by Frank Huang | August 15, 2022
Originally published in PEO Insider (August 2022). Reproduced with permission of the National Association of Professional Employer Organizations.
While walking one day I ran into a neighbor doing yard work. We hadn’t spoken much before, but upon striking up conversation I soon learned of his love of woodworking. His excitement led him to take me on a tour of his basement, where I saw all manner of intricate saws and Depression-era tools, along with beautiful pieces of furniture. The neighbor was giddy as he showed what was clearly one of the great joys in his life. Similarly, as an actuary, “finding the right number” is one of my great joys. Best yet, this topic is applicable to all industries and coverages. So, how does an actuary find the right number?
RELY ON THE RIGHT TOOLS AND UNDERSTANDING
As the profession broadens and technology advances, actuaries have more skills and tools at their disposal than ever before. But having a plethora of tools without adequate understanding and experience on how to use those tools can result in a number that is inaccurate and/or results in the end user making an incorrect decision based on that number. This is true in all circumstances but especially so for a niche industry such as PEO and staffing, where industry benchmarks may be too sparse and traditional approaches too simplistic to apply to a particular problem.
CONSIDER ALL PUZZLE PIECES
Actuarial work is often like putting together a puzzle. Except that this is not an orderly puzzle you buy from a store, but more like a box of random pieces from your kid’s playroom that may be a mixture of completely different puzzles. So it is with actuarial work – there are many different pieces of data, and it’s the actuary’s job to discern what pieces play into their particular puzzle, and then to figure out how those pieces fit together, even if not all of the pieces are available. Puzzle pieces can be both quantitative and qualitative, subjective and objective, retrospective and prospective, micro and macro.
MAKE IT UNDERSTANDABLE AND USABLE
Most people do not grow up learning about large deductibles or loss development triangles in grade school. For that reason, much of what makes a number “right” is that it is understandable, which makes the delivery and discussion of the actuary’s work just as important as the actual numerical answer. And once the end user understands the actuary’s analysis and resulting number, the actuary can illustrate how the right number impacts other areas of their business. The actuary connects the dots between the right number and the right next steps.
ADDRESS THE PROBLEM BEING ANSWERED
In some cases, the right number is not the best estimate. A client may be interested in talking through a unique situation or to help plan for an unlikely but significant event. They may want a range taken from various scenarios rather than a specific number. Whatever the case, it is the actuary’s job to ensure that they are helping the end user address whatever problem has arisen.
The right number is complete and does not stop short until a robust answer has been found. There are no half answers or partial credit given – the actuary must listen to their conscience and adhere to their professional duty to persevere until they believe the puzzle has been put together to the best of their ability. In the end, finding the right number isn’t just a result of proper math and statistics. It requires the actuary use all their available faculties to analyze, discern, and communicate his or her findings effectively so that the client understands how to operationalize the actuary’s work. It’s one of the reasons why I love what I do, and strive every day to help others find that elusive right number.
|Frank Huang has more than 15 years of actuarial consulting experience serving a wide range of clients, including serving as ADP’s Chief Actuary. Learn more about our PEO consulting practice here.|