By Christopher Critchlow, Consultant Actuary, OAC Actuaries and Consultants
January 2016 marks the introduction of Solvency II, the new European wide methodology which will be used to maintain a safe and robust insurance industry capable of meeting its obligations to policyholders. With this new regime being introduced in just 17 months’ time, insurers haven’t got long to finalise their preparations.
The scope of change is significant and will result in a much greater demand for actuarial skills. For a start, actuaries will need to provide the core actuarial function that all insurers require. Actuaries will also need to fulfil additional roles, including understanding and building appropriate models to help firms assess what their business might look like under different scenarios.
Risk is likely to be another key area where actuaries can add value by helping firms to assess and quantify the risks to which their business is exposed. Even more importantly, actuaries will need to explain the results of all this work in a manner that Boards of Management can understand and use in their decision-making process.
Taken together, these changes are likely to create opportunities for actuarial services in four key areas: risk management, communication, model development, and new requirements for non-life insurers.
Re-defining risk management
Actuaries are better placed than most to help firms understand what the emerging field of “risk” means for an insurance business. However, the first step is ensuring that everyone understands the term “risk”.
In the insurance business, risk is not simply just the risk of losing money on a portfolio of assets. Instead it requires a much deeper understanding of how the assets interact with liabilities. Actuaries are well-placed to make this distinction, as they can help firms to protect against not having enough financial assets to meet their liabilities when they fall due.
Helping management to understand these changes
One of the most important changes under Solvency II will be that any data analysis undertaken will have to be summarised and explained to a firm’s management team. This requires effective communication as any issues need to be identified – and options presented – in a manner that is straightforward, clear and concise. This only comes with understanding, and again is an area where actuaries can provide expert advice and support.
Taking charge of model development
Modelling is a key aspect of the actuarial function and a vital discipline for firms to embrace after the arrival of Solvency II. When used correctly modelling helps to ensure that firms are able to accurately predict the likely experience of the business under a range of scenarios. This will require an understanding of the characteristics of the insurance business the firm writes, the historic experience of that business and how that experience may develop in future. These models need to be sufficiently robust as to be able to reflect variations in the firm’s cashflow requirements to pay all the claims as they fall due under both realistic and extreme conditions.
Responding to increased demand from non-life insurers
Whilst all life insurers are used to incorporating an actuarial function in their business, a new requirement of Solvency II requires all insurers – both life and non-life – to have such a function. As a result, some non-life insurers will have to go through a process of establishing an actuarial function in their business, whether in-house or outsourced, in order to meet the information requirements of the new regime.
Taken together, these changes are likely to represent an exciting opportunity for actuaries. Implementation of Solvency II is long awaited and a radical change in the regulatory landscape of insurance. It heralds a new dawn of much greater scrutiny on how insurers operate. Actuaries will not only be instrumental in helping insurers to meet this challenge in terms of compliance, but will also help to ensure that the potential benefits of Solvency II in the form of good governance and soundly managed businesses are realised.
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