You can do better than Excel
Too many tools become staples of business practice purely because there’s no better option. Excel is the king of ruling by chance. It is definitely easy to use, and it can perform some extremely complex functions, but it is far, far away from perfect. Now, this titan of underperformance is used dangerously and excessively across the board in the financial sector, including insurance product development.
In fact, Microsoft's Excel is still top of the pile when it comes to spreadsheets. According to Chris Caren, the general manager of Office business applications at Microsoft, Microsoft Office (which includes Excel) can be found on some 450 million desktops today. In a Palisade study of 732 actuaries in 2006, Excel dominates, with 98% of all respondents claiming to use it.
Actuaries use this tool in the process of modelling, for calculations that balance on the accuracy of a knife edge. It’s like building a complex, advanced jet engine and hand drawing your designs with crayons. You can get the accuracy you need if you’re good at complex calculations in your head and handy with a ruler. But at some stage in the process you’re going to make an all too human mistake.
You really don’t have to dig far to find examples of how Excel can go wrong. Everyone has heard of the “London Whale” trade, an Excel bumble involving a faulty equation and a series of copy-paste errors that cost JP Morgan 6 billion in losses and more in fines. Or in 1995 the case of an accountant forgetting the minus sign on a loss of $1.3 billion for Fidelity's Magellan fund. This of course appeared as a gain, causing a devastating $2.6 billion error.
Sure, Excel is astoundingly easy and flexible. But making a major error in a spreadsheet is just as easy. On top of that, detecting those errors is something that Excel manages to make more difficult, leaving you with a gaping vulnerability. When it comes to insurance product development, Excel can lull you into a false sense of security. New products get approved because models predict their success. But with tiny errors during the product development process, you face two huge risks:
- Your product isn’t as competitive as you thought,
- or it won’t make as much money as you anticipated (any at all).
Any business process that relies on complex computations to make big decisions should be done by a powerful processor, a purpose built application that makes these errors all but nonexistent.
Flexibility remains Excel’s biggest strength and unsurprisingly, one of its greatest weaknesses. This flexibility means that it’s not transparent, only the people who built a spreadsheet can fully understand what’s happening under the hood. This means peer checking for accuracy is difficult, and if someone leaves a company, all the spreadsheets they built are either used incorrectly, or are completely scrapped so the replacement can start from scratch. Within the wider insurance organisation, silos of information become an issue. You lose any possibility of a ‘one truth’ information source and all pieces function without a real view of the others.
Again this can be fixed by using software that is purpose built, facilitating collaboration, version control and structure to your data.
There is also a huge risk of a loss of data. Although powerful, Excel is not very scaleable. The larger a spreadsheet gets, the slower it runs and the more unstable it becomes. Of course we require enormous spreadsheets, but they get more corrupt and more prone to crashing as you add to them.
So why are we still relying on it? The insurance industry desperately needs to modernize. Of course, we will never completely get rid of Excel, there will always a place for such a useful tool. But the ‘best practice’ insurance product development of the future is unlikely to include this many spreadsheets.