Revolutionizing Risk: Exploring Actuarial Outsourcing in Insurance | Blog

Outsourcing is a growing trend in the insurance industry to transform the actuarial function by reducing costs, creating innovation, increasing efficiencies, and filling the talent demand. Explore the factors driving insurers to partner with specialized service providers and the advantages and obstacles of actuarial outsourcing. Contact us to learn more.

In response to today’s uncertain macroeconomic conditions, changing customer demands, and geopolitical and climate risks, insurance and financial institutions realize the critical need for actuarial transformation.

This transformation involves reimagining the role of actuaries in the organization and adopting new technologies and methodologies. Enterprises increasingly seek outsourcing support from specialized service providers to enhance the effectiveness and efficiency of actuarial processes, including pricing, reserves determination, capital assessments, and financial reporting.

Outsourcing can also help enterprises meet a surging demand for specialized actuarial talent. According to the Bureau of Labor Statistics, the demand for actuaries is expected to increase by 21% between 2021 and 2031. This growth rate surpasses most occupations, signaling a promising future for those working in the industry.

The rising demand for attractive job opportunities in related fields like data science compounds this increasing demand. Additionally, insurers compete with technology firms for the best actuarial professionals, even inside the profession.

Recognizing that the increasing demand for actuaries is unlikely to subside naturally, insurers are proactively addressing this issue. Outsourcing actuarial services is emerging as a compelling long-term solution that enables insurers to maintain control and gain a strategic market advantage.

While insurance providers and insurtechs have outsourced actuarial services since the early 2000s, the trend has accelerated in recent years due to the rising complexity of actuarial work, the need to focus on core competencies, and the rise of insurtechs. Let’s take a look at the factors fueling its momentum.

Key trends shaping actuarial services outsourcing

Heightened demand for expertise and the integration of cutting-edge technologies are among the key factors shaping the future of actuarial outsourcing. These trends reflect the industry’s commitment to staying ahead in a competitive market.  Understanding these driving factors is crucial for insurers to harness the full potential of actuarial services outsourcing.

Advantages of outsourcing in actuarial transformation

The advantages of outsourcing in actuarial transformation extend beyond fiscal efficiency to encompass resource flexibility, access to specialized knowledge, and freeing resources to focus on more strategic tasks.

• Cost optimization: Actuarial outsourcing optimizes costs by using offshore resources and the specialized expertise of external partners. This fiscal advantage is significant in the insurance industry, where financial prudence is paramount. Insurance companies can significantly cut operational costs by automating manual processes and eliminating the need for an extensive in-house team
• Resource scalability: Actuarial workload fluctuates frequently, making maintaining an appropriately sized in-house team difficult. Outsourcing enables insurers to adapt their actuarial workforce to changing demands. This flexibility encourages prudent control of operating costs while ensuring workforce numbers align with actual needs
• Specialized expertise: Outsourcing partners bring a rich reservoir of specialized knowledge and expertise. Their in-depth understanding of actuarial nuances and steadfast commitment to staying current with best practices elevate actuarial work standards and expedite the implementation of novel solutions. This augmented expertise ensures alignment with the ever-evolving regulatory framework and enhances the organization’s overall actuarial capabilities
• Strategic focus: Outsourcing relieves internal teams of routine actuarial tasks, freeing them to concentrate on key strategic objectives. Insurance companies can focus on developing cutting-edge products, creating customer-centric solutions, and other mission-critical initiatives supporting growth, leading to a competitive edge
• Regulatory agility: Actuarial outsourcing is a flexible tool for regulatory conformity when supported by providers with a clear focus on compliance. It ensures that actuarial procedures consistently meet the ever-changing regulatory environment. This regulatory agility helps insurers avoid compliance-related pitfalls while enhancing their reputation for diligence and reliability
• Resource optimization: Actuarial outsourcing allows insurers to manage their resources more effectively. It will enable insurers to skillfully adjust their resource configuration while supporting legacy applications during the transformation without incurring internal hiring and training costs. This flexibility ensures actuarial tasks are handled quickly and continuously, guaranteeing smooth operations even in the face of unforeseen resource constraints

Challenges with outsourcing actuarial services

Next, we explore the obstacles insurers may face, as illustrated below:

Financial challenges

• Accuracy and timeliness: Outsourcing partners may struggle to deliver accurate results on time because of the complex nature of actuarial processes, potentially leading to financial errors or reporting delays
• Expertise gap: Outsourcing providers might lack the in-depth actuarial expertise required for precise financial calculations, raising concerns about the quality of results

Operational challenges

• Communication challenges: Poor communication between the insurer and the outsourcing partner can result in subpar project management, inefficient processes, and delays in critical tasks
• Quality and risk management: Inadequate quality and risk management processes by the outsourcing provider can compromise the overall quality of work, leading to operational inefficiencies

Counterparty challenges

• Resource scalability: The outsourcing partner’s ability to scale resources to match fluctuating actuarial workloads is crucial. If they lack the talent, capacity, or expertise, it can hinder the insurer’s objectives
• Contractual obligations: If the provider does not fulfill contractual terms, actuarial processes may be disrupted, causing unanticipated issues

Reputational challenges

• Stakeholder interactions: Inexperienced outsourcing partners may jeopardize relationships with external stakeholders such as regulators, insurers, and policyholders, leading to reputational risks
• Specialized roles: Outsourcing specialized actuarial roles due to a shortage of local talent may negatively impact the insurer’s reputation in those areas if the provider is inexperienced

Armed with an understanding of the opportunities and challenges of outsourcing actuarial services, selecting the right partner is critical. Insurers must evaluate providers’ capabilities by carefully considering their expertise, experience, cost-effectiveness, security measures, and technology infrastructure to make an informed decision.

To discuss actuarial outsourcing trends, contact [email protected] and/or [email protected]. Stay updated by accessing Everest Group’s latest research on Insurance Business Processes.

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