Actuarial Modernization

Actuarial Modernization

IABA The Changing Role of the Actuary in the Face of Robotics and Process Automation Bruce D. Fell, FCAS, MAAA, CFA, CERA Jonathan Ankney, ACAS, MAAA July 28, 2018 1 | Copyright 2017 Deloitte Development LLC. All rights reserved. DISCUSSION OUTLINE Background What is Pixelation? The Pixelation of Actuarial Roles Advanced Technologies Impact on Actuaries Copyright 2018 Deloitte Development LLC. All rights reserved. Deloitte Consulting | Exponential Actuary 2 BACKGROUND

Copyright 2018 Deloitte Development LLC. All rights reserved. Deloitte Consulting | Exponential Actuary 3 THIS IS WHAT A FACTORY LOOKS LIKE TODAY Copyright 2018 Deloitte Development LLC. All rights reserved. Deloitte Consulting | Exponential Actuary 4 AND THIS IS HOW A TYPICAL OFFICE LOOKS TODAY Copyright 2018 Deloitte Development LLC. All rights reserved. Deloitte Consulting | Exponential Actuary 5 We are on the cusp of Business 4.0 Within 10 Years 1-3 1st Industrial Revolution 1784: First mechanical weaving loom Introduction of mechanical

production facilities with the help of water and steam power 2nd Industrial Revolution 1870: First assembly line Through introduction of mass production with the help of electrical energy 3rd Industrial Revolution 1969: First programmable logic control system Through application of electronics and IT to further automate production 1700 s Legend

Industri al Revolu ti on Earl y Stage Technol ogy Mature Technology Future Event 4.0 201 5 Early Stage Early Cognitive Stage RPA BPM Systems Capable RPA 1 Solutions Deployed Dependence on Global Horizontal Category MLPs (Possibly Regulated) Widespread

Cognitive Augmentation and Automation 4th Business 4.0 This revolution redefines what it means to be a professional RPA will have commenced deployment in most large businesses by 2017 RPA and Cognitive Automation will be ubiquitous in business by 2020 Horizontal Machine Learning Platforms (MLPs) become ubiquitous by 2025 Robotic Process Automation Source: Industry 4.0: Challenges and Solutions for the Digital Transformation of Exponential Technologies, Deloitte AG, 2015 and Deloitte proprietary research 1 Copyright 2018 Deloitte Development LLC. All rights reserved. Deloitte Consulting | Exponential Actuary 6 Copyright 2018 Deloitte Development LLC. All rights reserved. https://www.bloomberg.com/graphics/2017-jobs-automation-risk/ Deloitte Consulting | Exponential Actuary 7 Impact of Automation A glimpse into the next 10 to 20 years for a sample of Technology, Media and Telecommunication jobs Proportion of tasks that can be automated1

10% Marketing Manager 1 22% Human Resource Officer Probability of automation1 2% 31% Marketing Manager Human Resource Officer 18% 21% 23% 85% Business Dev Officer Sales Representative

Business Dev Officer Sales Representative 87% 22% 97% 2% Payroll Specialist Finance Supervisor Payroll Specialist Finance Supervisor C. Lamb. (June 2016). The Talented Mr. Robot: The Impact of Automation on Canada's Workforce. Brookfield Institute. Copyright 2018 Deloitte Development LLC. All rights reserved. Deloitte Consulting | Exponential Actuary 8 A LOT OF BUZZ ABOUT ACTUARIAL MODERNIZATION There are numerous challenges across the Insurance industry driving the need for Actuarial

Modernization. Insurers are trying to address similar pain points in the management of financial results, reserving, pricing and ERM Industry Challenges Opportunity Patchwork of Outdated Systems Leading Actuarial Systems Disconnected Operations Integrated and Connected Services Constrained by Process and Data Focus on Value Add Activities Actuaries Performing IT Roles Automate IT Tasks Reactive Operations Proactively Analyze Results Limitations in Governance Embedded Governance Emerging Regulations

Readiness for New Regulations Copyright 2018 Deloitte Development LLC. All rights reserved. and are making targeted investments to shift the focus of Actuaries into more strategic activities Deloitte Consulting | Exponential Actuary 9 MODERNIZATION AND EXPONENTIAL TECHNOLOGIES Seven technologies have growing relevance for how the work of Actuaries gets done Core Modernization Cloud Here Now Visualization In-Memory Computing Process Robotics Exponentials Emerging Quickly Advanced Analytics Copyright 2018 Deloitte Development LLC. All rights reserved.

Cognitive Computing Crowd Sourcing & Competitions Deloitte Consulting | Exponential Actuary 10 CURRENT STATE OF ACTUARIAL FUNCTIONS The Actuarial Profession performs a range of activities across the cognitive/social spectrum with more effort spent than desired on lower cognitive activities. Automation has been used to automate some of these activities. Higher 50% Cognitive/Social Requirement 25% 25% Lower Spectrum of Actuarial Activities Ideation / Hypothesizing E.g. Product development, Marketing, Distribution Copyright 2018 Deloitte Development LLC. All rights reserved. Computation and Distillation E.g. Modeling, Pricing, Reserving, Financial Reporting Application and Decision Making

E.g. Strategic Planning, Inforce Management Deloitte Consulting | Exponential Actuary 11 WHAT WILL THE ACTUARIAL FUNCTION LOOK LIKE A FEW YEARS FROM NOW? Copyright 2018 Deloitte Development LLC. All rights reserved. Deloitte Consulting | Exponential Actuary 12 FUTURE STATE OF ACTUARIAL FUNCTIONS The nature of the Actuarial Profession and their activities is being disrupted due to technological and talent/operating innovation. This will shift human work towards higher cognitive and valueadd activities. Higher 45% 45% Cognitive/Social Requirement Future Now 10% Lower Automation Spreading Across Spectrum of Actuarial Activities Ideation / Hypothesizing E.g. Product development,

Marketing, Distribution Copyright 2018 Deloitte Development LLC. All rights reserved. Computation and Distillation E.g. Modeling, Pricing, Reserving, Financial Reporting Application and Decision Making E.g. Strategic Planning, Inforce Management Deloitte Consulting | Exponential Actuary 13 IN THE NEXT FEW YEARS, ACTUARIAL ORGANIZATIONS WILL LOOK VERY DIFFERENT Imagine A World Where 5:00 AM An automated robot completes running of actuarial models and reserves. Output is sent to its analytics engine 6:00 AM The data from the modeling engine is staged on a Tableau server and dashboards are refreshed 7:00am The natural language

generator adds in narratives to the dashboard 8:00am The Chief Actuary has access to the updated reports and narratives as soon as he/she arrives in the office 8:10am The Chief Actuary interacts with the chatbot in natural language to drill down into splits by channel/product 8:15am The Chief Actuary further drills down into variance analyses for products /services with dropping margins All of the technologies required to realize this vision of the future exist today 14 WHAT IS PIXELATION? Copyright 2018 Deloitte Development LLC. All rights reserved. Deloitte Consulting | Exponential Actuary 15

Pixelation comes from the world of digitized images When an image is broken down into its component pixels such that you can better identify its building blocks Copyright 2018 Deloitte Development LLC. All rights reserved. Deloitte Consulting | Exponential Actuary 16 Pixelation zooms into a task/project to break it down to its core components (pixels) Identify the components of a project in order to architect the right approach and leverage the best mix of technologies, people and crowds to deliver results. Copyright 2018 Deloitte Development LLC. All rights reserved. Deloitte Consulting | Exponential Actuary 17 A common place where Pixelation is used is with Crowdsourcing Crowdsourcing can be used for design, development, and testing activities that require a reliable source of skill or technique. The power and flexibility of crowdsourcing allows you to use the community for individual project components to facilitate an end-to-end solution. 2.Gameplan Creation Design and development projects can start with a rough idea or a full requirements document. or or Whiteboard Mockup

Scope survey Detailed requirements documents A gameplan breaks the project into small, open competitions that attract hyper-specialized competitors. Deliverables iterate and build on each other until the final product is complete. Challenges How it works 1.Requirements Why it works The scale and specialization of the crowd increases the probability of extreme value outcomes Design Challenge Developme nt Challenge Testing Challenge Time

Statistics 3. Challenge Execution Crowd submits code or algorithm Crowd tests and finds bugs Structure Competition drives creativity and quality The raw nature of competition forces participates to think out side the box and outperform their competition Sponsor feedback sets direction & forum posts answer questions Sponsor manages the feedback processes and the challenge forum where the crowd gets their questions answered Copyright 2018 Deloitte Development LLC. All rights reserved. Crowd submits checkpoint designs Sponsor provides direction & feedback Sponsor selects Crowd incorporates winners &

requests final feedback fixes High ranking crowd members review and score submissions Bugs are reviewed & prioritized Crowd submits bug fixes Scorecards determine challenge winners Co-pilot tests and deploys fixes Incentives Why does the crowd want to participate? Prize money Status in community Educational Opportunities

Deloitte Consulting | Exponential Actuary 18 BREAKDOWN OF IMPACTED ACTUARIAL TASKS Various segments of the Actuarial process can be automated and enhanced End-to-End Actuarial Process Data Acquisition & Preparation Modeling Reporting and Analysis Automation Spreading Across Spectrum of Actuarial Activities Use Cases Using rules-based processes and data automation to mimic human actions Copyright 2018 Deloitte Development LLC. All rights reserved. Using cognitive automation to enhance the actuarial processes Using enterprise content management and natural language generation to augment memorandum and report generation Deloitte Consulting | Exponential Actuary

19 THE PIXELATION OF ACTUARIAL ROLES Copyright 2018 Deloitte Development LLC. All rights reserved. Deloitte Consulting | Exponential Actuary 20 BREAKING DOWN PROCESSES INTO EVEN MORE REFINED STEPS IS REQUIRED Understand what tasks require humans and what can be disrupted Recalculate Alternative Estimates Depending upon results of Initial Results, calculate alternative estimates, etc. Review Initial Results Review various actuarial methods, along with diagnostic data, to determine appropriateness of various methods Perform Initial Actuarial Method Calculations Calculate age-to-age factors, cumulative LDFs, B-F estimates, loss development methods Compile Actuarial Data Compile paid loss, reported loss and claim count triangles along with diagnostic triangles (e.g. disposal rates, average case reserves, etc.) Data Reconciliation Quality control process to ensure data reconciles to financial systems and prior year analyses Data Extract Pull data from multiple systems containing policy and claim data required for actuarial analysis Copyright 2018 Deloitte Development LLC. All rights reserved. Deloitte Consulting | Exponential Actuary

21 SPECTRUM OF COGNITIVE TECHNOLOGIES Futuristic High Medium Low Degree of Cognition New technologies show significant application for the Actuarial profession, delivering substantial savings and efficiencies Robotic Process Automation Intelligent Automation Cognitive Automation Artificial Intelligence Mimics human actions Mimics human judgment Mimics human intelligence Computer program or robot that mimics rules-based actions in existing applications Tools that allow for the natural language generation based on a dataset and business rules Augments human

intelligence Computerized models that simulate human thought processes through predictive decision making The theory and development of computer systems that can perform tasks which normally require human intelligence Applications: Invoice receiving, Applications: Invoice processing Applications: Creation of Applications: Self-sustaining 3-way matching, customer credit and filing, workers comp. filing, competitor analysis, advanced reconciliations etc. assessment, reconciliation etc. underwriting advisor etc. planning & predictive forecasting etc. Technology is a source of sustainable cost reductions Copyright 2018 Deloitte Development LLC. All rights reserved. Deloitte Consulting | Exponential Actuary 22 ADVANCED TECHNOLOGIES Copyright 2018 Deloitte Development LLC. All rights reserved. Deloitte Consulting | Exponential Actuary 23 ROBOTICS VS. COGNITIVE AUTOMATION

Technology is evolving rapidly, opportunity exists to exploit disruptive technologies to increase the value and pace of change of information assets across service, process, and workforce transformation Realm of Process Robotics (RPA) Realm of Cognitive Automation Structured Data Deterministic Outcomes Unstructured Data Probabilistic Outcomes Mimics Human Actions RPA Realm: Rules-based tasks Operational processes RPA Technologies: Robotic Process Automation Rules engines Event stream / complex event processing Human-in-the-loop process automation Copyright 2018 Deloitte Development LLC. All rights reserved. Potential RPA Applications: Reporter Automated story writing Back Office All swivel chair clerical tasks Customer service Mass customization of automated CRM Augments Human Intelligence

Cognitive Realm: Cognitive analytics Decision making Cognitive Technologies: Deep learning Supervised machine learning Integrated Cognitive Computing Platforms (e.g. IBM Watson) Potential Cognitive Applications: Pharma Cognitive creation of new drugs Hedge Fund Algorithmic trading Banking Financial crime detection Deloitte Consulting | Exponential Actuary 24 WHAT ARE THE BENEFITS OF RPA? RPA can be executed with low costs, high accuracy, and high scalability, with the potential to produce transformative change and benefits Key Benefits Efficiency & Quality Scalability & Expertise Insource & Control Governance & Compliance Competitive Advantages Transformative

Change Re-engineer core processes while automating the function Robots perform tasks with a high degree of accuracy and operate 24x7 leading to high-throughput Robots can work up to 15x faster than humans in some cases, dramatically reducing time spent on process execution RPA streamlines, standardizes and optimizes the processes, improving quality and reducing costs A process can be automated quickly, reducing reliance on recruitment to handle workload spikes RPA helps engage talent by freeing time to work on strategic roles and develop new competencies / expertise RPA opens new doors for insourcing processes by providing greater control over service delivery model Robotic platforms are secure, audited and managed within an IT corridor of governance RPA improves data quality / consistency that can result in better analytics, insights and increased revenue

RPA has a short payback period since robots drive existing applications with low integration costs RPA provides high potential ROI which can be leveraged to drive critical initiatives Decouple Profits & Labor Revenue and profit generated becomes less dependent on the ability to scale labor; automation enhances the abilities of current resources Copyright 2018 Deloitte Development LLC. All rights reserved. Flexibility Rapidly scale up or down depending on the nature of the business issue New Competencies Cost Reduction Process owners elevated to process transformation leaders and robot designers as production becomes

more automated 15 90% cost reduction opportunity depending upon the characteristics of the functions selected for automation Deloitte Consulting | Exponential Actuary 25 WHAT IS ROBOTIC PROCESS AUTOMATION (RPA)? RPA is delivered through software bots that can be configured to undertake rules-based (deterministic) tasks; it is not actual robots in a production line RPA is RPA is not Computer-coded software Walking, talking auto-bots Programs that replace humans performing repetitive rules-based tasks Physically existing machines processing paper Cross-functional and cross-application macros Artificial intelligence or voice recognition and reply software What it can do Open emails and attachments What it cannot do

Scrape data from the web Copy and paste items Connect to system APIs Move files and folders Make calculations Log into web / enterprise applications Fill in forms Extract structured data from documents Collect social media statistics Follow if/then decisions/rules Copyright 2018 Deloitte Development LLC. All rights reserved. Work with unclearly defined processes Change process automation steps without human operation Handle unstructured data Adapt to frequent changes Have a conversation with humans

Make judgments and decisions Adjust on the fly Force human action Manage unpredictable processes Resolve exceptions Deloitte Consulting | Exponential Actuary 26 COGNITIVE AUTOMATION WHAT IS IT? Cognitive systems employ technology and algorithms to automatically extract concepts and relationships from data and understand their meaning, learn independently from data patterns and prior experience and extend what either humans or machines could do on their own. Emulates strengths of the human brain, including parallel processing & associative memory Enables natural language processing of structured and unstructured data. Understand/leverage big data in real time Use machine learning to develop context-based hypotheses Convert text, images, and voice data into meaningful concepts and relationships Make reasonable predictions and recommendations based on learned concepts and relationships Understand environment and present contextually relevant information Ability to automatically process, filter, and extract key information from a vast amount of data Interact with humans in natural language, voice, and text Cognitive computing can push past the limitations of human cognition and connect the dots between big data, enabling more informed decisions. Copyright 2018 Deloitte Development LLC. All rights reserved. Deloitte Consulting | Exponential Actuary 27

NATURAL LANGUAGE GENERATION Auto-generate parts of actuarial memorandums with the goal of reducing manual reporting, improving timeto-market, improving consistency of communication INPUT Ingests the following components: Current Actuarial Liability data such as reserve analysis for each line of business Past-year data/analysis to perform retrospective analysis Data structure, which can be visualized in Excel workpaper via macro OUTPUT Automated parts of the memo, including: Substantiation to the summary table (produce variable narratives for financial items selected though human analysis) Substantiation to the Retrospective Procedures analysis (such actual vs expected, year over year changes, etc.) IMPACT The solution enables company to: Reduce time spent on manual reporting Reinvest hours to more value-added opportunities Improve quality and consistency of

communication Improve delivery from data to actionable insights Templated/boilerplate descriptions Copyright 2018 Deloitte Development LLC. All rights reserved. Deloitte Consulting | Exponential Actuary 28 Key Takeaways The high volume of data sources and inputs make actuarial processes good candidates to be augmented with robotic automation Interactions with internal and external crowds should be designed differently. Each crowd is incentivized and motivated in their own unique way Cognitive learning software can be used to identify trends in actuarial data and learn from human-provided corrective feedback to become smarter and more effective Natural language generation and processing could simplify the process taken to develop opinion memos, actuarial reports and documentation that are frequently hundreds of pages long Surges in demand for actuarial services has led to a potential opportunity to incorporate crowdsourcing to address specific tasks Robotic automation and crowdsourcing cannot replicate the breadth of work done by an actuary. Instead, it can be leveraged to make the actuary more effective and efficient Copyright 2018 Deloitte Development LLC. All rights reserved. Deloitte Consulting | Exponential Actuary 29 IMPACT ON ACTUARIES

Copyright 2018 Deloitte Development LLC. All rights reserved. Deloitte Consulting | Exponential Actuary 30 HOW DO YOU GET STARTED ESTABLISH A DIGITAL ACTUARY LEADERSHIP TEAM Identify a visionary program leader and assemble a team to accelerate your digital goals. Determine a governance model and understand policies that might need to be adapted to execute successful change management and ensure the solution is absorbed into the business fabric THINK BIG START SMALL ACT FAST Immerse Yourself in Innovation Scaling the Edges Prove it Works (Quickly) Join an immersive experience (e.g., Exponential ActuaryTM Lab) to explore the art of the possible and determine a future state vision, goals, and benefits Disconnect from the core business and set up a digital actuary leadership team to assess disruptive opportunities within the organization Use an agile, iterative piloting approach to move from strategy to prototyping as quickly as possible fail fast and achieve rapid results

Build Your Ecosystem Pick One or Two Plays Market Your Own Success Evolve your Actuarial organization by collaborating with other business functions, BPO providers, and digital vendors Prioritize your desired tactics and pick just one or two to get started in order to establish proof of concept Seek opportunities to share digital experiences with other functions knowledge share Copyright 2018 Deloitte Development LLC. All rights reserved. Deloitte Consulting | Exponential Actuary 31 KEY TAKEAWAYS Disruption will impact Actuaries and other white-collar professionals, in addition to those blue collar professions that we typically associate with disruption (e.g. Uber/Taxis) Examples of change/disruption are manifold and include technology enablers such as robotics and cognitive automation Pixelating the opportunity set is important, which requires breaking the spectrum of work and entire end-to-end process into bite sized chunks Professionals need to continue to meet professional standards and how these are met will evolve as processes change There are significant implications for professional operating and talent models, such as the change in how we source talent and design organizations encompassing an array of resources, both internally and externally

Training and education of actuaries will dramatically change as the role moves away from performing mathematics and towards business decisions and insights using the results of automated processes and results The outlook for the future is bright and will enable professionals with the right skillsets to add more value to organizations through more strategic activities Copyright 2018 Deloitte Development LLC. All rights reserved. Deloitte Consulting | Exponential Actuary 32 About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (DTTL), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as Deloitte Global) does not provide services to clients. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the Deloitte name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. Please see www.deloitte.com/about to learn more about our global network of member firms. Copyright 2018 Deloitte Development LLC. All rights reserved.

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