Why insurance risk management systems must be able to do it all

February 04, 2021

In recent years, insurance risk management teams have focused a lot of their efforts on meeting the reporting requirements of the new accounting standards for insurance contracts – IFRS 17 and (in the U.S.) LDTI. However, recent world events have brought risk managers’ attention sharply back to the core issue of solvency. Are their systems up to both challenges?

For IFRS 17 and LDTI reporting, the best risk management systems allow insurers to easily manage new sets of complex calculations and seamlessly exchange data between actuarial and finance functions. While introducing more automation, flexibility and control to modeling and data management frameworks, they are bringing actuarial calculations to the heart of financial reporting.

In addition to the changes required by these new accounting standards, the fallout of the global pandemic has prompted many insurers to review their solvency and pricing modeling practices. The same is true of many regulators. If models and practices didn’t cope well with the various shocks that occurred in 2020, then it will now be time to revisit them. Even if they did hold up, would they withstand differing or even worse scenarios?

Life insurers in particular may also need to rethink their models and consider their mortality assumptions and the stress tests they perform. The stresses themselves should also incorporate future, even more extreme, events and the correlations between them.

The course of the pandemic has forced life insurers to consider a more complex combination of factors: social isolation, delays in cancer diagnosis and treatment, long COVID complications and the socioeconomic consequences of a lockdown-induced recession.

General insurers, too, will need to build many more considerations into their models, such as for business interruption and travel insurance. Extreme events like the pandemic generate a multitude of interrelated stresses – from businesses shutting down to stock markets falling, economies in recession, declining car usage, fewer claims on auto or even health insurance, policies lapsing or being cashed in and lower sales of new contracts.

Only a sophisticated actuarial solution will be able to model all these interactions for both assets and liabilities, and simulate the different paths down which a crisis may take you. It can then show you the many and various ways that solvency will be affected – and how to mitigate those complex risks.

Until recently, solvency regulation in some regions has overlooked many of these complexities, while other regions were planning new solvency regimes that mirrored Europe’s existing Solvency II framework. Now, regulators are turning up the dial on capital management requirements.

Although only strictly applicable to the largest Internationally Active Insurance Groups (IAIGs), the new Insurance Capital Standard (ICS) is being worked towards as a gold standard of capital modeling. In tandem with learnings from the pandemic, ICS will likely influence both emerging solvency regimes in Asia, Africa and the Middle East and further improvements to Solvency II.

In terms of both calculations and assumptions, there are still a lot of overlaps and similarities between solvency regulations and the IFRS 17 and LDTI accounting standards. But the purpose and use of models can be very different. While the accounting standards govern how insurers report profits, solvency frameworks drive firms to hold enough capital to remain solvent – even in extreme events – and so protect policyholders and other stakeholders.

This whole combination of challenges is what insurance risk management is all about. Whether you’re managing solvency, pricing contracts, performing valuations or ALM projections, or reporting on profitability, you need a system that can handle complex actuarial calculations and models.

As you continue to work toward compliance with local accounting standards, make sure you’re taking care of the rest of risk management, too – with an insurance risk system that can really do it all.

About the Author
Martin Sarjeant, SVP, Solution Management, Insurance & Climate Risk, FIS
Martin SarjeantSVP, Solution Management, Insurance & Climate Risk, FIS

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