Finalyse covers the following aspects of services:
The recent global trend towards more objective and transparent published metrics of financial performance and risk has resulted, in Insurance, in the emergence of a new standard for regulatory capital requirements (Solvency II) as well as new standards for disclosing Embedded Value (European and Market Consistent EV) and accounts (IFRS4).
Solvency II is set to change the way insurance companies are run, as the new framework brings strong incentives to manage risks. But this also implies some investment in the systems. Indeed, the more accurately the company model represents the actual risk position, the easier it will be to ensure optimal use of capital and effective management of a company.
Compliance to these new standards can require quite radical re-engineering of the data and data processing systems from which the required numbers are derived. In many cases this investment is amply recouped when external reporting requirements are integrated into a wider internal risk/return framework that management can use to make sure that the risk of any undertaking is built in to business processes from inception.
In addition to these information architecture issues it is also an essential part of Solvency II to be able to demonstrate the transparency and auditability of the systems and that they are effectively integrated into the decision making processes.
Most of the business components are experiencing radical changes:
- Capital Requirements (mostly defined by pillar one) have changed from arbitrary to risk-related.
- This is impacting pricing, as risk adjusted profitability is at the forefront.
- Diversification benefits are recognised and give incentives to optimise the structure of conglomerates.
- Risk mitigation through hedging, reinsurance and securitisation are also impacted.
- Data Management and IT tools have to be optimised to support the generation and dissemination of risk information.
Finalyse has proven experience in all layers of Solvency implementation projects:
- Pillar one - calculation of all quantitative measures: Best Estimates, Technical Provisions, Risk Margin and Own Funds, MCR/SCR (standard and internal models)
- Pillar two - support of internal assessments (ORSA) and internal controls
- Pillar three - extensive understanding and experience in the production of reporting templates (QRT)
Finalyse provides risk advisory services to Insurance Companies and help them implementing systems and processes for Insurance risk management.
Our professionals have a mix of actuarial, risk and financial experience as well as practical knowledge of how to turn theory into practice.
Insurance follows the general trend towards more sophisticated models for quantifying both value and risk embedded in activities. This enables management to fine-tune ever more precisely the risk-management process for a more optimal risk-return combination.
This is particularly true in the cose of Insurance Portfolio Management. An optimized portfolio management can lead to great advantages: a.o. less time spent on producing the figures, so more time available to analyze them, which can lead to improved decision making and a more optimal capital allocation process.
A tool with this purpose can price various assets under several hypotheses as well as offer forecasts on market value, accounting value, earnings and cash flows. The reinvestments of the future cash flows can also be managed. In order to have a quick up-to-date status of the portfolio, the results are made available in a reporting tool which is also useful to compare the results of the different simulations. Through a graphical user interface, it is also possible for end users to enter potential transactions. The tool will immediately calculate and present the impact on the existing portfolio of the entered transactions.
How can we help?
Finalyse has experience in developing such robust, powerful and automated tools which can generate results in a minimal time span. In this context, Finalyse can offer the following services:
- Analysis and set-up of business requirements
- Design of the required architecture
- Translation of business requirements into functional and technical specifications
- Data processing and modelling
- Design and production of related reports and dashboards
- Project management and follow-up of the whole implementation phase
Any actuary worth his or her salt knows how to use a mortality table or claims triangle to calculate a premium. But how do you integrate stochastic mortality and claims into an economic risk framework?
Finalyse has the skills and experience to help you step beyond the best estimate towards the distribution-based approaches.
The amount of market risk an Insurer is exposed to depends on the extent to which lower asset performance is offset by lower payouts to clients. It is low for unit linked policies and high for life insurance contracts with guarantees. In the latter case, we can also refer to this as ALM risk, which is a leveraged risk due to the fact that both assets and liabilities are much greater than capital.
In an analytical framework market risk may be defined as arising from the strategic asset allocation as opposed to the replicating portfolio. On the other hand, in the standard approach for Solvency II, market risk is defined as the value at risk on the assets, while the ability to pass-through market risk as well as other risks to policy holders is defined as "RPS", reduction for profit sharing.
Finalyse has extensive experience in all frameworks and can help you deliver adapted solutions.
Market Consistent Embedded Value
Market Consistent Embedded Value represents a step up in sophistication of the valuation of liabilities of an insurer.
The concept of embedded value - the generation of best-estimate claims run-offs for the purpose of comparing them to reserves - is well established.
Traditionally, however, such projections have relied on estimations of the factors that influence the cash flow on liabilities (mortality tables, claims triangles, lapse rates, profit sharing percentages) that were static and independent of actual market conditions.
In line with the increasing demand for transparency and objectivity through market consistency, insurance regulators require insurance companies to implement more detailed, market calibrated EV methodologies.
The methodologies include the necessity to value embedded optionality in life insurance contracts (hard return guarantees and softer profit-sharing targets, lapses etc) and to use discount rates that reflect current market conditions.
Finalyse has substantial expertise in the design and implementation of the kinds of models required to generate MC-EV figures as well as years of practical experience in the roll-out of insurance ALM frameworks that combine best practice from the banking world with the specificities of insurance portfolios.
Economic capital can be defined as the minimum amount of risk capital, assessed on a realistic basis, which a firm requires to absorb unexpected losses due to the risks to which it is exposed. Typically this is calculated by the value-at-risk or the tail-value-at-risk of the portfolio with a 99.5% or a 99% probability. It is thus the capital that ensures that the business survives a shock that happens with a 1% probability.
As important as the calculation of Economic Capital is the management of Economic Capital, that includes allocation and monitoring. This is equally important for Economic Capital and Regulatory Capital. In both cases, the objective is to maximize shareholder value (within a given set of constraints).
Finalyse can help you implement the tools required for allocating and managing capital within the constraints of the current regulatory framework as well as within the more economic-oriented Solvency II framework.
Fair Value and IFRS
Internal Financial Reporting Standards IFRS have already brought to the Insurance balance sheet the notion of Fair Value of assets and even some liabilities. It also requires a more rigorous test of effectiveness of hedges. International standards also request to value all liabilities in a market consistent framework.
Implementing the necessary fair value models involves not only the application of finance and actuarial theory but also the careful assessment of data requirements and the whole process by which balance sheet and profit and loss information is brought together.
By integrating these balance sheet measures into a wider internal risk and performance framework, management can ensure a consistent approach to both measures both across its business units and between external and internal disclosure.
Finalyse has practical experience of designing and implementing the tools its clients need to make the transition from the traditional cost and accrual accounting to the modern standards.
The move towards Fair Value measurement in insurance is part of a global trend towards more objective metrics for the value of contracts based on benchmarking contracts to financial markets.
Finalyse can provide consultants with knowledge of topics including Hedge Accounting, Shadow Accounting, Fair Value in the Balance Sheet, Fair Value at Risk, Liability Adequacy Test, IAS 19 and pension funds.