|
|
| Insurance is another sector where sweeping changes in regulatory requirements have significant modelling implications. |
 |
The insurance industry is undergoing a large-scale revision of the regulations that govern how minimum levels of capital are calculated, with opportunities for suitably-resourced firms to internalise these calculations.
In this sense, Solvency II is a strong analogue to Basel II. A similar, three pillar approach is being taken that will specify capital to meet solvency minimums; the process and scope for supervisory review; and disclosure requirements. Pillar One’s analysis of minimum requirements also extends to computing lower bounds for technical provisions (reserves).
Under Solvency II, insurance firms will be able to choose whether or not to apply the SCR (Solvency Capital Requirement), or develop and utilise internal models. Internally-developed models will come under ‘supervisory review’. This is analogous to banks’ freedom to apply for different levels of approval within the Basel II framework. Critically, it creates strategic opportunities for firms to differentiate themselves through investments in analytic capabilities beyond what is currently in place for pricing and reserving.
Similar to Basel II, firms will be subject to a process of supervisory review with a special focus on internally-developed models. If the methods used to estimate capital internally are deemed inadequate, Supervisors have the power to increase the capital requirement.
There is a pressure therefore to develop, document and deploy a well-formulated, credible model set that produces stable results. Equally, the consequences of a well-run models programme go beyond compliance to affect a firm’s competitive position as differences in capital levels flow through to returns and pricing.
Results from the recently released QIS3 study throw some light on the state of play for insurance firms. On the surface, it appears that the European base of insurance companies will not, as a whole, require more capital. However, the pressure to develop a defensible internal model set will increase as, at this point in time, it appears to have a significant impact on the capital requirement.
Significantly, modelling has not stood still in the insurance domain. Actuarial methods are evolving at a rapid pace, with simulation finding increased representation alongside traditional methods. Interest-sensitive components in contracts; complex reinsurance arrangements; increased contract optionality; an appetite for scenario analysis; and increased desktop processing power, are some of the many factors that have made simulation a more attractive method. In turn, this has led the insurance industry to augment their actuarial resources with services specific to simulation and modelling in general.
We can assist insurance companies in satisfying their growing requirements through specialised modelling, programme support and technical advice.
White Kite has already developed credit risk models for rating some sectors of the insurance industry and plan to extend this further. We are currently exploring a number of opportunities to undertake analytic work that intersects with our model-based offerings. Where it is convenient for the client, we are also interested in supporting projects run by other consultancies.
|
| TOP |
|
| White Kite: +44 (0) 207 234 9470 |
| Email: risk@whitekite.com |
|
