given that we work in a highly regulated business. We want to get it right, but this desire thwarts our ability to innovate. Counterintuitively, we must inject randomness and uncertainty into processes so loosely coupled groups can dynamically self-organize to innovate new solutions. However, there is a perceived fear that any uncertainty and randomness will immediately lead to chaos, which is a self-fulfilling prophecy.

Modernization is an Attitude, Not a Project

Edgar Peters points out that this has short-term stability but long-term instability. By sucking out all the uncertainty in the short term, it accumulates disproportionately in the long term. In the meantime, these processes become ever more brittle and time-consuming, and the distance between static and chaos shrinks immensely. Then, someone decides that Modernization is required to fix the issue, but it is too late.

Keeping the processes static during Pre-Modernization and not giving people autonomy in decision-making means they did not acquire the skills to innovate. Everyone was focused on short-term goals, so they never learned to communicate and collaborate with other teams innovatively.

Bottom Line

Brandon's video gives all the high-level details on how to remove the issues pointed out in Milliman's innovation report. To truly modernize is to follow the principles of Brandon Burns' presentation. If you modernize it and it does not look like what Brandon describes, then you are not getting much money, and you likely still have as many issues as you did before modernization.

Processes and software systems are complex systems at their heart, so we looked at Edgar Peter's description of markets, complex systems, and risk to reconcile Brandon's findings. As actuaries, it is essential to look at multiple sources of information to triangulate our findings. We can see that there is a lot of work to do if we are to move beyond our current problems.

You can connect with Bryon Robidoux on LinkedIn here Bryon Robidoux | LinkedIn

References:

Miller, John H., and Scott E. Page, Complex Adaptive Systems: An Introduction to Computational Models of Social Life, Princeton University Press, 2007.

Peters, Edgar E. Complexity, Risk and Financial Markets. Wiley, 2001.