As the actuarial world moves toward a more strategic, value-added approach to modeling—rather than the ad-hoc approaches of the past—technology becomes a critical enabler both in standardizing the inner workings of models and in automating the repeatable processes necessary to establish the modeling discipline of the future. However, balance across all three elements of the modeling environment—technology, process, and people—is necessary for maximum effectiveness.
As the industry changes, the way people and processes interact with governance changes as well. In the past, individual responsibility for models was the norm. A single actuary might be in charge of processes from gathering data, developing assumptions, and loading data to designing the model, configuring the model, producing output, and analyzing results. Today, these responsibilities are becoming the realms of specialists in sync with larger processes. New, different people are becoming more involved and have more interest in the modeling environment; processes transcend functional units and ripple across more areas of the organization.
Developing and implementing a model governance framework in this new era requires special attention to the softer aspects of people, collaboration, and organizational change. Other papers have been written on the topic of model governance: what should be governed, how it should be governed, etc. This paper focuses instead on the human aspect of building and implementing a new model governance framework and how these softer aspects can be critical determinants of model governance success.
The power of buy-in
As more people take interest in the success of the overall modeling effort, it is essential that stakeholders come along for the governance ride. Those who do not have the opportunity to provide input or be a part of designing a new model governance framework may reject the new paradigm as too complex and too time consuming. It is important to give them formal opportunities to contribute ideas and be included in designing, developing, and implementing the solution.
This creates a sense of “buy-in.” Because they have had the opportunity to shape its creation, they are more willing to embrace the solution—not least because, ideally, their input has been incorporated in such a way as to create the most harmony with established ways of working. Instead of being told what to do, people will grow to embrace model governance because it helps them do their work more effectively.
Buy-in from the beginning: Defining the change
The first task—before any actual change happens—is to form consensus around the definition and fundamentals of model governance, which fall into two main areas: policies and procedures, and the operating model itself. Some aspects will be based on industry standards, while others will be unique to the organization. But the importance of establishing and using a common language as soon as possible is difficult to overstate. Policies and procedures to be considered at this stage may include:
- Standard model-development process
- Change-management procedures
- Coding, testing, and documentation standards
- Architectural standards
- Appropriate use guidelines
- Standards for reviewing and peer reviewing
Within the operating model, one might include:
- Organizational design
- Roles and responsibilities
- Approval processes
- Frameworks for making and executing decisions
- Communication channels
This is the time to become closely connected to key constituents in functional units, teams, or areas. Understanding current processes and practices—including what is working well and what is not—is essential because it enables a focus on commonalities rather than conflict and provides a starting point for developing solutions that will dovetail naturally with what already exists wherever possible.
When introducing or exposing a new model governance framework, it is important to provide only the level of detail necessary for the given audience, which can be difficult for actuaries leading the process who may be accustomed to high levels of granularity. Many participants will be intimidated or turned off by too much detail at the beginning, and this gives them less room for input. It can be better to begin with the “bones” of the plan and build consensus as the details are fleshed out. Easy-to-consume communications that focus on the visual—such as high-level diagrams of processes—can be valuable in reaching non-specialist audiences. The details can come later.
Communication should also be established early between those responsible for model governance at the line of business level and those responsible for enterprise risk management. In many cases, the two teams will be pursuing model governance simultaneously, and if they do not communicate early and often, duplicate or even conflicting efforts can result. Model risk management and model governance overlap significantly and can be undertaken more efficiently as part of a coordinated effort.
Away we go: Flexible implementation and the effectiveness of an Agile process
Once it is time to begin implementing the protocols and procedures that actually comprise model governance, it can be tempting to put the emphasis on control rather than collaboration, on perfection rather than continuous learning. While this may provide the appearance of reducing risk, it can actually increase risk by reducing valuable experimentation. Rapid prototyping, on the other hand, can enable participants to see and feel how a revised approach is different and how it can add value—and enables them to shape the new process or procedure. Accepting and learning from small failures in implementing model governance along the way can prevent larger failures that have higher cost—and that are more likely when a big change is rolled out to constituents without their input along the way.
When implementing new model governance and during the actual modeling activities themselves, it can be helpful to use a flexible approach that has more in common with contemporary software development than heavy-handed organization-change procedures of the past. Known formally as the Agile methodology, this approach can be an effective way to simplify participation with stakeholders. Features of Agile that can support improved collaboration include:
- Regular peer reviews in real-time, short, practical “sprints” rather than long, infrequent, information-packed meetings.
- Spreading work among more people, which increases the number of eyes on a given element to reduce risk and moves the process forward instead of getting stuck in bottlenecks caused by individuals’ changing workloads, schedules, or priorities.
- More emphasis on delivering value over endless planning. This often results in experimentation and rapid prototyping rather than feeling a need for perfection in the first iteration. This type of “fail fast” mindset will naturally surface potential issues sooner rather than later.
- Breaking documentation (critical in light of ever-changing regulations and modeling environments) into manageable deliverables that are completed along the way rather than all at once at the end. This not only makes documentation more manageable but also improves quality by capturing more details to provide greater value to future users and auditors.
- The identification and execution of quick wins to engender support and build enthusiasm. By celebrating these successes, positive momentum will be built.
Simplify, simplify, simplify
In order to create a positive user experience, every element of the model governance framework should be made as simple as possible while still fulfilling its purpose. Technology is a critical enabler of simplicity, making governance easier for people to manage and easier to understand and comply. With automation of modeling processes and workflows, participants need not worry as much about remembering or enforcing each step, tracking every document, or ensuring that signoffs are properly obtained. Technology can help enforce segregation of duties with role-based access to specific functionality. If it is properly designed, it can reduce the amount of time required to train people and help them understand how they are part of the greater whole. They can simply get on with their jobs.
Simplicity also requires restraint on the part of those in charge of creating the model governance framework. Once things get rolling, it can be tempting to throw every control and procedure imaginable into the mix to reduce risk to an absolute minimum. However, if the model governance framework becomes onerous, it will not be used effectively, which can actually create more problems than it solves. Emphasizing collaboration and communication helps to right-size the process to fit the need.
Taking stock: Measuring success in sync
As a new model governance framework is implemented, those with oversight will want to evaluate or measure success. Measuring the benefits of model governance can be a challenge. The benefits can be ambiguous and difficult to quantify. One place to look for benchmarks is the pre-governance environment, but this does require some forethought in the sense that statistics and data must be captured before the new framework is in place. These measurements could include:
- How many mistakes, errors, or misstatements had to be corrected in the prior year?
- How long did model changes and enhancements take?
- How many peer reviews were executed for new models or model changes?
- How much time was spent troubleshooting, maintaining, and executing models versus analyzing results and deciphering the story around the numbers?
If these factors are measured before the governance framework is in place, they can be re-measured as the governance framework is rolled out (whether that rollout is incremental or wholesale).
Beyond measuring specific outcomes, it is just as important to establish a feedback loop to gauge the success of model governance internally—to gather feedback and suggestions from stakeholders. And while governance often includes change management procedures for models, change management should also be implemented for the governance framework itself. This change management process should establish the decision-making authority for escalating feedback and changing any policies, procedures, or other aspects of the governance framework. Overall, the development, implementation, and improvement of model governance should not be seen as a linear process with a defined end point. It should be seen as cyclical and continuous, and how that continuous improvement will be achieved should be part of the discussion at every step.
Tying it all together
A high-performing modeling organization balances people, process, and technology. Yet making such an environment a reality requires attention to a much larger set of needs beyond models themselves. Organizations may need to rationalize disparate systems, evolve to meet changing regulatory requirements and competitive threats, reassess resource requirements and allocation, reconfigure workflows, and change the role of information technology inside their organization. Model governance should be seen in the context of broader transformation efforts—and as a driver of positive change. Doing so requires looking up from the technical nuances of modeling and processes to examine broader needs, opportunities, and strategies. In other words, it requires a deep focus on the human side of organizational change.