Showing posts with label risk optimization. Show all posts
Showing posts with label risk optimization. Show all posts

Jul 14, 2010

Solvency II Project Management Pitfalls

When you - just like me - wonder how Solvency (II) projects are being managed, join the club! It's crazy...., dozens of actuaries, IT professionals, finance experts, bookkeepers accountants, risk managers, project and program managers, compliance officers and a lot of other semi-solvency 'Disaster tourists' are flown in to join budget-unlimited S-II Projects.

On top of it all, nobody seems to understand each other, it's a  confusion of tongues..... 

Now that the European Parliament have finally agreed upon  the Solvency II Framework Directive in April 2009, everything should look ready for a successful S-II implementation before the end of 2012. However, nothing is farther from the truth.....

Solve(ncy) Questions in Time
The end of 2012 might seem a long way of...
While time is ticking, all kind of questions pop up like:
  • How to build an ORSA system and who owns it?
  • What's the relation between ORSA and other systems or models, like the Internal Model
  • Where do the actuarial models and systems fit in?
  • What are financial, actuarial, investing and 'managing' parameters, what distinguishes them, who owns them and who's authorised and competent to change them?
  • How to connect all IT-systems to deliver on a frequent basis what S-II reporting needs......?
  • How to build a consistent S-II IT framework, while the outcomes from QIS-5 (6,7,...) are (still) not clear and more 'Qisses' seem to come ahead?
  • Etc, etc, etc, etc^10

The Solvency Delusion
Answering the above questions is not the only challenge. A real 'Solvency Hoax' and other pitfalls seem on their way....

It appears that most of the actuarial work has been done by calculating the MCR and SCR in 'Pillar I'.

It's scaring to observe that the 'communis opinio'  now seems to be that the main part of the S-II project is completed. Project members feel relieved and the 'Solvency II Balance Sheet' seems (almost) ready!

Don't rejoice..., it's a delusion!  The main work in Pillar II (ORSA) and Pillar III (Reporting, transparency) still has to come and - at this moment - only few project managers know how to move from Pillar I to Pillar II.

Compliancy First, a pitfall?
With the Quantitative Impact Study (QIS-5) on its way (due date: October 2010) every insurer is focusing on becoming a well capitalized Solvency-II compliant financial institution.

There is nothing wrong with this compliance goal, but 'just' becoming 'solvency compliant' is a real pitfall and unfortunately not enough to survive in the years after 2010.

Risk Optimization
Sometimes, in the fever of becoming compliant, an essential part called "Risk Optimization" seems to be left out, as most managers only have an eye for 'direct capital effects' on the balance sheet and finishing 'on time', whatever the consequences......

Risk Optimization is - as we know - one of the most efficient methods to maximize company and client value. Here's a limited (check)list of possible Risk Optimization measurements:

1. Risk Avoidance
- Prevent Risk
   • Health programs
   • Health checks
   • Certification (ISO, etc)
   • Risk education programs
   • High-risk transactions
      (identify,eliminate, price)
   • Fraud detection
      (identify,eliminate, price)
   • Adverse selection
      (identify, manage, price)

- Adjust policy conditions
   • Exclude or Limit Risk  
   • Restrict underwriter
      (excess, term, etc)

- Run-off portfolios/products

2. Damage control
- Emergency Plans (tested)
- Claims Service, Repair service
- Reintegration services

3. Risk Reduction
- Diversification

- Asset Mix, ALM
- Decrease exposure term
- Risk Matching
- Decrease mismatch
- Outsourcing, Leasing

4. Risk Sharing
- Reinsurance (XL,SL,SQ)
- Securitization, Pooling
- Derivatives, Hedging
- Geographical spread
- Tax, Bonus policy

5. Risk Pricing
- Exposure rating, Experience rating
- Credibility rating, Community rating
- Risk profile rating

6. Equity financing
- IPO, Initial Public Offering
- Share sale, Share placement
- Capital injections

Solvency-II Project Oversight
Just to remind you of the enormous financial impact potential of 'Risk Optimization' and to keep your eye on a 'helicopter view level' with regard to Solvency-II projects and achievements, here's a (non-complete but hopefully helpful) visual oversight of what has to be done before the end of 2012.....

(Download big picture JPG, PDF)

Be aware that all Key Performance Indicators (KPIs), Key Risk Indicators (KRIs) and Key Control Indicators (KCIs) must be well defined and allocated. Please keep also in mind that one person’s KRI can be another’s performance indicator(KPI) and a third person’s control-effectiveness indicator.

Value Added Actions
As actuaries, we're in the position of letting 'Risk Optimization' work.
We're the 'connecting officers' in the Solvency Army, with the potential of convincing management and other professionals to take the right value added actions in time.

Don't be bluffed as an actuary, take stand in your Solvency II project and add real value to your company and its clients.

Related Links:

- A Comparison of Solvency Systems: US and EU
- UK Life solvency falls under qis-5
- Determine capital add-on
- Reducing r-w assets to maximize profitability and capital ratios
- Risk: Who is who?
- Balanced scorecard including KRIs (2010)
- Solvency II, Piller II & III
- Risk Adjusted Return On Risk Adjusted Capital (RARORAC)
- ERM: “Managing the Invisible" (pdf; 2010)
- Unlocking the mystery of the risk framework around ORSA
- Risk  based Performance: KPI,KRI,KCI
- Risk of risk indicators (ppt;2004)
- Defining Risk Appetite
- Risk appetite ING KPI/KRI
- Board fit for S II?
- How to compute fund vaR?
- Technical Provisions in Solvency II
- Insurers should use derivatives to manage risk under Solvency II 
- Solvency Regulation and Contract Pricing in the Insurance Industry
- Overview and comparison of risk-based capital standards 
- Solvency II IBM
- Reinsurance: Munich Re  , Reinsurance solvency II