Three Actuarial Roles
If you manage, sell for, or invest in an insurance company, you deal with actuaries in three distinct roles. They are Valuation Actuary, Financial Actuary, and Marketing Actuary. Your organization may not use these three titles, and you might only employ one actuary. However, these three roles are being played. If the dynamics of these roles are not recognized and managed, your actuarial function may be performing below its optimal level.
The Valuation Actuary is your in-house regulator. He or she represents the interests of the policyholders. Valuation Actuaries issue an opinion each year that the assets supporting your reserves, combined with your future premiums and investment income, are adequate to meet your future obligations to policyholders. The best way to deal with your out-of-house regulator (e.g. state insurance department) is to have an effective in-house regulator – the Valuation Actuary. The Valuation Actuary can help assure that your reserves are just right – not too high and not too low. Further, the Valuation Actuary can help structure the investments supporting your reserves so that cash inflows match cash outflows to the maximum extent possible.
The Financial Actuary represents the interests of your owners. Those who invest in an insurance company are, by definition, assuming risk. The Financial Actuary can help assure that expected returns are commensurate with the risks assumed. Financial Actuaries can also help manage capital structures, using equity, debt, and reinsurance to achieve the desired risk-return relationship. Finally, Financial Actuaries help manage the financial reporting process. Insurance companies report financial results, to owners, regulators, taxing authorities, and the public. Each has a different purpose and requires a different set of actuarial assumptions in the financial reports prepared.
The Marketing Actuary considers the reserve requirements of the Valuation Actuary, the risk/return requirements of the Financial Actuary, and the realities of the marketplace (including product regulations), and designs marketing programs that create value. I believe the best way to create value is to follow a six-step process that includes market definition, market research, competitor research, distribution system analysis, product development, and monitoring of emerging experience. Each of those topics merits significant further discussion.