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The Actuary The magazine of the Institute & Faculty of Actuaries

Navigating uncertainty

Brian Robinson discusses why business projections are so important and looks at the challenges involved in their creation.



Today’s economic and business climate is challenging for insurance companies. Growth is a priority for many firms, margins are under pressure and low interest rates in many economies around the world make it hard to generate returns from the assets backing the liabilities.

Furthermore, senior management must manage businesses across multiple bases and metrics – something that is made more difficult as accounting standards and solvency regulations evolve. A change for many insurers is the introduction of the new IFRS 17 accounting standard, which impacts the emergence of reported profits.

In Asia, there are new regulatory solvency regimes on the horizon, such as K-Insurance Capital Standard (K-ICS) in South Korea and Risk-Based Capital in Hong Kong. This trend towards more market consistent measurement, as seen in Solvency II, means that volatility in the capital markets has a direct impact on the balance sheet, making it more difficult to manage.

To help it make the right decisions, senior management needs better insight into the impact of its actions. A business projection capability is a core management tool to deliver such insight. 

It is important to assess the impact of different scenarios over a multi-year time horizon; this benefits both internal and external communication. A core part of this analysis is being able to assess the impact of different management actions – such as strategic asset allocation, new business volumes and pricing, reinsurance or M&A – which may be deployed to create value or mitigate the impact of a particular scenario. Assessing the impact of each scenario allows management to develop and test action plans that can be implemented in response to particular events.

Projection challenges

Modelling multi-period projections for an insurance company across a range of metrics and in a holistic, timely and consistent manner, is a challenging task for any insurance company. For those in the life business, projecting is particularly intricate due to the large number of assumptions needed, as well as the intrinsic complexity and interconnection of some of the variables projected. Business projections are not new – firms have been doing projections for many years as part of the planning cycle and stress testing. However, modelling an insurance business has become increasingly complex, and is subject to multiple practical constraints for many firms.

Figure 1
Figure 2

Gaps in coverage

Insurance companies are managed using a range of metrics. For example, profitability is driven by the applicable accounting standard, such as IFRS or local GAAP, whereas solvency is assessed against the relevant prudential regulations – for example Solvency II in Europe – plus any additional internal economic measures.

There is a danger of focusing only on a specific basis. Projecting on the accounting basis alone, for instance, does not factor in any capital constraints that may arise from prudential capital regulations. Conversely, projecting the regulatory solvency basis does not show the expected emergence of accounting profits. In addition, some key metrics, such as return on capital, require a combination of outputs from both the accounting and solvency bases.

In order to formulate a comprehensive forecast of the business, firms must be able to project all the key metrics against which the business is being managed in a consistent modelling framework.

Specialist knowledge

The multi-period narrative scenarios, representing the events that decision-makers are most interested in, are key inputs for the projection capability. 

These forecasts are required in order to help senior management assess the risks and opportunities that result from a changing economic and insurance environment. 

One of the main challenges is that these scenarios require input from different experts, such as economists, actuaries and data specialists. In addition, these scenarios are not sufficient on their own to feed into the projection framework, as they do not contain all the information that is required. For example, the macro scenario might only forecast two points on the yield curve, one-year and 10-year spot rates, whereas the full yield curve will be required for discounting liabilities in the future.

Figure 3

 Numerous models

The business projection capability must have a clear link with the complex actuarial and capital models (the ‘heavy models’). Establishing that link can be a challenging process due to the numerous models that are required across different functions to feed into the projection process. This usually requires many manual processes, and the final results tend to be aggregated using multiple spreadsheets linked together.

Solvency projections are also potentially complex, and it might not be possible to use the existing capital model directly; simplified approaches, such as risk driver methodology, may be required. A further challenge relates to liabilities with options and guarantees where the projection models are slow to run and difficult to set up.

Projection capabilities based on consolidation spreadsheets that rely on rerunning the heavy models every time tend to be time consuming, and do not have the flexibility to deal with the increasing number of senior management ‘what if’ requests.

The way forward

There must be a clear vision to deliver a business-oriented projection framework. Such a framework has to deliver business insight to senior management. Some key questions to ask:

  • Which metrics are used to run the business?
  • Which economic and insurance 
  • scenarios are important to senior management?
  • What actions does senior management want to assess?
  • What level of analysis is required? 

Insurers have invested heavily in actuarial and capital models due to regulatory changes in recent years, so it makes sense to use these models to provide the building blocks for a holistic projection framework. 

As a minimum, senior management requires a projection framework that aggregates the various sources of projected data in a way that is streamlined and easy to use, and provides analysis capabilities for the business. However, it is not always practical to go back to the original actuarial and capital models to answer each ‘what if’ question. The use of agile modelling techniques, such as cashflow flexing and proxy functions, can help to mitigate the timeliness challenges associated with rerunning the heavy models each time.

A projection framework that meets the needs of today’s senior management must be designed from the outset to deliver insight in an accessible way. It is best achieved through a modern technology platform focused on the key business metrics, with ‘what if’ analysis and dashboard capabilities. It must allow access for multiple users within the business with appropriate governance, and should have controls built into the solution.

Planning for the future

Today’s economic and competitive landscape is challenging, and senior management must be confident that it is making the right decisions to create value for shareholders and policyholders.

A business projection capability has become a core management tool, allowing insurers to understand how their business reacts to a range of events, both short and long-term. A modern projection framework, combined with plausible forward-looking scenarios, allows management to assess the impact on key metrics in a consistent and timely manner. These tools promote better understanding of value creation opportunities and potential risks, and support more effective planning and enhanced risk-based decision-making.

Brian Robinson is senior director of product management at Moody’s Analytics