Actuaries Work in a Number of Areas at Allstate Financial
Pricing and Product Management
The Product Management department is responsible for developing and pricing new products, updating existing products, monitoring the profitability of the company's current products, and completing requests from other areas of the company. Actuaries contribute to each of these responsibilities.
Pricing and Product Management: The Product Management department is responsible for developing and pricing new products, updating existing products, monitoring the profitability of the company's current products, and completing requests from other areas of the company. Actuaries contribute to each of these responsibilities.
In order to develop, price, and update annuity and life insurance products, actuaries follow a product development process. The process involves a series of steps, which include coming up with a product idea, researching the idea, designing and planning, implementing, and monitoring. Each of these steps is outlined below.
Product Idea: This includes coming up with an idea for a new product that fills a need or solves a problem that isn't addressed by existing products. The product must be consistent with company goals and strategies.
Research: In the early stages of product development, the actuaries on the product development team must complete research to determine if it is feasible to develop and offer this new product. They must conduct market research, identify product risks/constraints, and speak to many other areas in the company to get their input and thoughts on the new product. This includes speaking with others from the marketing, legal, tax, valuation/finance, investments, and technology departments.
Design/Plan: This stage includes coming up with the product design, develop pricing models and assumptions, and set the prices for the product. The objective in setting the price is to balance the need for the company to make a profit and the need to be competitive with other companies.
Implementation: Implementation includes filing products with state insurance departments and designing marketing and training materials for agents. Actuaries are involved in assisting with any state specific requests needed to get the product approved in each state.
Monitor: After a product is launched, actuaries need to continue to monitor sales levels, sales mix (males/females, smokers/nonsmokers, underwriting classes, etc.), company expenses, and ongoing profitability. As a result of the monitoring, the actuaries need to decide if the product should be modified or discontinued.
Each of the stages listed above create a cycle that is ongoing. The product development process can move back and forth between each stage as needed. For example, if we are in the design process, we can always go back to the research stage if it is determined an aspect of the product needs more research. The diagram below illustrates the cycle.
Modeling (Cash Flow Testing)
Actuaries in Modeling perform financial projections of in-force (policies previously sold that are still on the books) and new business policies for a variety of purposes. Life insurance and annuity products are individually modeled in specially designed actuarial software packages. The Models are built from the ground up using product specifications and seriatim policy data. Different economic scenarios and actuarial assumptions are added to the models dependent on the output required for certain actuarial processes and customers.
Actuaries in Modeling acquire valuable actuarial modeling experience, including broad exposure to actuarial modeling software. They also are exposed to life insurance financial statements and GAAP and Statutory accounting concepts. Actuaries in Modeling gain an understanding of the key financial drivers of life insurance products and learn valuable analysis techniques.
The main processes in Modeling include:
DAC (Deferred Acquisition Cost): GAAP accounting requires the matching of expenses to revenues. Large upfront expenses required to sell life and annuity products must be amortized over the life of the products based on expected future profits. Each year actuaries in Modeling are responsible for calculating the amount of the DAC write off or write up, the remaining DAC balance, and expected future profits.
AOM (Actuarial Opinion and Memorandum): State insurance regulators require that insurance companies hold sufficient reserves. In other words, regulators want to ensure that companies will be able to pay all the current and future claims owed to their policyholders. AOM is the process life actuaries perform to provide regulators with this information. The present value of a company's assets must be greater than the present value of its liabilities. The present values are reviewed under a variety of assumptions about how interest rates will behave in the future.
RBC C-3: Risk-based capital is a method developed by the National Association of Insurance Commissions (NAIC) to measure the minimum amount of capital that an insurance company needs to support its operations. The measurement sets capital requirements to reflect the degree of risk taken by the insurer. Many elements of RBC are factor-based, but the C-3 (interest rate risk) component is determined using a company's models. Allstate Financial sets the C-3 capital component as the percentage of statutory reserves required to maintain solvency at the 95th conditional tail expectation of a stochastically generated set of economic market scenarios.
Economic Capital: Economic Capital is a new application of our corporate actuarial modeling software. Economic Capital can be defined as the excess of the market value of the assets over the fair value of liabilities required to ensure that our obligations can be satisfied at a given level of risk tolerance, over a specified time horizon. Stochastic scenarios are used to capture the economic risks inherent in the insurance business, including: market risk (interest rates and equities), credit risk, mortality risk, lapse risk, and operational risk. Economic Capital has many uses including determining the "right" level of capital, allocating capital back to the product lines, performance measurement, assisting with rating agency discussions, risk management, and product pricing.
Model Maintenance and Enhancements: In between delivering on the above process, the Modeling Unit focuses its efforts on maintaining and enhancing the corporate model. This includes working with different areas of the company to revisit assumptions, adding new products and new product features, converting a few "older" models not on the current platform, automating portions of the modeling process, and developing new model capabilities such as duration-matching and stochastic investment credit migration. In addition, time is spent looking at potential future applications of the corporate model, such as principles-based reserves, fair value accounting, and economic performance measures.
Actuarial Valuations and Analysis
Actuarial Valuations and Analysis (AVA) evaluates the impact of risk, regulations and other dynamic factors to the Allstate Financial balance sheet. The major contributions of the team are to 1) fairly state the actuarial assets and liabilities, to 2) appropriately interpret the rules and guidelines that govern actuarial calculations and to 3) provide the actuarial analysis of the financial results. The foundation of what we do is our people. Developing talent through careful training and engaging talent in challenging work assignments are key factors in delivering exceptional value and exceeding our goals.
Actuaries in AVA can be involved in many projects and processes. Each month, actuaries partner with technology and finance to produce the actuarial valuations. These valuations are then analyzed by the team to understand the "why behind the financial results and in to be predictive of results for future periods. The actuaries insights into the business drivers provide senior management the ability to make better business decisions.
AVA actuaries build out the assumptions that support the company's actuarial projects. They assure integrity in the assumptions and the results produced by the actuarial calculations. They study the economic and political environments and provide insight as to how these environments can impact the financial success of the company.
Important strategic projects in AVA include the Business Intelligence Environment (BIE). The BIE will provide accurate and timely information to allow for in depth close and project level analysis. The BIE is the foundation for the other key projects of the team, namely the expansion of the Experience Analysis Unit and the Analysis Enhancement Project. Focusing on these key projects strategically positions the AVA Team to address future initiatives, namely, Principles Based Approaches to Capital and Reserves and Fair Value Reporting.
Capital Management and Reinsurance
Allstate Financial's Capital Management Unit is responsible for measuring, monitoring and enhancing the capital usage of the company. The unit balances the varied needs and perspectives of our regulators, rating agencies, customers, shareholders, and management. Our overarching goal is to improve the capital efficiency of the company while assuring strong solvency and financial risk management. Not only does this require traditionally strong actuarial skills, but also creativity and an ability to network with several areas of Allstate including Product Development, Accounting, Actuarial Valuation and Analysis, Tax, Treasury and Legal. Improvements in capital efficiency can stem from many sources, however reinsurance is a common tool that our unit employs to manage the risk/return profile. As such, the Capital Management unit determines reinsurance usage strategy and guidelines for the company, maintains all relationships with external reinsurance partners, and negotiates reinsurance arrangements.
Actuaries within the Capital Management Unit utilize and develop knowledge pertaining to: Regulatory and rating agency perspectives on required capital and the financial strength ratings process, Statutory and GAAP accounting, specifically associated with how differences in the accounting bases impact statutory capital and GAAP equity.Managing reinsurance negotiations as well as measuring and managing reinsurer counterparty credit exposure. Methods for enhancing the risk/return profile and improving return on equity. Forecasting of statutory and GAAP results, required capital, and associated dividend planning. Maintaining a network of internal Allstate resources as well as external reinsurer relationships.
Asset/Liability Management (ALM)
Allstate Financial's Asset/Liability Management (ALM) Unit is responsible for accurately measuring and properly mitigating instances of harmful capital markets risk and enabling investment performance that fuels AF sales and profitability. The unit works closely with Allstate Investments to invest in assets that enable profitable growth while prudently managing overall company risk of changes in interest rates, investment spreads and equity markets. Not only does this require traditionally strong actuarial skills, but also creativity and an ability to work well with several areas of Allstate including Allstate Investments, Product Development, and Finance.
Major contributions of actuarial students can include many things, including: Computation and reporting of key ALM risk metrics, Developing, substantiating and promulgating prescriptions for attaining optimal risk positions, Assistance in development of new economic capital framework, New product development analysis of capital markets risk, and Adjudicating sources and uses of operating cash
Actuaries within the ALM Unit utilize and develop knowledge pertaining to: Investments, including types and uses, Key capital markets risks, hedging and other risk management techniques and strategies including the use of derivatives, Asset allocation techniques and importance of diversification, Asset / Liability Management strategies, and Optimization techniques used in risk management strategies.
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