Risk Based Capital regimes the challenges ahead
Martin Sarjeant
21 October 2015
Evolve
PRESENTATION TO THE ACTUARIAL SOCIETY OF KENYA
Agenda
• Drivers for Risk Based Capital and Principles Based regimes
• Business value from Risk Based Capital regimes
• Barriers to moving to Risk Based Capital regimes
• How can Prophet help you?
• Governance
• Requirements of IFRS Insurance Contracts phase II
• Q&A
• Prize draw
Drivers for Risk
Based Capital
regimes
Drivers for Risk Based Capital and
Principles Based regimes
• Solvency II
• International Association of Insurance Supervisors (IAIS)
• Insurance Core Principles (ICP)
• Increasing the standard to which insurers are accountable
• Consistency in the valuation of assets and liabilities
• Capital requirements in line with the risks undertaken by the insurer
• Efficient use of capital and better risk management
• Consistent standards for supervision and intervention
Advancements in Risk Based Capital
Capital modelling is an important part of an end-to-end risk
management process. Mainly driven by evolving global
regulations whereby regulators are looking to manage the
risks of each company more according to their specific risks
as opposed to a standard or assumed risk profile.
A lot of the drive has been from Solvency II regulations but
many other global regulators have been adopting similar
approaches.
Some of the key elements are moving towards:
• Pillar 1 - more sophisticated quantitative capital
requirements,
• Pillar 2 - robust and integrated qualitative risk
management measures
• Pillar 3 - disclosure and reporting requirements
Another key element of regulatory developments includes a
risk self-assessment, often called the own risk and solvency
assessment, ORSA.
European Solvency II
EIOPA
• Effective 1 January 2016
• Includes:
• Pillar 1 - Capital calculations
• Pillar 2 – Systems and controls
•
Includes an annual FLORA – Forward Looking Own Risk Assessment (aka ORSA)
• Pillar 3 – Reporting
•
Includes quarterly and annual reporting
• Technical provisions = Best estimate liabilities plus risk margin
• Solvency Capital Requirement on a one year 99.5th percentile basis
• Engaging the business
• Using the model
• Appropriate systems and controls
US Solvency Modernization Initiative
NAIC
• Critical self-examination of the US insurance solvency regulation framework
• Includes a review of international developments regarding insurance supervision,
banking supervision, and international accounting standards and their potential
use in U.S. insurance regulation.
• Focusing on five key solvency areas
• Capital requirements
• International accounting
• Insurance valuation
• Reinsurance
• Group regulatory issues
• Obtained Solvency II equivalence
• Includes an annual ORSA
• Only for companies above a certain entity or group GWP threshold
• Requires individual state adoption
Why should a regulator trust
your risk model if you don’t
trust it enough yourself to use it
ORSA
Own Risk and Solvency Assessment
•
•
•
•
•
•
Principles based
Self assessment
Risks specific to each company
Engaging the business
No strict rules or prescribed tests
Standards
IAIS Insurance Core Principles
The risk management system is designed and operated to
identify, assess, monitor, manage and report on all reasonably
foreseeable material risks of the insurer in a timely manner.
An effective risk management system typically includes elements such as:
• a clearly defined and well documented risk management strategy
• a clearly defined risk appetite approved by the Board with Senior Management;
• a written process defining the Board approval required for any deviations from
the risk management strategy
• appropriate written policies that include a definition and categorisation of
reasonably foreseeable and relevant material risks to which the insurer is
exposed
• suitable processes and tools for identifying, assessing, monitoring, managing,
and reporting on risks.
• regular reviews of the risk management system
• an effective risk management function
Progression of Capital Requirements
Non-risk based formula – percentage of reserves, gross written premiums,
sum at risk etc
Risk based formula for capital requirements, typically providing separate calculations for
premium risk, claims risk, asset/market risk, operational risk and so on.
A dependency structure is often used allowing for some correlation of the various risks.
The formula is usually an articulation of a defined measure of risk, for example a one in
two hundred years value at risk measure over a one year time horizon. But this is still a
standard formula with an element of assumption around a typical risk profile.
The next step that a number of regulations are moving towards is a full internal model
approach, most notably European Solvency II. In this case, the standard formula can be
replaced by the company’s own internal model. The internal model has no prescribed
format other than to adhere to the prescribed measure of risk within the regulations. This
then removes any element of standard risk profile assumption and relies upon the
company’s own risk models that should better fit the true risk profile.
Non Risk
Based
Formula
Risk
Based
Formula
Internal
Models
Progression of Actuarial Systems
Desktop
•
•
•
•
•
•
•
•
•
Complex systems grown in an
ad hoc way
Excel?
Manual processes
Poorly documented
Poorly connected
Measurement of risks
Disparate processes and
systems
Data challenges
Lack of change control and
other IT disciplines
Risk to stakeholders
Embedded
and
Controlled
Grid
Adapt
Change
Evolve
•
State of the art systems
•
Controlled and automated end to end
process
•
Sophisticated risk based models
•
Well documented
•
Measurement and Management of risks
•
Mission critical
•
IT /& Business owned and supported
•
Produces actionable information
•
Governance
•
Embedded in strategic decision making
process
Benefits to stakeholders
TASK Vision
“To position the Actuarial Profession
in Kenya and the region as the
leading profession in the areas of
modeling and management of
financial risks and contingent events”
Business value from
Risk Based Capital
regimes
Business Value from Risk Based
Capital regimes
•
Stability of insurer
• Ensure capital held is commensurate with the risks of the insurer
• Better protection for policyholders
• Protection of shareholder value
• Increased reputation of industry and penetration of life insurance in Kenya?
•
Management
• Enables a better internal understanding of risks which leads to better management decisions
• Models create can be used to better manage all aspects of the business (as long as designed
for purpose)
• Better Risk Management – raising the bar
•
Alignment of
• Asset and liability valuation methods
• Insurers risk profile (one size doesn’t fit all)
• Kenyan insurers internationally
RBC regimes also foster or specify better more governance and control around processes further
protecting against reputational risk and operational risks
Polling question
When Kenya introduces a Risk Based Capital
regime would you?
A
Ensure that the company complied with the regulation but no more
B
Use it as a driver for change, embrace the new regime and use it to drive better risk
management within your company
Should not be seen as a “tick box”
exercise
Regulatory compliance is only one benefit of a new regime
The regulatory initiatives should be welcomed as a step change to risk
management, and business practices enhanced to align with this
Rating analysts are starting to take note and a robust risk management framework
can help to support and even improve credit ratings.
For insurers seeing this as a “tick box” exercise and adopting a “good enough”
approach will typically fail to realize all of the benefits that they have the opportunity
to bring to a company
Companies are continually looking to add value to their enterprise, risk based
capital models are one way to do this
Real Added Value
Embedded capital models can help to unify elements of the business as it can open
up impacts of decisions in one area on another. By also bringing the business
together to collectively contribute to the capital model a wider sense of involvement
and ownership can be achieved.
Increases sustainability and competitiveness, not just profitability
of the enterprise
A capital model can open the eyes of a business wider to a longer term strategic
view.
Certain strategies may yield higher longer term value to a company compared to
some shorter term options and embedded use of a capital model can help to
identify and support these strategies.
Polling question
Is your current Risk Management platform sufficient
for modelling needs now and to meet upcoming
standard?
A
Yes, we believe so
B
Yes, but it will need substantial investment
C
No, it is not sufficient
Barriers to moving to
Risk Based Capital
regimes
Barriers to moving to Risk Based
Capital regimes
• Shortage of skilled resources to set up models
• Costs – system, people, infrastructure
• Agreement to a common standard
• Your current systems limitations
• Internal corporate inertia / resistance to change
• Reliability and accuracy of data
How can Prophet
help you?
Prophet’s Global Acceptance
Trusted by the
insurance industry
for over
25
YEARS
More than
10,000 USERS
At over
850 CUSTOMER SITES
In more than
65 COUNTRIES
200+ CUSTOMER SITES NOW USING PROPHET ENTERPRISE
www.sungard.com
How can Prophet help you?
Prophet’s comprehensive actuarial libraries are built to support Risk Based Capital
regimes used extensively across the world.
• Contains standard product and regional specific code that can easily be customised
• Available with actuarial libraries suitable for Kenya
• The extensive libraries and example products enable rapid deployment and
development
• Within the Prophet suite a number of complimentary programs exist to allow for end
to end risk management (data validation, experience analysis, process control,
management of assumptions, results reporting..)
• Tried, tested and trusted by more than 10,000 users
• Standard library code for Solvency II and Solvency Assessment and Management
(SAM)
• Standard library code for IFRS Insurance Contracts phase II
• Easy to customise / parameterise as regulations are finalised
Freeing you from managing the tools to manage the risks
How Prophet can help with those
barriers
Shortage of skilled resources to set up models
•
Prophet includes extensive actuarial libraries and tools to enable rapid deployment and
development
•
Ready for your needs today and tomorrows needed immediately
•
Productivity tools to enable faster working
•
Already trusted and used in over 65 countries including Kenya
•
Large resource pool of skilled users in Africa and internationally
•
Very easier to learn - user friendly coding
Prophet helps to reduce the need for additional skilled resources due to the investment already
made in the platform and actuarial libraries and example products
How Prophet can help with those
barriers
Costs – system, people, infrastructure
• The costs of any system need to be weighed against the benefit they bring
• The benefits good systems bring are : compliance, better risk management,
better information, stability, more efficient use of capital and costs savings,
freeing up actuaries to focus on added value areas
With the right choices the benefits will outweigh the costs
How Prophet can help with those
barriers
Agreement to a common standard
• Kenya seems to be on the right path with new standard being adopted based
on IAIS’ Insurance Core Principles
• Prophet is used around the world in 65 countries, 850 customer sites and
10,000 users
• Prophet is proven and accepted and provides a flexible modelling
environment to take on a wide range of environments.
Widely proven and used extensively in regions with sophisticated capital regimes
How Prophet can help with those
barriers
Your current systems limitations
• Implementing systems in line with IAIS recommendations and to have a controlled
risk management solution and framework can be a costly investment
• Excel, internally designed programs are unlikely to be acceptable in new regimes
• With Prophet you get documentation, transparency, controls, volume scalability,
future proofing, extensive actuarial libraries
• Significant functionality “out of the box” to free actuaries up to manage the
business
• Proven platform in Europe, Africa, Asia Pacific, U.S. and Latin America
How Prophet can help with those
barriers
Internal corporate inertia / resistance to change
• This can be a significant hurdle
• It is important to get sponsorship from executives / board
• Understand the business benefits / regulatory requirements
• Buy in from all stakeholders – “what’s in it for me?”
• How will this benefit me?
From an actuarial point of view we have a very influential voice and responsibilities
How Prophet can help with those
barriers
Reliability and accuracy of data
• This should be a focus point prior to any wider implementation
• “Garbage in and Garbage out”
• Data should be complete, accurate and appropriate
• Tools such as Data Conversion System (supplied with Prophet allows conversion,
validation, correction, audit and grouping of input data prior to runs
• Tools such as Glean an Experience Analysis system help with assumptions setting
and fraud detection
Data in more detail
Data Standards
Data should be clear, unambiguous, complete and accurate
Data used should have received sufficient review and checking so users can rely on
the resulting information
Any judgement made should be fully document to enable a competent technical
person to understand the decisions and the appropriateness of them
For incomplete data an assessment should be made if the data can be improved by
adjusting it or supplementing it
Data is very important and a high degree of reliance is placed on it.
“The quality of the output of your models is only as good as the quality of
the input”
•
SunGard’s Data Conversion System
Allows full validation, checking, conversion and correction
Feature
Validate data
Custom check rules
Correction of data
Transformation from other systems
Preparation of data for Prophet,
Life, Health GI and Retirement
Preparation of data for experience
analysis
Grouping of data
Enables fast creation of test
policies
Analysis of movement data
Audit output
Reports on data checks
Batch processing of multiple
extracts
Integrates with vendors workflow
User Count
Seamless integration with Prophet
Sub records
Validation to Model (inputs)
•

















Data
Experience Analysis
Experience Analysis
 Actuarial modelling results are crucially dependent on the input data, and the
assumptions which underpin the models.
 Small changes in mortality rates, lapse rates, or different choices of economic
scenario can produce very different results, even if the model remains the same.
 Companies need to have confidence in the assumptions they are using.
 Regulators across the globe emphasise the need for clearly documented and
well understood assumptions, and assumptions evidenced by experience
analysis
•
Applications of SunGard’s Glean in Insurance
Pricing
– Setting Pricing Bases
– Modelling Conversion Options
– Introducing new Rating Factors
Sales & Marketing
– Measure Effectiveness of Campaigns
– Identify most Profitable Business
– Sales Force Lapse Analysis
Management Issues
– Key part of the control cycle
– Monitoring and early fraud detection
– Assessing Underwriting Standards
Regulatory Requirements
– Setting Reserving Bases
– Experience Reporting
– Internal model assumptions under Solvency II
•
Experience Analysis
Glean helps you:
•
•
•
•
Provide evidence to support and justify the choice of modelling basis
Identify and investigate features observed within sets of experience data
Compare company experience against industry standards
Build rules to predict the outcome for a given level of risk factors or risk factor
proxies
• Build in early fraud detection triggers and patterns
•
Governance
Governance and controls
Model
Development
Model
Execution
Separation of Roles
Roles understood
Controls around development environment
Defined, documented process
Automate process
Data complete, appropriate and accurate
Controls and governance
Embed systems into the business using results to drive strategy
Audit control
Performance and scale
Mission critical
Use Business Intelligence to turn results into information
•
Model
Reporting
and Use
Requirements of
IFRS Insurance
Contracts Phase II
Background on the regulation
• Last Exposure Draft released June 2013
• IASB is aiming to publish a final IFRS standard in 2016 at the earliest
• FASB is no longer looking to reach a common standard with IASB …
• … FASB will be making “targeted improvements” to existing standards instead
• Under European rules, earliest it could come into effect is 3 years later
• … so earliest possible effective date would be in 2019
• … i.e. first reporting as at 31 December 2019 for most firms
• … with a 31 December 2018 “brought forward” position for the CSM (Contractual
Solvency Margin) and other revenue account items
Background on the regulations and
Prophet
• Connectivity of systems, governance and automation and
“Pillar III” reporting will be important for IFRS
• Calculations for IFRS Insurance Contracts Phase II can be done in Prophet and
already included in library updates we will make available in Prophet later this
year
• Fairly significant overlap with Solvency II calculations that are already in our
actuarial libraries
• The biggest challenges insurers see are connectivity with other systems and
updates to accounting systems and administration systems
Products to support IFRS
• Core Products
• Data Conversion System
• Prophet Glean
• Prophet Professional
• Prophet Enterprise
• Nested Structures module
• Insurance Data Repository
• Prophet Process Controller
Upcoming Releases
• Foundation Releases of liability libraries (IFRS calculations as standard)
• Assumptions Manager
iWorks Risk Management Vision
To be the single port of call for insurance
actuaries and risk managers for end to end
solutions to all their risk management needs
and providing….
An environment in which actuaries
have the power and freedom to create
and run sophisticated models
Executives, Senior Managers and
regulators with the confidence that the
data they receive is correct, tested, and
up to date
PROPHET
END-TO-END
ENTERPRISE-LEVEL RISK
MODELLING FOR INSURERS
Q & A?
Evolve
PRIZE DRAW
Evolve
FOR MORE DETAILS PLEASE CONTACT
Martin Sarjeant [email protected]
Deon Nortmann [email protected]
Evolve
SOCIETY OF KENYA CONVERSION 2015
How Prophet can help you meet the challenges
ahead
Thanks.