October 21st, 2018

Pushing the Model Boundaries - GC@BB Commentary

Posted at 1:00 AM ET

cox_andrew_bio2eddy-vanbeneden-small1till-wagner-final1Andrew Cox, Managing Director, GC Strategic Advisory; Eddy Vanbeneden, Managing Director, Head of GC Analytics, Continental Europe; Till Wagner, Senior Vice President, GC Strategic Advisory Contact

  • Companies keen to expand internal capital model remit
  • Multiple factors hindering ability to integrate into broader strategic framework
  • New technologies support rapid model evolution and increased data resolution

As Solvency II-based capital regimes further impact internal capital models, greater clarity around a company’s view of risk is becoming more critical. Yet optimizing model infrastructures is often limited by platform inflexibility, computational power and cumbersome approval processes, according to a European roundtable of Guy Carpenter leaders.

“For most organizations, Solvency II is fully integrated into business-as-usual reporting,” says Andrew Cox, Managing Director, GC Strategic Advisory. “Now the focus is on further integrating capital models into a broader strategic framework to better support decision making.”

However, as Eddy Vanbeneden, Managing Director, Head of GC Analytics, Continental Europe, explains, extending the model’s strategic remit is challenging.

“Expanding model functionality can be burdensome,” he states. “For Solvency II-based internal capital models, changing the underlying platform requires the redocumentation of all model processes to demonstrate compatibility with the Solvency II Directive’s requirements. The approval and validation process requires a full audit trail.”

He also highlights model data limitations. “Many companies want to embed underwriting activities into the internal capital models. However, this requires the model to handle much greater data resolution than defined under Solvency II, which would put existing frameworks under much strain.”

This stringent nature of the Directive has also hindered the evolution of capital model technology, given companies’ reticence in seeking approval for changes to the infrastructure.

“Many current models were built on leading-edge technologies at the time they were developed,” Cox explains. “However, as new technologies have become available across other parts of the (re)insurance process, we have not seen these to the same level in the internal capital models.”

One development which may force the technological hands of (re) insurers is the International Financial Accounting Standard 17 (IFRS 17).

As Till Wagner, Senior Vice President, GC Strategic Advisory, explains: “While IFRS 17 is an accounting rather than a capital standard, internal capital models can form a key part of the reporting requirements. Companies will want to avoid data duplication and divergence if operating multiple reporting models.”

However, he adds, the models will need to be upgraded to meet the standard’s data demands.

“Companies will need to adapt their internal capital model to fit with IFRS 17 requirements,” he says. “It will place more stringent data demands on organizations requiring much greater resolution than under Solvency II and the need for virtually live data on a policy-by-policy basis. Organizations will need to look at greatly enhancing the technology underpinning their model capabilities.”

Guy Carpenter is currently working with clients to better optimize internal capital models, create a more integrated model environment, and implement necessary technological performance upgrades.

The firm recently announced a multi-year partnership with Reynolds Porter Chamberlain Consulting LLP to license and develop proprietary applications to run within its Tyche software.

“Through Tyche,” Vanbeneden explains, “we are able to integrate a vastly more powerful computational engine into the model framework, enabling the processing of huge data sets in almost real time, and facilitating analysis across the model framework –underwriting, pricing, reserving and capital management – on a single platform.”

Such platform-based solutions can deliver greater flexibility and enhanced data-management capabilities at reduced cost. Built to support speedy integration into existing frameworks, they support easier validation and a more straightforward auditing process.

As Cox highlights: “Such technologies mean our clients now have, for example, the opportunity to review reinsurance capital model outputs daily. Greatly improved analysis speed means complex optimization scenarios can be modeled in minutes, with results directly influencing live discussions on capital and broader risk strategy.”

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