Financial and risk modelling software moves into “qualitative” areas

Our guide to 18 systems from 14 vendors shows a wide range of approaches. All of them have features relevant to compliance with Solvency II and some are prepared for pillar II and III requirements.

While 2009 is set to be crunch time for insurers and reinsurers because of the decisions they have to make on the models to be used under Solvency II, it's an equally critical period for software providers. These firms have to satisfy demand from the insurance industry not just for improved modelling tools along with faster computing speeds involving ever-more complex calculations. There's also demand for a whole range of other features in systems, including coverage of the broader regulatory issues relating to models and the more qualitative requirements of pillars II and III of Solvency II.

Some of these requirements were specified by the FSA last week in spelling out its plans for a "thematic review" later this year as part of its internal models approval process (see News, 7 May, "FSA outlines next steps on models"). They cover areas like risk and model governance, the use test and senior management understanding.

So it's an appropriate time to review what the software vendors have on offer. The directory below gives what we believe to be a near-exhaustive list of the systems available in this area. The 18 systems listed describe themselves in a range of sometimes overlapping ways. Some talk in general terms of actuarial and financial planning packages; others highlight specific approaches such as dynamic financial analysis (DFA) tools, portfolio replication tools and economic scenario generators (ESGs). Some offer Monte Carlo simulation or stochastic modelling capabilities.

Thanks to the individual capital adequacy standards (ICAS) regime, which the Financial Services Authority (FSA) introduced in the UK in 2005, many systems being used in the UK already provide a lot of the functions needed for Solvency II compliance. But in the last six months or so, there have been three launches or relaunches of software packages aimed at this sector of the insurance market -- RiskAgility from Towers Perrin, Simulum 3 from Watson Wyatt and RiskPro Solvency II from FRS Global.

These come into a market where there are already well-established systems. The life sector, for instance, is dominated by MoSes, also from Towers Perrin, VIPitech, also from Watson Wyatt, SunGard's iWorks Prophet and Milliman's MG-ALFA (Asset-Liability Financial Analysis). Milliman, headquartered in Seattle, is strong in the US, Latin America, Japan and Korea, and is starting to grow in Europe and China.

Between them, EMB's Igloo and AonBenfield's ReMetrica appear to have the bulk of the UK non-life industry covered. Igloo and ReMetrica are strongest in Europe, but growing elsewhere.

Towers Perrin officially launched RiskAgility on 28 April, though the system had been commercially available since last November. RiskAgility is the company's new enterprise financial modelling platform, which can execute its own applications as well as other financial modelling applications such as MoSes, Towers Perrin's long-standing engine for functions like internal model development for Solvency II.

Now, the firm has added an economic capital (EC) engine to the RiskAgility platform which also, it is claimed, provides improved risk management through its centralized, integrated, auditable, and automated technology. In addition, the EC engine provides a centralized database and analytics to ensure that information required for the use test is made available to the enterprise as a whole.

This is one of several systems that looks beyond the pure modelling requirements of Solvency II to much broader enterprise risk management (ERM) issues. Critical information can no longer remain the preserve of a few experts: it has to be distributed in a timely way to all senior managers and board members, where ultimate responsibility lies, and it has to be in a form that managers or board members who are not actuaries or quants can understand. Changes to inputs into models and checks on the data being input need to be documented and audited. Embedding these types of procedure into the day-to-day running of the company is key to satisfying the Solvency II use test.

Watson Wyatt also highlights preparation for the use test as one of the features of its new Simulum 3, along with preparation for the "own risk and solvency assessment"(ORSA). Simulum is said to be suitable for small and medium-size insurers in the non-life sector wishing to develop an internal model. In fact, the original Simulum, according to Watson Wyatt, was built to help the FSA in developing the ICAS regime.

The other newcomer, FRSGlobal's RiskPro Solvency II has a model testing programme that addresses not just the use test but the five other key tests for internal models laid out in the Solvency II directive: statistical quality standards, calibration standards, profit and loss attribution, validation standards and documentation standards.

SunGard's Prophet also offers solutions which not only enable an insurer to fulfil the use test but also the auditability requirements of Solvency II: Prophet provides the facility to base models largely on common libraries, producing a much smoother auditing process.

Documentation of the model is another aspect to be considered in a system, since Solvency II will require this as evidence that a company would be able to continue using its internal model even if key staff running the model were to leave the company.

In this respect, ReMetrica seems to be in a strong position. AonBenfield claims that ReMetrica is "one of the most comprehensively documented systems on the market with over 800 pages of technical specification for the user and regulator."

Many of the systems listed below are owned by consulting firms. Even SunGard's Prophet was until 2005 part of Deloitte. Whether the vendor is a consulting firm or not, most offer consultancy to complement the software after purchase or licensing. Some firms stress that their software is stand-alone and capable of being run without input from a consultant, e.g. Ultimate Risk Solutions; others offer help with implementation and early use, e.g. EMB with Igloo; still others suggest an on-going relationship is beneficial to the client.

AonBenfield, being a broker, makes a virtue of the fact that its ReMetrica was designed not by consultants but by people working in the markets. The firm also claims that it will have an advantage when the time comes for models to be independently validated for Solvency II purposes, pointing out that ReMetrica "is used by many of the world's top actuarial consultants, providing insurers with a choice of independent and knowledgeable auditors of their internal capital models."