What do we do now?
With Solvency II being put back for two, three, four or maybe more years, firms now have a chance to scale back their programmes and focus on the usual business objectives of making profits and looking after customers. We think it will prove a mistake for firms to pull the plug carelessly on their programmes and lose much of the knowledge arising from the time and effort invested in this major organisational change.
Smart firms should look at how they use the additional time to make sure that their capital model actually integrates properly into their management processes. This will enable boards and senior management to build confidence and understanding of their models so that they can obtain returns from the significant investments laid out to date.
Cut costs / Locate margins
Cutting expenses through winding down their Solvency II programmes is not the only way for firms to seek enhanced returns in 2013. Well-built capital models can help firms enhance returns through enhancing reinsurance and investment decisions. In a soft market, the details of reinsurance contracts can significantly change their value. Similarly, strategies that increase returns while taking on only marginal risk will help firms with the confidence to take them quickly.
As a result, models that prove most useful are going to be those that are two things:
- Detailed enough to enable enough of the features of reinsurance programmes or asset portfolios to be captured to be relevant to decisions
- Fast and nimble enough to allow enough alternatives to be compared in a timely fashion.
Back to basics
With little or no global growth, excess capacity and low yields, insurers need to direct attention to delivering their core disciplines effectively:
- Underwriting needs to be supported by robust technical pricing that feeds good portfolio management information.
- Reserving needs to anticipate underlying portfolio dynamics, take a rigorous approach to key perils and provide output that is helpful to pricing, capital modelling and business planning activities.
- Capital modelling should serve to inform how firms are consuming their risk appetite, and helping them identify opportunities to enhance returns. While not glamorous, experience shows that quality risk MI that helps firms to avoid mistakes is the best way to generate value.
Form follows function
The PRA has suggested, in its approach to insurance supervision, that actuarial is a “control function” which should have “separate pricing and reserving teams, subject to different governance, so that there is clearly defined, separate responsibility for each of them”. There is already some debate surrounding this proposal, and the extent to which this will mandate distinct actuarial pricing and reserving units within a business, or simply independent reporting lines.
With 2013 being the year that the FSA becomes the PRA and the FCA, this will prove a timely point for firms to review the way they use their actuarial function to maximise the benefit they derive from this intellectual resource.