Insurers are now focusing more on pillars 2 and 3.
Martin Sarjeant, Head of Actuarial Business Practice, SunGard iWorks, talks about the modelling, data and reporting challenges of Solvency II and how 2012 will be iWorks Prophet's most ambitious year to date in terms of product enhancements.
What are the main modelling challenges of Solvency II?
The main challenge insurers face is to create models that meet the regulatory requirements and are understandable by key stakeholders. The quantitative challenges of Solvency II are well-understood by insurers, and have been largely implemented by market leaders. However, there is a danger of building overly sophisticated models which few stakeholders can directly understand or explain. Insurers should focus on creating models with appropriate technical calculations, but also invest time on documentation and education around the model, including the key behaviour, limitations and approximations to bear in mind when interpreting results. SunGard has focused not only on functionality but also on providing insurers with clear and transparent modelling and documentation, both in the code and the results output, to assist understanding of the underlying calculations and assumptions.
Are insurers now focusing more on Pillars 2 and 3?
We certainly see insurers focusing more on Pillars 2 and 3, particularly those European countries that already had risk-based capital regimes in place and were therefore well placed to meet the Pillar 1 quantitative requirements. Insurers who are ahead of the game understand the challenges of Pillars 2 & 3 and are actively working to satisfy the requirements. Many insurers either do not fully understand or are underestimating the challenges involved in embedding sophisticated models into their processes and ensuring key stakeholders understand them. There are some areas of difficulty, particularly the Pillar 2 ORSA requirements, where there is not a rigidly defined process for creating the reports required.
Is data gathering and organisation a particular problem?
Data will be an issue for many insurers, as Solvency II capital calculations rely on accurate, consistent and complete data. Solvency II models will use huge quantities of data from many sources, such as policy, investment and economic data, and these models will generate even more data. Data needs to be ‘connected' to demonstrate auditability, and the large data volumes produced from these models translated into meaningful information to report to key stakeholders. Organisation and storage of data will be something insurers need to consider due to the volume and frequency of full model runs. They will need to invest in suitable infrastructure and look at storage and archive options.
How can SunGard help in all this?
iWorks Prophet will form the heart of the calculations for many of the risk metrics in Solvency II and will assist insurers in covering many aspects of all three pillars. Alongside iWorks Prophet, SunGard can also help with data management, reporting, integration and automation. Through iWorks ERM Framework automation and tight integration of iWorks Prophet, it is also possible to capture full audit and workflow information. In addition to the SunGard ERM Framework, SunGard also offers data reconciliation services and products.
What enhancements to Prophet are planned in the near future?
Significant enhancements are planned to further strengthen our product offerings for our extensive global customer base of over 9,000 users. Enhancements and extensions are planned throughout the Prophet suite of applications and we also expect to release new modules around data management, risk reporting, as well as updates to the core actuarial libraries. 2012 is likely to be our most ambitious year to date in terms of product enhancements. Additionally, in conjunction with Barrie & Hibbert, we are expanding our Solvency II offerings to include additional liability proxy modelling and risk aggregation within the iWorks Prophet solution, to help our customers enhance risk modelling and gain faster calculations of their Solvency II metrics. It will also help them embed internal models into the decision-making process, improve insight into the risks and behaviour of insurance liabilities, and aggregate risks across the organisation.
Are you doing more business in continental Europe?
Yes, we are still seeing companies change systems to iWorks Prophet in continental Europe and within the UK. These insurers are largely looking to replace existing legacy systems with new systems that can meet Solvency II requirements and serve them well for the years ahead. We also have seen a large increase around European customers' use of Prophet Enterprise, and use of our ERM framework components to create an end to end solution.
Is there interest from insurers outside the EU in iWorks Prophet for modelling purposes?
USA and Asia Pacific are both very strong markets for iWorks Prophet. The USA is a mature and sophisticated market, with many customers looking for next generation platforms such as iWorks Prophet. In Asia Pacific, regulatory change is accelerating in both sophisticated and emerging markets, and we are seeing extremely strong growth.. We also see strong demand for Solvency II type modelling and controls in South Africa, where Solvency Assessment and Management (SAM) comes into effect January 2014.
Do you think the likely delay in implementation to Solvency II is seen as welcome or irritating by insurers?
On balance, the delay can be seen as positive as it will give insurers and regulators more time to get to grips with the far reaching requirements of Solvency II and minimise the risk and impact of premature implementation. I'm sure some insurers will welcome the ‘breathing space', and certainly perception of whether this is good or bad will vary by region, company size and current preparedness for Solvency II. Potentially, insurers who have already invested considerable time and money in developing internal models may react negatively to seeing the benefits of any reduced capital requirements delayed by the change of implementation date. The uncertainty of the delay may also cause concern for insurers, as it has been known for some months that there is likely to be a delay, but this will not be formalised until early 2012. Until then, insurers must continue to work towards the current implementation date.
