Helping firms gain commercial benefits from regulatory compliance
Curt Burmeister, head of buy-side products at IBM Risk Analytics, talks about how internal model firms are using the impetus of Solvency II to optimise business decision-making processes, helped by the formidable IBM product range
What Solvency II solutions does IBM offer?
IBM provides a solution for every size of insurance company and for all levels of sophistication. IBM Algorithimcs' Economic Capital and Solvency II Solution, IBM OpenPages Operational Risk Management combined with the IBM Solvency II Accelerator represent scalable and operationally robust solutions that provide complete coverage across all three pillars of Solvency II. For Pillar 1, our solutions cover both the Standard Formula and the Internal Model approach to calculating SCR. The Algorithmics' Economic Capital and Solvency II solution: Compliance and Reporting Edition is aimed at firms who wish to use the Standard Formula while the Enterprise Edition is for firms who want to build a full internal model. IBM OpenPages helps insurance companies meet the challenges of Pillar 2 providing an enterprise wide approach to define, document, monitor, and report on risk policies and procedures, monitor and manage Operational Risk, and support ORSA. To assist companies meet the reporting and disclosure requirements of Pillar 3, IBM Solvency II Accelerator delivers the 63 QRTs in a robust reporting framework that can be integrated with the required finance, claims, and risk data source systems.
But insurers look for more than just regulatory compliance, don't they?
Solvency II is not only about calculating the numbers, but also incorporating and embedding risk into the decision-making process to meet the use test. Clients that have implemented a framework to calculate Economic Capital, Solvency II numbers or risk metrics on a regular basis are now moving beyond regulatory compliance. Once calculations can be accomplished in a timely manner, management are asking for new sets of calculations and analyses. Requests become more varied, such as rerunning the numbers with slightly different assumptions relating to the impact of changes in market conditions, buying a company, increasing sales of a product or selling off a division. Firms can optimise their business processes by incorporating this information as inputs and then analysing the data in different ways to get diverse perspectives. Having up-to-date business analytics to manage the business more effectively is a huge benefit.
How are you enhancing your solutions?
We are working on tighter integration between IBM and Algorithmics components and making sure the data can flow seamlessly between them. IBM Algo Financial Modeler, an actuarial and financial modeling tool, can now write data that is consistent with our asset simulation engine. Calculating the assets and liabilities with similar precision opens the doors to a whole host of additional types of analysis from enhanced reporting to full stochastic on stochastic modeling. We are improving performance to help those clients with intensive calculation needs. As firms start running their model, they are looking for greater accuracy, which means more computational requirements. There is a strong focus on workflow to help firms go beyond compliance, and we are concentrating on enabling our clients to run the calculations more effectively, multiple times, with varying inputs. For example, this is particularly beneficial for large companies who wish to undertake partial runs or runs on sub-entities.
Where does the economic scenario generator fit in?
Economic scenario generators (ESG) are an integral part of the pillar 1 calculations and the whole running and building of internal models that necessitates real-world and risk-neutral scenarios. There is a natural progression to have more accuracy and this will drive a constant development in modeling techniques with models evolving to incorporate ever more different types of scenarios and risk factors. The Enterprise Edition includes an inbuilt ESG but is agnostic to where the scenarios are derived as long as they are generated in a consistent manner. Some clients augment our ESG by mixing and matching scenarios from either their own internal scenario engines built for specific purposes or external providers, such as Barrie & Hibbert.
Which areas of your business in particular are expanding?
Currently there is strong interest in the IBM Solvency II Accelerator as firms start to work on the reporting requirements under Pillar 3. This standalone offering helps create the quantitative reporting templates in a scalable and operationally robust framework that can be enhanced to meet other reporting requirements as they evolve. There is strong demand for the Enterprise Edition among larger insurance companies worldwide who are looking to build an internal model to calculate regulatory or economic capital. Furthermore, there is demand for the Compliance and Reporting Edition from smaller to medium-sized companies in Europe that are looking for a complete Standard Formula based Solvency II solution.