Risk Advisory Organizations

By: Katrina Redelsheimer, FCAS, Candidate Liaison Committee

This is the fourth in a series of “This Actuarial Life” articles that illustrates the day-to-day life of the actuary in different fields.

One of the more unusual features of the insurance industry in the United States is the existence of statistical agents and rating bureaus. Statistical agents are organizations that gather and report data from across the insurance industry. Rating bureaus perform a similar function for their members, who are insurance companies, by gathering data and producing rate filings. This article will refer to statistical agents and rating bureaus together as rate advisory organizations, or “ROAs”; however, the term ROA is most properly applied only to statistical agents.

Those who have taken Exam 6 will know that ROAs developed out of insurers’ need for more data than any one insurer can typically provide. ROAs pool loss experience from many insurers in order to produce statistically credible rates for insurers. In another industry, this would constitute illegal collusion. However, the unique needs of the insurance industry, where the cost of the product is not known prior to its sale, warranted a special exemption via the McCarran-Ferguson Act of 1944.

Since ROAs are in effect setting or recommending rates for the entire insurance industry, they naturally employ large numbers of ratemaking actuaries. The two largest ROAs are the National Council on Compensation Insurance (NCCI), which focuses on workers’ compensation insurance, and the Insurance Services Office (ISO), which covers just about every other property-casualty line. For California, workers’ compensation rate advisory services are provided by the Workers’ Compensation Insurance Rating Bureau of California (WCIRB). All of these ROAs rely on actuarial expertise.

In some ways, working for an ROA is similar to consulting. You have clients, the insurance companies, to whom you sell products and services. You must be cognizant of and responsive to customer concerns. ROAs typically host periodic meetings with insurers to present their findings and address insurer needs. These meetings focus on a particular line of business and topic. There are typically separate meetings to go over actuarial topics. ROAs sometimes provide consulting services to help customers use their products effectively. Consequently, soft skills like business writing, presentation skills, and customer service are important.

In other ways, however, ROA work resembles that of a ratemaking actuary at an insurance company. Your team works on one particular line of business (though not necessarily limited by state or region), and you rotate through different teams and lines over time. Projects are team-based and include underwriters, particularly for developing insurance plans. The analysis and data manipulations are typically performed in Excel or SAS. The workload and culture tend to be similar to insurance companies as well.

What separates ROA actuarial work from other kinds is the vast quantity of data involved. Almost by definition, ROAs have the most data available to them. All insurers are required to submit their data to some ROA on a quarterly basis via the statistical plan. The large amount of data is the prime selling point of ROA work, but the other side of that coin is data quality. ROA actuaries face greater data quality issues, since they compile information from many different sources. Consequently, Step 1 of any ROA actuarial project is data quality. Data must be collected, aggregated, and analyzed, and any questions regarding reasonableness must be addressed with insurers before moving on.

Let’s consider a typical project: a change of rating algorithm. First, you’ll talk to customers about what they’d like to see changed or improved in the rating plan. Then you’ll collect and clean the data. You’ll consider new variables and review relativities for existing variables. You’ll work with underwriting to create rating rules and enhanced coverage. For new coverages, you’ll work with legal to develop the appropriate forms.

After filing the revised plan, you’ll answer questions from regulators. Finally, you’ll push the plan out to customers and help them incorporate the new system. The whole process takes months and could be just one of several projects on your plate. For the actuarial student, ROAs offer ample study time, a strong exam culture, and rewards for exam success. Technical skills are highly valued, as are interpersonal skills. Depending on the ROA, you may gain exposure to many lines of business as well. You will learn the ins and outs of ratemaking; however, you will only see the products side of the insurance industry. Reserving, marketing, and distribution do not come into play for ROAs.