FIS Blog

Insurers, It’s Time to Take Control of Your Actuarial Modeling Process


Sean Hayward | Thursday, October 27, 2016

Between intensified governance, reporting requirements and demand for better projections for management, one thing is clear: reliance on financial risk modeling software will continue to grow as actuarial models are pressured to do more than ever before.

At this summer’s SOA Valuation Actuary Symposium in Hollywood, Fla., discussions around preparing for Principles-Based Reserving (PBR) implementation and changes to U.S. GAAP were prevalent. The focus is clearly shifting to a balanced approach to model governance and assumptions as insurers realize their standard views of actuarial systems no longer work in today’s world.

For insurers to thrive, they need to take control of their actuarial modeling process with a new paradigm – a modern platform that truly meet the needs of the modern actuary. The question is, can one system do it all?

Competing priorities in a PBR world

PBR standards take effect on Jan. 1, 2017, and the world of valuation will undergo a major transformation, as well as a mismatch in priorities. Valuation will require tools traditionally used for projection functions, such as pricing and ALM. However, valuation models require more precision and governance, rather than the flexibility and transparency on which pricing and ALM models have typically focused.

The reality is, traditional, separate systems for valuation and projection are not equipped to meet the requirements of VM-20 – calculations, assumptions and reporting – and the needs of ALM and pricing. Today’s insurers will need the right combination of governance, transparency, flexibility and speed in order to meet standards without using multiple systems with competing priorities.

Meeting multiple modeling needs

It is natural to presume that multiple modeling platforms would be needed to meet the growing range of modeling requirements. In reality, however, using a combination of open and closed systems that are not generally calibrated or consistent with each other can lead to higher actuarial, vendor, internal IT and infrastructure costs. Lack of consistency between models also means less efficiency when adopting new products or when making major changes to existing products or assumptions.

The growing importance of assumptions and data

Although the actuarial calculation engine sits at the center of the actuarial modeling process, it is only one piece. After all, actuarial models are only as good as the assumptions that go into them. As the complexity of models increases, and when insurers use the same model across multiple functions, it is crucial that they have an efficient, transparent and controlled process for managing assumptions. In fact, with impending regulations requiring more robust reporting around assumptions management, this facet of actuarial modeling is becoming more important.

A complete assumptions management solution needs to have the same level of transparency and governance that a calculation engine has. Flexibility is needed for designing models, building company-specific tests, or modeling new product features, management actions or policyholder behavior. Meanwhile, the entire process needs to be accelerated by enabling some tasks to be completed without the actuary’s intervention.

Although assumptions represent the input side of data, there are significant needs on the output side as well. Today’s modern actuarial models require enterprise-level data management tools to extract meaning from the vast array of output produced. And as we move into a PBR world, the amount of data being generated – and thus the need for effective data management – will increase even more dramatically.

A modern platform for the modern actuary

A modern platform provides governance across the entire solution. It doesn’t sacrifice transparency and is much more than just a calculation engine. Most importantly, a modern platform provides insurers with all the tools they need to manage their business, from pricing to valuation to capital management, and its keeps control where it belongs – with the insurer. In addition, users need software that consistently supports the ever-shifting regulatory environment, while remaining open enough to allow them to modify the product chassis and implement innovation designs.

As with most things in life, actuarial system needs are rarely black and white. The truth lies in the grey, where the best of open and closed systems are integrated to truly meet the needs of today’s actuary. With the right system, the mutual goals of transparency and governance can be achieved – not just within the calculation engine, but across the entire actuarial modeling solution.

For more information, download FIS’ new white paper Taking Control of the Actuarial Modeling Process.

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Tagged in: Institutional and Wholesale, Insurance, Principle Based Reserves

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