The Chief Modeling Officer is a role that few insurance companies have—for now. But it might not be too long before it becomes one of the most influential positions in the C-Suite.
Van Beach, Principal, Milliman.
Chief Modeling Officers could be the catalyst for forward-thinking insurers to leverage data and analytics to shape their future strategies and transform their businesses.
Here are three reasons why I believe the insurance industry will appoint Chief Modeling Officers to capitalize on the opportunities of the “information age.”
1) Mission-critical models
The business of an insurer is to understand, manage, and capture the value of risk. Models are the foundation of that analysis. Recently, predictive models have become a key analytic tool as insurers look to better understand the drivers of risk. Traditional actuarial forecast models that project the financial impacts of insurer liabilities and assets under various possible future scenarios have been used for more than 20 years.
The number and range of models continue to grow exponentially, as has the frequency with which they are now run—annual exercises turned into quarterly pieces of work, which have often now become monthly, even daily, tasks.
Risk-based regulatory regimes, like Solvency II, have increased and formalized insurers’ modeling burdens even further. Companies are struggling to meet the demands for more and increasingly detailed information from their stakeholders.
Insurers’ modeling activities are now extensive and complex and the consequences are dire for any company that gets its numbers wrong. Incorrectly reported financial results, “leaky” financial hedges, and mispriced products are only a handful of the worries that keep executives with roots in financial modeling awake at night.
The Chief Modeling Officer role can provide the necessary focus and leadership to a mission-critical function that now sits at the heart of the operation and is driving the health of the insurance organization.
2) A model employee
Once insurers awaken to the mission-critical function that modeling provides, they will also realize the need to put a greater focus on attracting and retaining modeling talent within their organizations.
While modeling applications have evolved and grown over the years, the perception of modeling roles at many organizations has not. A function that has the potential for multimillion-dollar financial impacts should be respected and valued. However, modeling roles are often misunderstood and underappreciated for their advanced business and technical skills.
An initial step that some companies have taken is to create a centralized modeling team. This step begins to recognize the unique skills required for efficient and effective modeling. The consolidation of talent and responsibilities increases visibility of these important roles and is an effective way to boost their profile and standing within the company. The team also offers them the support and career development modelers need to contribute even greater value to the organization.
Attracting and retaining the brightest graduates, especially when competing with hedge funds or investment banks, will also require that companies offer an attractive career path.
Creating the role of Chief Modeling Officer, with a clear mandate and support from the CEO, would send a strong message to talented young people that they could go all the way up to the “C-suite” if they choose a career in modeling with that insurer.
3) From compliance to competitive advantage
But it’s only when insurers grasp the opportunity of moving beyond using modeling just to comply with regulations and instead start working to harness the transformative power of data and analytics that they might understand the real value of a Chief Modeling Officer.
Demographic shifts, the emergence of new markets, and changing customer demands will all have profound effects on the industry’s future. Anticipating and understanding these shifts is a story told through data.
Regulatory changes have demanded that insurers expand the depth and breadth of their models and the data produced. The insights into financial drivers, again, is a story told through data.
The great leaps forward in computing power and analytical techniques mean companies can organize and analyze these vast amounts of data.
Insurers that can exploit this information to innovate, create new products and develop better pricing models, identify new markets and better target existing markets, and more effectively manage risk will have a marked competitive edge over their rivals.
Insurers already understand how important information will be in deciding the winners and losers in tomorrow’s market.
In a 2011 PwC survey of 150 senior international insurance executives, 49% say they expect new data analysis sources and techniques to be the key competitive differentiator.
But, in truth, while they recognize the value of data and analytics, few insurers have the right organizations or strategies in place right now to make the most of the information they already have at their fingertips.
Although they have spent huge sums developing sophisticated models, they have yet to truly figure out how to use these models to their full potential. Their primary function—to produce the solvency numbers required by regulators and results for financial reporting—has so far been their sole purpose. But with vision and drive, these models could help to shape the company’s future.
The Chief Modeling Officer could be central in moving companies beyond compliance to realizing competitive advantages from their modeling activities.
A seat at the table
Information is exploding. Information for compliance and reporting results. Information on products, customers, and the markets that provides insights for growth.
Specialized skills are needed to identify the opportunities, develop the predictive analytics and specialized models, and turn these insights into advantage. The opportunity to create and capture value is there. Modeling vision, talent, and focus is required.
While modeling has historically been an actuarial function, the applications are broader than actuarial, so it doesn’t really fit under the Chief Actuary. Modeling, especially for mission-critical analyses, has operational aspects, but it is not purely an operation role so it doesn’t fit under the Chief Operating Officer either. Similarly, modeling leverages data and computational power, so it has a heavy reliance on information technology (IT), but it is not an IT function that would reside under the Chief Technology Officer. Modeling is certainly a risk-oriented exercise, but given the support that modeling can provide to product, marketing, and other revenue-generating functions, it doesn’t necessarily fit under the Chief Risk Officer.
Truly, modeling is unique as both an operational function as well as a strategic function. It is worthy of a seat at the table with other C-level officers to drive a company’s vision.
Contemporary companies see that a centralized modeling team under a Chief Modeling Officer would, by pooling its forward-looking data analytical and operational resources, help to drive greater quality, consistency, and efficiency in all existing modeling activities.
This would create a modeling virtuous circle that would enable modelers to do the kind of analysis on the changing market that could underpin some real blue-sky thinking on the business’s future direction.
Given the natural inclination to assess risk and opportunity and capture unseen potential, there’s no reason to think that in the future a Chief Modeling Officer wouldn’t become a CEO.
Just as Microsoft’s Satya Nadella and Adobe’s Shantanu Narayen were given the top jobs because they articulated visions for the future of their companies based on the growth potential of new technologies, it’s quite possible that a Chief Modeling Officer could lead an insurer along a new path plotted from insights gleaned from the models.