 Rob Collinson is P&C Capital Modelling Leader for Towers Watson in the EMEA region
Many professionals who have had to complete the Standard Formula spreadsheets as part of the QIS exercises will testify that they don’t necessarily present the portrayed easy option for calculating the Solvency II SCR. Rob Collinson explains how specific Standard Formula modelling applications are aiming to simplify the lives of actuaries.
The application of the standard formula to calculate a company’s risk capital requirements remains a core task in the Solvency II process. This is true for all insurance businesses within the regime, whether that business has adopted an internal model or not.
Although the application of the standard formula would appear to be relatively unchallenging compared to the rigours of putting an internal model in place, it has changed considerably since 2006 and is far from trivial. Those businesses that went through the QIS5 process in 2010/11 will be particularly aware of the challenges of completing the calculation which, despite its apparent simplicity, is actually relatively complex.
As a result, a number of companies are investing in or investigating pre-builtmodelling alternatives to the manual completion of the Standard Formula spreadsheets. Such models are not only aimed at simplifying the challenges of calculating the SCR but also offer packaged solutions that are designed tohelp make insurers’ response to Solvency II morerobust, efficient, flexible and practical.
Data control and governance
One area wherecompanies should expect models to offer something extra is data control and governance. One of the building blocks behind Solvency II is increased private and public disclosure, which will help enforce market discipline on companies. However,the implementation of key drivers of the business – such as the Standard Formula calculation – within a spreadsheet causes significant concerns about the governance of the data submitted to the Standard Formula calculation, which is a primary requirement of the Solvency II framework.
A robust governance platformmustsignificantly enhance the integrity of the relationship between inputs, outputs and calculations. This will ensure a secure and controlled solution that allows for the governance aspects absent in the typical spreadsheet solutions.
The retention of a full audit history and parameterisation changes, dates of such alterations and details of who made them, also has the advantage that it creates complete audit trails and guarantees reproducibility of historic results at a later date - also an important factor for relationships with ratings agencies.
Reporting
Another element of Solvency II is that reporting will be much more detailed and extensive than current requirements.
The Solvency II regulatory regime stresses the need for an approach that permits a firm’s actuarial and compliance teams to report upon issues to previously unprecedented levels of detail. To make the best use of such information, it will be necessary to have user-friendly reports and graphs functionality that give the management team easy access to key performance and risk indicators, and better support for decision-making processes. Such reporting should also be designed specifically with the operational needs and compliance responsibilities of senior non-technical managers and other decision makers in mind. As such, an approach that enables the preparation of reports to the variety of other spreadsheet and database packages that are already familiar to the business is likely tobe a valuable benefit.
Impact on future business
Solvency II requires that businesses take full ownership of the risk structure and modeling processes. This,in part, explains why an increasing number of companies require their in-house actuaries and compliance teams to be capable of undertaking the majority of the work and analysis themselves once the standard formula is in place. Training, therefore, is an important part of the implementation of the standard formula within the business; covering not only theuse of any selected software platform, but also wider issues associated with enterprise risk management and techniques that will enable insurers to get the most business benefit from their preferred approach to Solvency II standard formula compliance.
As with internal models, it is likely that there will be a continuing need to adjust the standard formula in the future, reflecting the evolution of the calculation itself and to allow for market factors impacting the business, such as changing market conditions and new products. We anticipate that many insurers will choose to adopt an application that will not only help them work effectively and efficiently, but will also future-proof the models used in their compliance functions and the business at large.
Removing the reliance upon EIOPA to provide timely updates following any changes to the standard formula specification is one example in particular. This will allow the necessary flexibility and scalability to ensure models reflect the key requirements of a specific business and can grow with their company and ease the journey from simple to more sophisticated models.
Technical efficiency
Performing the SCR calculation across multiple legal entities and attempting to satisfy rules in relation to governance causes the proposition to become yet more complex.
It is therefore important for the business to define its requirements and available resources in relation to the Standard Formula and to understand what it will do, why a result is obtained and how the output will be used.
Such clarity, be it based on a modeling solution or not, will allow the business to design and implement a solution reflecting the necessary complexity of the business whilst retaining a clear and understandable process capable of efficient turn around and reporting.
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