Capital allocation – driving business engagement
Our client, a small Lloyd’s managing agency within an international re/insurance group was struggling to get business engagement with the output of their newly-built capital model. They asked us to guide them in designing a capital allocation framework that could support discussions surrounding underwriter targets and performance assessment.
We reviewed this insurer’s existing capital allocation models and identified a number of improvements that enabled them to be more usable. This involved helping them to make compromises over technical purity so that they could get buy-in to the results to support future business-planning discussions with underwriters and senior management. We then assisted our client in implementing these recommendations in practice.
External validation – cutting through complexity
We carried out a comprehensive independent review for a large Lloyd’s managing agency writing a broad mix of property and casualty direct and reinsurance business. Features of our approach were:
- Top-down and bottom-up testing – considering whether the overall result was correct as well as identifying detailed areas for future enhancements
- Consideration of both quantitative and qualitative aspects – while the focus was on the numeric output of the model, we were able to provide valuable insights to the board on model governance and use through benchmarking them against our wider client experience.
- Value-added approach through: Targeting detailed testing to key risk areas; peer review of secondary risks.
- Scope and coverage testing: Identifying where model design and coverage fell short of requirements.
We provided our client with a series of reports suitable for provision to regulators as part of the firms’ internal model approval activity.
Mergers and Acquisitions
Sell-side M&A in the Lloyd’s market
We provided support to a major insurance company where its owners were looking to sell. Having helped prepare reserve adequacy presentations to prospective investors, we were invited to join the senior management team during their pitch meetings. As due diligence progressed we were actively involved in providing answers to the many and varied questions that arose.
At the exclusivity stage, we then worked with the in-house team to perform reverse due-diligence exercise on the shortlisted buyer. Our ability to scale up our senior team was an important differentiator of what we offer to firms in these situations. Our work was critical in highlighting red-flags and supporting the inclusion of key terms in the sale and purchase agreement.
Once the sale was completed, we subsequently assisted with planning and implementing the early integration process to ensure a smooth hand-over to the buy-side actuarial team.
Knowledge Transfer and Peer Review
Solvency II board training – tools for the board, not just facts
Our client, a large Lloyd’s managing agency / plc asked us to design and lead the initial delivery of a board training programme on Solvency II. This involved four distinct phases:
- Designing an overarching programme, mapping out not just the information that senior individuals needed to know, but what they were supposed to do with the knowledge.
- Drafting a series of bite-sized briefing papers.
- Preparing and delivering effective half-day group training sessions (including developing engaging group exercises and tests).
- Carrying out one-to-one coaching to enable board members to raise and explore sensitive knowledge gaps in a safe environment.
We received very positive feedback on the engaging sessions we ran and how our approach had helped the board to move beyond knowledge overload to genuine skill development.
Small Data: Large Liabilities – Modelling the Unmodellable?
A large UK domestic insurer came to us wanting our help in modelling some obscure and highly specialised latent claims liabilities to assist with their provision-setting in their audited accounts. This was a ground-breaking area of work, with no precedent for how the challenge was to be completed.
We performed an extensive literature review of the scientific and demographic information available and developed a modelling framework that helped us to prepare reserve estimates in a manner that could be readily understood by our client. Our straightforward approach to communicating uncertainties and innovative model design provided our client with insights of genuine value.
Our work assists firms address the following:
- Establishing right framework to use for pricing this class of business
- Building underwriter buy-in to pricing models
- Tracking pricing performance against technical rating
- Determining a reasonable approach to setting and validating model parameters
- Allocating capital in an effective manner to support pricing
- Linking pricing models to business planning, reserving and capital modelling processes
Software and Systems
Capital modelling software –tender process for capital modelling software and economic scenario generators
We helped our client, a large Lloyd’s managing agency, carry out a tender process to help them select two critical software components:
- Core capital calculation software; and
- Economic scenario generator.
This work involved us preparing the functional and non-functional (ie IT-related) requirements of the desired product and then assisting with the review of the submissions, including attending vendor presentations. We reviewed all of the major vendor products, along with a small number of competitor product providers. Key to the success of this exercise was our experience running an actuarial software team, and therefore being able to translate generic IT-related business requirements into meaningful specifications for actuarial software.
Enterprise Risk Management
Enterprise Risk Management services across the classic 3 lines of defence model
First line services Our skill set enables us to pull data successfully from across reserving, pricing and capital and risk functions to ensure a consistent approach:
- Establishing risk frameworks around each underwriting team
- Build or review your underwriting models and support the actuarial function in preparing its opinion on the underwriting policy
Second line services We know how to design and build internal capital models and link them to risk appetites and tolerances, including stress and scenario testing:
- Design and build of internal capital models, including selection of appropriate software platforms
- Support design of and review an organisation’s risk appetite and its translation into risk tolerances along with supporting management information
- Independently validate internal model processes and parameters
Third line services We support and co-source internal audit reviews of risk, capital and actuarial activities with a firm
- Internal audit-led internal model validation
- Deep-dive testing of actuarial and risk modelling processes and controls
- Review of actuarial function governance and standards compliance
- Actuarial function design: Under Solvency 2, the Actuarial Function becomes a key contributor to enterprise risk management with an annual report required to be produced. We can assist with considerations of the optimal structure for the actuarial function and the production of the annual report which can reach beyond the traditional areas of actuarial involvement
- Support or project management of business planning process
- Board training: We have designed engaging board training courses through coaches, briefing papers and workshops. Our focus is on helping board members to understand how they apply the knowledge