Five steps to optimizing Solvency II internal model architecture

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For long-term success in meeting the requirements of Solvency II, it's essential that insurers keep an eye on the future when designing the framework and processes around the internal model architecture.

Don't assume that existing technology and infrastructure will be able to support and meet all future requirements. As you plan for internal model improvements, be sure to take into account the following five issues:

  • Greater frequency of calculations with tighter deadlines.
    Calculation frequency for Solvency II will likely occur at least twice a year or quarterly and require significantly faster reporting timelines than most companies currently have in place for economic capital. Your technology solutions must accommodate greater automation and calculation speeds. One potential solution? You may be able to speed up calculations using the replicating portfolios technique. This involves replicating the key risk features of the liabilities with a portfolio of simple financial instruments and calculating financial risks based on this simple portfolio rather than on large volumes of policy data.
  • Modular and scalable model architecture.
    Technology solutions must also accommodate changes in the risks modeled and the structure of your company, both of which can vary over time. For example, your company may alter its structure, enter or exit products or markets, and purchase or divest subsidiaries in the future. Internal models should be modular and scalable, which can best be achieved by separating “risk” data, like economic scenarios or insurance events, from “exposure” data (the initial balance sheet).
  • “What if” functionality.
    When circumstances change or an important element requires investigation by management, do your current models allow sufficient time for a full rerun of your company's risk model? For a model to be embedded, the technology must be able to provide an on-demand “what-if” analysis, so real-time management information is available when needed.
  • Automated reconciliations.
    Does your current risk function waste too much time on reconciliation? Using the same system to prepare all finance, actuarial and risk information allows for automation of the reconciliation process and can significantly shorten the production timeline. Consider integrating the market value balance sheet into a robust group accounting system, with direct reconciliations to IFRS net assets.
  • Managing end-user computing.
    “End-user computing” (EUC) differentiates between systems of lower security and, say, mainframe systems. Internal control requirements are usually more stringently applied to EUC applications, which could drive your choice of technology solution.

As your company moves forward with designing the optimal internal model architecture for Solvency II, a number of major structural changes may be needed. Allow at least six months to a year to secure the necessary funding and IT resources required to initiate model architecture projects.

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