The Actuary As Product Manager In A Dynamic Product Analysis Environment

The financial performance of P&C insurance products are vulnerable to a variety of complex social, economic, legal, and operational forces. Unfortunately, traditional ratemaking methods do not fully capture these dynamic elements of the insurance system. Insurers who develop advanced pricing techniques can better anticipate these dynamic issues and thereby enjoy competitive advantage. This paper addresses how an actuary can develop rates in recognition of these dynamics and play a leading role in the management of the insurance product. This paper presents concepts regarding dynamic ratemaking, which, compared to traditional pricing, is more comprehensive, utilizes more advanced technology, and more fully addresses company operations and insurance market issues. The Dynamic Product Analysis (DPA) model is introduced as a means for driving the exhaustive product review required by dynamic ratemaking. This paper also describes the Product Management concept and recommends its application to insurance products. DPA and product management are complementary systems which can optimize the scope of the pricing analysis and capitalize on its conclusions in order to direct insurance products. It is argued that the actuary assume the role of product manager and thus take responsibility for managing the operational and financial facets of the product. The product management team creates the DPA model by evaluating, and making hypotheses about, a range of product issues and environmental forces. The data required in this model is wider in scope and more detailed than that used by traditional pricing methods. There is a reluctance to merely use historical averages for making projections; instead, underlying distributions are to be evaluated to identify meaningful patterns or unanticipated correlations. DPA also specifies continuous analysis of the company’s operational systems and expenses. As product manager, the actuary leads the effort to build the DPA model, develop strategies, execute business plans, and provide hands-on leadership. In this environment, the actuary’s role is expanded beyond the narrow boundaries of traditional ratemaking.