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