The pressures that Solvency II puts on risk and capital modelling are manifest: more information is required within shrinking deadlines, it has to be communicated better and it must be produced with more rigorous governance. FIS explains how its Prophet solution is helping actuaries and risk professionals deliver
The challenge of complying with the letter and spirit of the Solvency II regime has been dominated by two seemingly divergent demands. First, there has been the need for actuarial modelling on an unprecedented scale and to an unparalleled degree of complexity in order to meet solvency reporting requirements.
Second, at the same time insurers have had to create a framework of controls and governance around the entire actuarial modelling and reporting process, which is also reflected in the substantial efforts that have gone into formalising the business processes supporting model approval.
The tightening of reporting timescales under Solvency II is clearly a major pressure point for actuaries and risk professionals, who now have far less time to review increasing volumes of model results and to explain their meaning to senior management before they are submitted to the regulator.
Actuaries and risk managers must be able to respond quickly to new and sometimes unexpected requests
Solvency II is of course part of a wider regulatory trend that will sooner or later affect insurers globally. And financial regulation itself can be seen in the wider context of increasing demand for transparency from a growing audience of stakeholders, both external and within the company.
ORSA documentation work has already created enormous pressure within firms. Compounding this are increasing requests from senior executives. As they receive more information on the company's risk and capital position, and in more detail, senior management tend to ask new questions, such as how the results would change with different assumptions, under different stresses, or for them to be presented in a different light.
This means that actuaries and risk managers must be able to respond quickly to new and sometimes unexpected requests. But in addition to being more agile, they need to carefully manage the data and processes, and create confidence in the results by being able to trace them back to the assumptions and inputs that underpin them.
Essentially, the actuarial and risk functions are now expected to perform at increasingly higher levels, processing vast amounts of data to deliver accurate information in more detail, more quickly, and with limited in-house resources – all with greater visibility and within an appropriate governance framework.
The challenge is not just one of operational effectiveness: with Solvency II in place, many insurers will doubtless be keen to embed these new processes as quickly as possible into business-as-normal, and to then extract full business value from them.
FIS continues to invest significantly in developments to its Prophet platform to provide actuarial and risk teams with the most effective tools to adapt to evolving requirements, stay ahead of demand, and to support their businesses.
On the calculation front, we have provided advanced modelling techniques with 'Nested Structures' – a new approach to Prophet modelling that helps companies project forward their Solvency II models to more accurately assess the future needs of the business.
Nested Structures can be used to project the evolution of the risk margin and best-estimate balance sheets, and allows for Solvency II capital requirements, US GAAP, Principles-Based Statutory Reserve requirements or equivalents. Looking ahead to new financial reporting requirements, it also supports projecting the evolution of the contractual service margin under IFRS 4 Phase II.
Running nested stochastic calculations calls for greater computing power and Prophet's calculation engine has been optimised to support them. Customers using Prophet Enterprise or the Prophet Managed Cloud Service can run Nested Structure calculations within shorter timeframes by taking advantage of scalable processing, either within their local grid or on the public cloud.
We have found the initial reluctance of insurers to trust the cloud with their data has much reduced as the technology matures, and companies are becoming much more comfortable with the capabilities of the cloud.
Aside from being able to carry out model runs far more quickly, such as for peak reporting, cloud technology offers the flexibility of using as much or as little computing resources as you need, and only when needed. This kind of flexible outsourcing also helps with managing costs.
When using the cloud, ensuring data security is critical. FIS has partnered with both of the leading, industry-accepted public cloud infrastructure providers to support its Prophet Managed Cloud Service. Since each customer's needs and preferences are unique, we believe it is important to offer a flexible solution within an integrated managed service.
Controls and governance
On the controls and governance front, we have been adding important components to Prophet, including Assumptions Manager and the Insurance Data Repository that extend the control framework to the input and output of the core Prophet calculation engine. Prophet Enterprise bridges the gap between the calculation demands and the control framework, offering both an organised way of scheduling the complex runs required under Solvency II, and a governance framework to control the flow of data through them.
We have seen a growing desire among insurers to better control the timely distribution of accurate risk information – not only for Solvency II or other financial reporting, but also to strengthen internal decision making. Risk intelligence is much in demand to help steer business decisions, and the reliability of the data has become crucial.
Given the need to educate and inform a broader internal audience about risk, we can expect clearly presented visual reports to become increasingly popular
Customers with these needs have taken advantage of the Prophet Data Management Platform. This provides a set of components that give assurance over the quality, timeliness and auditability of results, as well as the ability to automate workflows. The Insurance Data Repository is an important module within the platform. Customers have been using this to improve the performance of downstream data delivery, and the module has directly supported regulatory approval over data preparation and reporting processes.
Our latest update to the Prophet Data Management Platform was the addition of business intelligence capabilities, enabling the end user to transform actuarial output into graphical representations of risk. Given the need to educate and inform a broader internal audience about risk, we can expect clearly presented visual reports to become increasingly popular.
In speaking with customers, the need for a joined-up solution is evident. Our introduction of capital modelling and reserving capabilities for general insurers has extended the Prophet platform's industry scope beyond life, health and pensions, and this supports composite insurers who have been using Prophet for non-life business.
We have created new ways for the valuation actuaries to interact with Prophet that are much more closely aligned with their working practices
In the US, valuation and projection actuaries have often had different systems and requirements. With our 'US Single Platform' initiative, we have put together an offering that is accessible and appropriate for both valuations and projections. We have created new ways for the valuation actuaries to interact with Prophet that are much more closely aligned with their working practices, while retaining the power and transparency of the core Prophet engine.
Transparency is with doubt a critical issue: as models grow in complexity, understanding what is happening under the surface becomes increasingly important. As regulations like Solvency II and Principles-Based Reserving in the US take effect, the actuarial model is now central to financial decision making.
Given the significance of the results produced by actuarial models, many now expect full model transparency. 'Black box' constrained systems, where users rely on providers for new features to be added, and where only switches and toggles are exposed, can restrict the understanding of the model upon which the business depends for key decisions.
Prophet continues to support our customers as a comprehensive actuarial modelling and risk management solution. Yet we also recognise that many firms have brought together different internal and external tools for their current processes. This again raises the issue of flexibility – where possible, we help companies develop their current model technology environment to improve their capabilities.
While Prophet is an end-to-end platform, its components - notably the Prophet Data Management Platform - are designed to coexist with other systems. By adding performance-enhancing tools to their existing systems, actuarial and risk teams, and the business as a whole, will be better equipped to adapt to inevitable changes in demand.