Moody's Analytics: the development of ERM solutions

Companies: Moody's Analytics

Brian Robinson, senior director, enterprise risk solutions, at Moody's Analytics discusses the development of enterprise risk management (ERM) solutions to help insurers meet regulatory and business challenges

Brian RobinsonWhat are the significant ERM challenges ahead?

Many insurers are still trying to understand the implications of Solvency II. The real challenge is managing the balance sheet and the solvency position, and being able to communicate changes effectively, both internally and externally.

Understanding the dynamics of the balance sheet, for example the risk margin and other technical areas such as the matching adjustment and transitional arrangements, will take time. We have already seen the impact of market volatility during 2016 and that will continue to be a theme particularly for firms with weaker balance sheets.

Insurers need to be much more proactive in how they are managing their business. At a fundamental level, firms are having to revisit the value drivers under the Solvency II regime, and the associated performance indicators needed to run their business.

What is needed to tackle those challenges?

Senior management needs to be able to understand the interactions between risk and reward. To do this, firms need more advanced modelling capabilities to support effective risk-based decision making. The ability to run what-if analysis, carry out stress and scenario testing, and understand their balance sheet on a forward-looking basis will become increasingly important.  

How well have insurers dealt with the need for forward-looking analysis?

Capital planning and capital allocation are a key part of the annual business planning cycle, so firms need to project their solvency position over a three or five-year time horizon allowing for interaction with different business plans and management actions.

Many firms continue to struggle with business projections under a Solvency II regime.  At one level there are technical challenges, for example, projecting complex liabilities and the capital requirements.  However, we expect this will evolve over the coming years through a combination of methodology and technology.  More broadly, there needs to be greater collaboration between finance, which is responsible for capital planning, and the risk function which understands the dynamics of the solvency position. 

We see forward-looking analysis becoming increasingly vital to firms.  Senior management needs to understand how future events may impact their business and, where required, develop an action plan to deal with those scenarios.  Ultimately, firms want to avoid surprises.  We expect regulators will want to see appropriate levels of stress and scenario testing, and better forward-looking assessment of risks as part of the Own Risk Solvency Assessment.

How are your ERM solutions set to evolve?

Regulation continues to be a major driver but I think we will see increased focus on delivering business value, being able to support senior management in their risk-based decision-making.

Technology is changing rapidly and this creates opportunities to support our clients in new and more effective ways. For example, cloud technology provides flexibility around deployment but also delivers significant performance and cost benefits.

Software design is incredibly important and this is where we are investing significant effort for the future.

Why is software design so important?

Traditional software solutions have tended to solve problems with a bottom-up approach, but firms need fast, easy-to-use solutions to run their business. So we need to be able to provide software that solves complex problems, but in a way that is more accessible and allows senior management to answer those difficult what-if questions.

We might see different levels of solutions being used in some cases: complex, granular capabilities for in-depth investigation by actuaries and capital and risk managers, but also some higher level complimentary capabilities that senior management can use quickly and can also be validated through the “heavier” models. It is not enough to make heavy models faster and faster if they are still complex to use.

In fact, the need to improve the efficiency and usability of risk models runs right through the organization. Actuarial and risk teams are spending too much time and effort setting-up, maintaining and running these models. Our next wave of solutions are being designed to reduce production effort and free up resources to carry out analysis that supports the business.