During the last 15 months, insurers have had a number of challenges with their risk modelling. So when it was time to launch our 2021 Readiness Report, we focused in particular on insurers’ solvency and risk modelling capabilities. What did we discover?

Nearly 80% of global insurers admit they must upgrade their solvency and risk modelling capabilities. This is a staggering amount.

However, it’s not surprising. We haven’t known a crisis like this in our lifetimes. COVID has tested systems to the limit and brought about a lot of uncertainty and volatility across many risks.

The operational obstacles

• Remote working – shifting to large scale remote operations not only presented access and performance challenges; it created governance challenges, particularly where systems were not centralized and didn’t have good audit trail and governance built into them. According to the Readiness Report, 77% of executives say the governance of their solvency and risk modelling work needs greater attention.
• A lack of power and flexibility – too many firms couldn’t perform regulatory and own risk solvency analysis. Many also lacked the agility to manage the risks associated with volatile markets and uncertainty. Those who hadn’t moved to the cloud also found it more difficult than usual to process high volumes of different assumption sets and scenarios quickly and give management the information they need to guide strategy. Those using managed public cloud solutions could scale up quickly and easily to meet the additional requirements.
• Flexibility – the pandemic quickly revealed whether insurers could promptly and easily make controlled changes to formulas, assumptions and the way their models are executed. Some of this will be due to use of rigid systems, but it’s also in part due to antiquated processes which release on people being in the office. Sixty-one percent of insurers found it difficult to amend and run robust solvency and risk models when staff were primarily working from home.
• Security concerns – in many cases, providing remote access to certain applications was a quick tactical exercise rather than a considered strategy for the long term. Insurers now need to revisit these arrangements and implement a more robust solution.

But the lessons go beyond operational resiliency. It’s also critical to look at how the pandemic exposed your existing solvency regimes and practices. Do you perform enough scenario modelling and stress testing, including reverse stress testing? Many regulators are moving towards more stress testing and combinations of stresses occurring together to better mimic a true crisis and to better capture the correlation between risks. Will you be able to comply?

In addition, some insurers underestimated the risks around business interruption resulting from the pandemic. Solvency II had some allowances for a pandemic; however, it was really focused on stresses to mortality (by modelling an additional 0.15% to the underlying mortality rates). The pandemic exposed many other risks though, such as payouts on business interruption contracts, travel insurance and the risk of insurers not having clear enough terms and conditions around any exclusions So, it’s important that future solvency models capture these and other broader risks.

Insurers need integrated and robust systems that are flexible enough to quickly change when you need them to. But equally, you need control and governance, including integration with all systems so that management can rely on the information being supplied. So, as you take a look back at the lessons we learned – and forward to whatever the future might bring – it’s time to ask: what’s your plan?