Over the last couple of years insurers have been extremely busy. The prevailing market conditions are quite challenging. Technological developments and changes in consumer preferences also continue to have an impact on your company’s business model. On top of that Solvency II has required more than a fair share of your attention. In the run-up to Solvency II most insurers focussed on getting compliant with the new regulatory framework and dealing with the implications on governance. Now that the dust of the regulatory burden is starting to settle you can focus your attention on the vast amount of information that is available to you within your company. And how it can help you set a course for your business in the upcoming years.

To achieve your objectives in a controlled manner requires first of all insight into the development of your balance sheet and the risks your company faces. This does not stop at frequently - that is, on a monthly or quarterly basis- calculating the solvency position or evaluating whether the asset allocation is still within its pre-defined bounds. In order to assure that the long-term objectives of your company are still within reach you should monitor elements relating to each of the following questions:

The added value of forward-looking analysis

First and foremost, you need to have insight in the current situation of your company: where are we now? This is necessary to identify all key ratios and make sure that they are currently up to par. Furthermore, this provides an overview whether or not all constraints are currently satisfied. In case one or more of these constraints are violated, immediate action could be taken to remedy this breach. Equally important is knowledge about how did we get here? Market conditions or other significant changes in the outlook over the past months may have led to a situation in which the insurance company is no longer on the right track to reach its long-term goals. To give insight into the underlying dynamics of the recent developments – for instance, through a movement analysis on key ratios – creates awareness and supports the choice for possible interventions. This automatically leads to what is potentially the most important element of any periodic risk monitor: looking ahead at what is to come. By including forward-looking information you will incorporate insights into possible future threats. These threats could either be within scope of your best estimate outlook, or be contained in one or several alternative (economic) outlooks incorporated to paint a more comprehensive picture. This forward-looking information could then serve as an early warning system that signals (future) breaches of your risk appetite and provides the opportunity to navigate around these threats in order to achieve the long-term goals.

These early warning signals can be defined as Key Risk Indicators (KRIs) on a longer horizon. Note that these KRIs could come in any shape or size that fits your specific needs and risk appetite; ranging from a maximum probability of falling below a certain Solvency II ratio to a maximum number of years in which you will be unable to provide your policy holders with profit sharing. If these KRIs are near (or violate) the critical boundary you have set, this should at least trigger a discussion within the board on whether or not to take mitigating actions. All in all, it leads to a proactive approach to stay on course to achieve the long-term goals of your company.

Dynamic scenarios

The cornerstone of any forward-looking analysis is the economic scenario set used to perform the analysis. The economic scenarios of Ortec Finance – the Ortec Finance Scenario set (OFS) – are dynamic, meaning that the future paths they describe connect with how the economy demonstrably appears to develop. In addition, we continuously add new information and data to the OFS, keeping the risk return trade-off as realistic as possible. The scenario set captures the complex relations between risk factors that can be observed in the economy and financial markets and offers the option to supplement historical relationships with external information. For example, the OFS takes into account the impact of policy – think of stimulus measures by the central bank – on interest rates, inflation and therefore on return. Given these characteristics the scenario set is perfectly suited for short, medium and long-term monitoring of KRIs and risks.

Consistency is key in risk management

When setting up your risk monitoring system to keep your business on course for your long-term goals, be aware that consistency is key throughout your whole risk management process. This starts with an Asset Liability Management (ALM) analysis which is probably executed once every 2 to 3 years. Furthermore, regulators require you to perform an ORSA at least annually which – just like the ALM analysis – contains a forward-looking analysis. When the assumptions underlying these two processes differ from the assumptions made in your monthly or quarterly risk monitor, confusion could arise and this could severely complicate keeping your business on course. After all, more time will be spent on analysing the differences between the various results than on taking action on these results. We therefore believe that consistency (in assumptions, methodology and more) is paramount throughout your risk management process.

How we can help

At Ortec Finance we develop software and economic scenarios that enable your organization to manage the quantitative issues in your risk management process. This goes hand in hand with continuous support from Ortec Finance. We always make sure our models are fully up-to-date, for example with regards to the Solvency II framework. In addition, the skills and expertise of our risk specialists are available to you and support in setting up a forward-looking risk monitor or a full and consistent risk management process. Your Ortec Finance account manager is ready to help you and your organization in case of questions or the need to deliberate on certain issues. Ortec Finance is also often asked to review specific analyses or processes. In this way we will continue to serve as a trusted partner to your organization.


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