Tag Archives: insurance

Strategic implications of Solvency II

There is currently no publicly available revised timeline for the implementation of Solvency II. With the long term guarantee assessment taking place over the coming months it is likely that it will be summer at the earliest before such a timetable is made public.

This briefing note examines some of the longer-term strategic issues that insurance and reinsurance companies may want to consider as they continue to prepare for Solvency II.

Stressing the tipping point

Reverse stress testing focuses on the sustainability of a business model and may help identify obscure underlying risks. Neil Cantle is quoted in this Risk.net (subscription needed) article discussing the importance of recognizing “tipping point” scenarios that could damage a business. Here is an excerpt:

It is also important not to focus on only big events. “It is possible for non-viability to arise from a slow buildup of smaller events too,” says Cantle.

… An important element of the detailed analysis can be identifying tipping points at which a slow build-up of events or circumstances reaches a critical mass and undermines the business. “An organisation can be apparently operating quite normally, but slowly becoming more sensitive to a particular stimulus. When that trigger happens, the company could unravel very quickly indeed,” says Cantle of Milliman.

This is a key insight from the science of complex systems, so understanding how these types of scenarios occur is crucially important for reverse stress testing, Cantle says. “If an insurer is close to a tipping point, it is unlikely that it will be able to avoid it and so it should focus its resources on resilience. If it is sufficiently far from the tipping point and the speed of onset permits it to take action in the time remaining, then it may be able to devote resources to avoidance or mitigation. Knowing which path to follow is a key learning exercise,” he adds.

Model limitations for risk management

While model building will always be a core element of insurance, being aware of the limitations of models and techniques to manage those limitations is crucial to successful risk management.

A new article authored by Pat Renzi and Elliot Varnell for the Actuarial Post focuses on the challenges risk managers face given their responsibility for an internal or Own Risk and Solvency Assessment (ORSA) model. The article highlights three issues that risk managers need to make allowance for in managing their models: model scope and historical data; associative dependency; and the problems that arise when elegant models confound transparency and understanding.

Here is an excerpt:

…Model building is at the core of the insurance sector and we will never stop building models. But awareness of their limitations and the techniques to manage those limitations is crucial to successful risk management.

Simplifications and expert judgment are a fundamental part of building models too and should be recognized as such. However they should be applied with full transparency and in full knowledge of their limitations rather than couched in mathematical derivations where they cannot be readily challenged.

The article was published in the July 2012 issue of the Actuarial Post. Read it here.

Workshop preview – “Making Insurance Less Sexy” (B6)

The ECJ ruling on the ‘Gender Directive’ last March left many unanswered questions for the insurance industry.  Does the ruling apply to contracts written prior to 21 December 2012, can insurers use gender for underwriting and reserving, can insurers even collect gender? With just over a year to go to ‘G-Day’, insurers need to start advancing their strategies for dealing with a new unisex world.

In workshop B6, Jim Murphy will be discussing these issues. We’d love to see you there to add your views to the debate.

Insurance accounting Phase 2…a step in the right direction.

Overall there are a lot of positives coming from the insurance accounting standard exposure draft with a number of measures aimed at improving transparency and comparability of insurers’ financial statements.

There are a number of similarities with Solvency II calculations such as no surrender value floor, probability weighted cashflows however as expected there are some issues in the detail of the proposals.  For example, contract boundary definition is different for IFRS, MCEV and Solvency II and there are other areas of inconsistency which need to be addressed.