Actuarial Models in Business Decision Making

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Actuarial Models in Business Decision Making Powered By Docstoc
					                                             Microsoft Server Product Portfolio
                                             Customer Solution Case Study

                                             Insurer Cuts Modeling Time by up to
                                             99 Percent with High-Performance Computing

Overview                                     ―By adopting a solution based on Milliman and
Country or Region: United States
Industry: Financial services—Insurance
                                             Microsoft HPC technologies, we’re able to deliver an
                                             appropriately priced product far more quickly and with
Customer Profile
Cincinnati, Ohio–based Western &
                                             a greater degree of accuracy and confidence.‖
Southern Financial Group, a Fortune 500      Nora Moushey, Senior Vice President and Chief Actuary, Western & Southern Financial Group
company, provides life insurance,
retirement planning, and investment          Western & Southern Financial Group faced the challenge of running
products and services to millions of
policyholders nationwide.                    ever larger and more complex actuarial models as its number of
                                             policyholders and products grew and regulatory requirements
Business Situation
Western & Southern needed a fast, cost-      changed. The company initially added dedicated workstations to
effective way to run its various financial   process these models, but run times were long and it was difficult
and actuarial models.
                                             to keep scaling to meet demand. Western & Southern also tried an
Solution                                     outsourced solution, but that proved expensive. Ultimately, the
The company decided to deploy the MG-
ALFA solution from Milliman, which runs on   company chose an actuarial solution from Milliman that runs on
a Windows® high-performance computing        Microsoft® high-performance computing (HPC) technology. The
(HPC) operating system.
                                             solution is easy for the company’s IT staff to manage and adjust to
Benefits                                     meet business needs. The company is using the new solution to
 Faster model run times
 Improved quality for reduced risk
                                             reduce modeling time by up to 99 percent, which means that it can
 Significant cost savings                   fine-tune its models for more accurate product pricing and financial
 Enhanced user satisfaction
 Greater business agility
                                             projections and reduce time-to-market for new products.
Situation                                       run more than 40 combinations and then test
For more than 120 years, Western &              the product’s behavior under multiple
Southern has been committed to protecting       economic scenarios.
its financial stability on behalf of its more
than 2 million policyholders. The Fortune 500   Adds Moushey, ―In developing new insurance
company has demonstrated resiliency             products, you learn as you go; even if you
through challenging economic cycles, but        think you know what a model’s results will be,
doing so requires meticulous care.              you can sometimes be surprised after
                                                running it. An iterative process in which we
Western & Southern, like all insurers, relies   can set up a scenario, run a model, analyze
on actuarial models for both product pricing    the results, and try again is extremely helpful.
and performing financial projections. In the    But when marketing staff ask for a new
product development process, the company’s      product, they frequently already have the
actuaries work with the business units and      rollout date set, which puts a lot of time
marketing department to create models to        pressure on us. We needed a faster time-to-
establish the proper price for a new or         insight to alleviate that pressure.‖
modified insurance offering. ―We need to
determine if the proposed product can be        Financial Projections
successful in the marketplace,‖ explains Nora   For financial projections, Western & Southern
Moushey, Senior Vice President and Chief        uses ―in-force‖ modeling, which involves
Actuary for Western & Southern. ―Marketing      running much larger models to test the
staff and actuaries go back and forth to        company’s current products, dividend
tweak the potential offering until we have a    projections, asset liability management, and
competitive product that the company can        so on. Actuaries run the models using various
sell profitably. This means that our models     economic conditions to look at expected
must make it fast and easy for actuaries to     profitability and to evaluate and manage risk.
adjust the product details and price until we   ―We project outcomes anywhere from 5 to
get it right.‖                                  100 years into the future, depending on the
                                                purpose of a particular model,‖ says
New-Product Pricing                             Moushey. ―The models get larger and more
As the company increased its number of          complicated based on the different types and
new insurance products per year, demand         number of scenarios we include.‖
for actuarial modeling increased as well.
―We went from releasing a new product or        Those in-force models are run not only for
significantly modifying an existing product     business intelligence and decision-making
about once or twice per year to once every      purposes but also in response to regulatory
quarter,‖ says Mike Neumeier, Senior            requirements. Each state’s insurance
Programming Analyst for Western &               department requires insurers to show that
Southern. ―Plus, there’s now a greater          the reserves they hold are adequate to cover
emphasis on bringing products to market         their current policies. ―We run multiple
as quickly as possible, so our goal is to       models for our various business segments,
accelerate the pricing process without          using different periods of time, interest rates,
sacrificing accuracy.‖                          and other economic factors so that we can
                                                draw conclusions from the test results,‖
However, for each of the company’s new          explains Joseph Beckner, Senior Actuary for
products, running just one model cell could     Western & Southern. ―Ultimately, we reach
take more than 30 hours. Ideally, actuaries     the point where we can show the state that
our company is strong and can meet our            As a partial solution to the time-consuming
obligations.‖                                     process, Western & Southern contracted with
                                                  an outside vendor to run pricing models in its
Western & Southern must submit the results        high-performance computing environment.
of its in-force testing process within 75 days    Western & Southern used FTP sites to send
of the beginning of each calendar year. How-      data to the organization, which ran the
ever, the process does not begin until the        models and returned the results. ―We needed
company’s year-end financial statement            to enhance our processing capacity because
preparation is complete in mid-January. ―The      of our plan to begin offering new variable-
process requires a considerable amount of         annuity products. To safely price those,
work within a relatively short period of time.    actuaries need to perform advanced
And the more complex the model, the longer        mathematical stochastic modeling, and this
it takes to run,‖ notes Beckner.                  required more powerful computational
                                                  capabilities than we had in-house,‖ says
Time-Consuming Process                            Moushey.
In the past, Western & Southern dealt with
the increasing complexity of its models by        This way of doing business, although faster,
running them on dedicated workstations.           quickly grew expensive. Says Mahon, ―We
With an in-force model taking as long as 60       were paying a lot of money to address our
hours to run, however, actuaries had to wait a    actuaries’ needs, and the costs would only
considerable amount of time to get results.       increase as our models continued to grow in
To keep up with demand, the company added         size and complexity.‖
workstations. ―We used to have five actuaries
using 10 workstations, and at times, all 10       Additionally, outsourcing put constraints on
would be running around the clock to get          Western & Southern as to how many and
through all 50 of our in-force models,‖ recalls   which kinds of models its actuaries could run.
Beckner. ―It got cumbersome to keep track of      ―We couldn’t make as many adjustments and
which computer was running which models,          rerun the models as much as we’d like, and
and we had to be especially careful to keep       it’s difficult to know in advance what it is that
workstations from trying to access the same       you need to know,‖ says Ryan Richey, Staff
data at the same time because that could          Actuary for Western & Southern.
cause the models to fail.‖
                                                  Western & Southern determined that it would
Adds Chuck Mahon, IT Infrastructure               bring those models back in-house. To do so, it
Manager for Western & Southern, ―Our              had to upgrade its projection software and
actuaries couldn’t be as efficient as they        enhance its computing environment. ―We
wanted to be because they could be                wanted a next-generation platform that could
waiting two or three days for results. We         reduce our expenses, give us greater control,
also developed issues with virus-protection       and enable us to take advantage of the
software interfering with the models running      beneficial software applications starting to
overnight and the potential for cleaning crews    emerge in the market,‖ says Mahon.
to accidentally unplug workstation power
cords. Keeping the workstations secure and        Solution
well-managed without interfering with the         Western & Southern narrowed its choice for a
actuaries’ number crunching became a real         new actuarial projection system to two
concern.‖                                         leading-edge software applications that run
                                                  on a Microsoft® high-performance computing
―We were open to a                        (HPC) operating system: the MG-ALFA             company’s previous workstation solution.
                                          solution from Milliman and a second system.     Says Beckner, ―After comparative tests, we
Windows-based solution                    ―We were open to a Windows-based solution       decided that the Milliman actuarial software
because our users are                     because our users are familiar with Microsoft   had the built-in functionality and speed that
                                          technologies, and we already have an IT team    we needed for our complex products.‖ The
familiar with Microsoft                   that’s dedicated to and knowledgeable about     MTC team also helped Western & Southern
technologies, and we                      the management of the Windows Server®           determine the equipment that the company
                                          platform,‖ says Mahon. ―But we didn’t know      needed to purchase to support the solution.
already have an IT team                   what kinds of performance improvements to
that’s dedicated to and                   expect or whether a Microsoft HPC environ-      In July 2008, Western & Southern deployed
                                          ment would be easy to set up, manage, and       MG-ALFA and Windows® Compute Cluster
knowledgeable about                       support.‖                                       Server 2003. As of October 2008, the
the management of the                                                                     company has approximately 30 licensed
                                          Western & Southern next reached out to its      desktops and an 8-node cluster (containing
Windows Server                            Microsoft account team, which introduced        64 cores) in its high-performance computing
platform.‖                                the company to a high-performance com-          environment. The company is on track to
                                          puting specialist from Microsoft who had        meet its goal of running all of its 35 product
Chuck Mahon, IT Infrastructure Manager,   particular expertise in the insurance and       pricing models on the new solution by the
Western & Southern Financial Group        capital markets industries. The specialist      end of 2008. Western & Southern plans to
                                          showed Western & Southern what similar          have all 50 of its in-force models running in
                                          organizations were doing with Microsoft HPC     its Microsoft HPC environment by the end of
                                          solutions. ―We hadn’t understood how            2009. In the meantime, the actuaries who
                                          invested Microsoft was in our industry,‖        handle in-force models will use a hybrid
                                          admits Mahon. ―That, combined with the low      environment comprising both the old dedi-
                                          capital investment required and our high        cated workstations and the new solution.
                                          degree of comfort with the Windows Server
                                          environment, made a Microsoft HPC               Benefits
                                          environment an excellent fit for us.‖           Western & Southern took steps to better
                                                                                          support its actuaries, who now can be more
                                          The Right Software Choice                       productive and return more valuable results
                                          To choose between the two actuarial             for smarter company decision making. ―By
                                          software candidates, Western & Southern         adopting a solution based on Milliman and
                                          took advantage of a trip to a Microsoft         Microsoft HPC technologies, we’re able to
                                          Technology Center (MTC), where Microsoft        deliver an appropriately priced product far
                                          architects helped the company conduct a         more quickly and with a greater degree of
                                          barrage of tests on both solutions. ―We were    accuracy and confidence,‖ says Moushey.
                                          able to devote two days to each product and
                                          run similar tests on both,‖ says Neumeier.      Faster Model Run Times
                                          ―We wanted to know how fast our models          Western & Southern has found that it can run
                                          could run in an HPC environment.‖               its models considerably more quickly in its
                                                                                          new environment. The time that it takes to
                                          Western & Southern experienced a number of      run a model has gone from days to minutes.
                                          surprises at the MTC, including the discovery   ―It took us 30 hours to run just one pricing
                                          that it could run a complex actuarial model     model for one age, gender, smoking condi-
                                          on the new high-performance solution in just    tion, and so on, using our workstation
                                          23 minutes using 32 cores. Running the          method, and we need to run a considerable
                                          same model took almost 7 hours on the           number of those models to determine
―The granularity of job              adequate pricing,‖ says Moushey. ―With the          Significant Cost Savings
                                     new solution, we can run that same model in         Although Western & Southern views the
scheduling and                       only 20 minutes. That’s a huge time savings—        solution as one that was driven more by
prioritizing available with          almost a 99 percent reduction.                      speed and the need to better serve business
                                                                                         units than by seeking a high return on
the new solution will                ―Even if it’s a relatively simple pricing process   investment, the company is experiencing
also help us alleviate               with straightforward calculations, we still         significant cost savings because it has an in-
                                     have to deal with a considerable volume of          house cluster. ―While adding tremendous
former problems caused               data to accommodate five or six different           value for our actuaries and those who rely on
by file access issues                plans, seven underwriting classes, multiple         them, we also eliminated outsourcing fees,‖
                                     ages, and so on,‖ continues Moushey. ―High-         says Neumeier.
when running models                  performance computing in-house makes it
simultaneously.‖                     possible for us to run more models in the           Moushey states, ―We’ll definitely experience
                                     same timeframe, thereby increasing our              cost savings with this solution. We’ve only
Joseph Beckner, Senior Actuary,      quality significantly.‖                             had our cluster in place for three months, and
Western & Southern Financial Group                                                       the savings from eliminated outsourcing fees
                                     That increased productivity means that              have already exceeded our hardware costs.‖
                                     Western & Southern can trim the time for
                                     pricing calculations. ―From an IT perspective,      Enhanced User Satisfaction
                                     this solution helps us fulfill our mandate to       Western & Southern has found the new
                                     enable actuaries to more quickly share              Microsoft HPC solution to be straightforward
                                     results with our other departments and              for actuaries to use and for IT staff to
                                     condense the product-development timeline,‖         manage. ―Those of us running pricing models
                                     says Mahon.                                         have found the HPC to be very easy to set up
                                                                                         and use,‖ says Richey. ―We had a bit of
                                     Improved Quality for Reduced Risk                   trouble dealing with different levels of user
                                     Now that models can be run in shorter               authorities—IT versus actuarial users—but
                                     amounts of time, Western & Southern                 we’re working that out.‖
                                     actuaries can extend their testing to include
                                     more models for greater accuracy. ―Our              The company also will be freeing up work
                                     actuaries now have the time and freedom to          space as additional workstations are
                                     use stochastic methods for testing that             eliminated. ―Five actuaries will no longer
                                     weren’t available to them before due to             need to keep track of 10 workstations,‖ says
                                     computing challenges,‖ says Mahon. ―They’ve         Beckner. ―The granularity of job scheduling
                                     expanded the number of pricing scenarios            and prioritizing available with the new
                                     they run into the thousands.‖                       solution will also help us alleviate former
                                                                                         problems caused by file access issues when
                                     Explains Moushey, ―We currently generate            running models simultaneously,‖ says
                                     1,000 economic scenarios and then reduce            Beckner.
                                     that number to 50 representative scenarios
                                     for our in-force models. However, when              Actuaries have been particularly happy with
                                     pricing new products, it’s better to run            their increased productivity with the new
                                     through all the scenarios to avoid overlooking      solution. ―There’s been a lot of exuberance
                                     a risk. With the Microsoft HPC solution in          about the time savings,‖ says Mahon.
                                     place, we’re able to do that, which reduces         ―Actuaries have reported all the way up the
                                     the chance of overlooking something that            Western & Southern management line that
                                     may have negative long-term implications.‖
―[Our IT staff members]                   they’re experiencing big successes, and that      before other insurers do, giving us the
                                          makes our executives happy.‖                      opportunity to avoid them. And we now have
have reported that the                                                                      the ability to design a product based on such
Microsoft HPC environ-                    Continues Mahon, ―We had no worries about         thorough testing that we can confidently price
                                          the learning curve for our IT staff members       it lower than our competitors, giving us a
ment is as reliable and                   either. They have reported that the Microsoft     more attractive product for consumers that’s
easy to manage as a                       HPC environment is as reliable and easy to        still profitable.‖
                                          manage as a standard group of computers on
standard group of                         the Windows Server operating system.‖
computers on the
                                          Greater Business Agility
Windows Server                            Western & Southern now has the ability to
operating system.‖                        fine-tune its pricing processes and its
                                          business strategies, as well, because
Chuck Mahon, IT Infrastructure Manager,   computational capabilities are no longer a
Western & Southern Financial Group        limitation. ―We’ve not only dramatically
                                          enhanced our computing capabilities, but
                                          we’ve also implemented a solution that we
                                          can rapidly scale up just by adding servers to
                                          the cluster—straight from the box,‖ says
                                          Mahon. ―That means that our IT group can
                                          respond quickly to meet the needs of our
                                          business customers, and that’s where we
                                          want to be. It’s comforting to have that
                                          straightforward scalability available if and
                                          when we need it.‖

                                          On the business side, the company can
                                          gather more comprehensive business
                                          intelligence. ―Now we’ll be able to run
                                          thousands of scenarios that we couldn’t
                                          before,‖ says Beckner. ―That will not only help
                                          us improve compliance, but also give us a
                                          better sense of where we stand, which is
                                          valuable to know, particularly in an economic
                                          climate like this one. For example, our Chief
                                          Risk Officer will benefit from more in-depth
                                          model results when conducting the
                                          company’s internal risk assessment.‖

                                          Competitive Advantage
                                          Western & Southern considers its new
                                          solution to be an element that will help give
                                          it an edge. ―We’re absolutely gaining a
                                          competitive advantage with the Milliman/
                                          Microsoft HPC solution,‖ says Moushey.
                                          ―We’ll be able to identify potential risks
For More Information                                            Microsoft Server Product Portfolio
For more information about Microsoft                            For more information about the Microsoft
products and services, call the Microsoft                       server product portfolio, go to:
Sales Information Center at (800) 426-                
9400. In Canada, call the Microsoft
Canada Information Centre at (877) 568-
2495. Customers who are deaf or hard-of-
hearing can reach Microsoft text telephone
(TTY/TDD) services at (800) 892-5234 in
the United States or (905) 568-9641 in
Canada. Outside the 50 United States and
Canada, please contact your local
Microsoft subsidiary. To access information
using the World Wide Web, go to:

For more information about Milliman
products and services, call (206) 624-
7940, or visit the Web site at:

For more information about Western &
Southern Financial Group products and
services, call (866) 832-7719, or visit the
Web site at:

                                                                    Software and Services                    Hardware
                                                                     Microsoft Server Product Portfolio      One Dell PowerEdge 1950 server
                                                                      − Windows Compute Cluster Server         computer with Quad-Core Intel Xeon
                                                                        2003                                   E5420 processors; 2x6 MB cache; 2.5
                                                                     Microsoft Services                       GHz, 1333 MHz FSB; 8 GB, 667 MHz
                                                                      − Microsoft Technology Centers (MTC)     memory
                                                                                                              Eight Dell PowerEdge M600 server
                                                                    Partners                                   computers with Quad-Core Intel Xeon
                                                                       Milliman                               E5420 processors; 2x6 MB cache; 2.5
                                                                                                               GHz, 1333 MHz FSB; 8 GB, 667 MHz

This case study is for informational purposes only. MICROSOFT

Document published November 2008
                                                                 Hardware Dell PowerEdge 1950 server computer with Quad Core Intel Xeon E5420
                                                                  processors, 2 x 6 MB cache, .5GHz, 1333MHz FSB, 8GB 667MHz memory
                                                                 Dell PowerEdge M600 server computers with Quad Core Intel Xeon E5420, 2x6MB Cache,
                            Dell PowerEdge M600 server computers with Qua d Core Intel Xeon E5420, 2x6MB Cache,

Description: Actuarial Models in Business Decision Making document sample