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Navigating the Risk Management Challenges in Insurance
By Sham Yapa | January 16, 2018

2017 saw no shortage of innovation in the insurance world and this was certainly reflected in the technology we deployed and the solutions we discussed with our clients.

The imperative to source and deploy value-added analytics solutions cannot be underestimated for insurers. For example, internal models demand sophisticated and bespoke analytics based on market leading asset modeling and curve building – a longstanding strength of FINCAD. In 2017, we significantly improved our data integration tools, unified technology platform and high performance computing utilities, evolving our analytics into the next generation of enterprise solution with our clients.

We also saw that navigating the choppy waters of insurance ALM became increasingly hazardous and now requires an upgraded vessel. From our discussions with several insurers and insurance asset managers, it’s clear that many are analytically ill-equipped to adapt to the new challenges of insurance balance sheet management.

Surveying the Landscape

In October, we felt it was important to step back from the maelstrom and reflect on the evolving environment. In our seminar, Solving Capital Optimisation Challenges under Solvency II, we invited some preeminent thinkers in the industry to lead us in reviewing the obstacles created by regulatory change over the past few years, and the efficacy of the steps taken to overcome them. Our thanks again to Erik VynckierEdvard SjogrenGareth SutcliffeWojciech Herchel and Prasun Mathur for their invaluable insights.

The discussions were varied but some clear themes emerged. Firstly, insurers have continued the hunt for capital efficient assets that deliver real cash flow matching. Perhaps surprisingly, this has led them towards forms of innovative lending, in the way of real estate loans and SME financing. Additionally, developing a more sophisticated approach to clearing and collateral management was identified as a critical forward-looking benchmark for the industry. We concluded that insurers will be pushed evermore to clear OTC positions and must equip themselves accordingly.

For both, the conclusion was clear: Invest in technology, because you can only be as good as the quality of your data and analytics.

The year to come…

Whilst we allow ourselves a collective sigh of relief at the delay in the Insurance Distribution Directive (IDD), we would be remiss to conclude that 2018’s other challenges can be kicked too far down the road.

Core regulatory change remains in scope with EIOPA conducting its review of standard formula SCR calculations. To the chagrin of many in the UK, including seemingly the PRA, root and branch re-working of risk margin calculations still seems unlikely in 2018. This position may change as the year progresses and with Brexit clearly on the horizon, the UK will soon be structurally free to liberate native insurers from unwanted bureaucracy and red-tape – in theory at least.

Disruptive forces, as never before, are circling incumbent business models, eager to advance new technologies and paradigm-shifting services. Be they IoT, AI or InsureTech driven, it has never been more important for insurers to maintain their focus on core infrastructure and stay ahead of the curve.

For deeper insight into the themes I’ve discussed in this post, check out the video from our recent insurance event: Solving Optimisation Challenges under Solvency II