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Tuesday 29th May 2012
Can the use of simulators help us to explore and develop a level of understanding of the complexities of Solvency II, asks Neil Reynolds
31 MAY 2012 | NEIL REYNOLDS
Insurers face many challenges with their Solvency II programmes. Changes are being made to business processes, financial reporting and operating models. However, what many executives do not yet appreciate is how Solvency II will change the way decisions are made by management teams and how it will fundamentally alter the way they look at, and manage, their business.
Design
This is where a simulator is invaluable - a tool that allows participants to experience managing an insurance company in a realistic post-Solvency II environment. Participants, working in teams, make business decisions using the enhanced information, tools and business applications that will be used in a Solvency II world. They decide matters such as product strategy, new business volumes, hedging and reinsurance policy as they always have, but now with a risk and capital focus running through the decision-making process as required in the new environment.
A simulator promotes quick learning by encouraging management to use the tools and information available to them and to become familiar with the implications of Solvency II in an interactive setting through active discussion and decision-making.
Solution
This can be done in an instructive way as a business game consisting of several rounds in which participants make business decisions (see Figure 1).
This is where a simulator is invaluable - a tool that allows participants to experience managing an insurance company in a realistic post-Solvency II environment. Participants, working in teams, make business decisions using the enhanced information, tools and business applications that will be used in a Solvency II world. They decide matters such as product strategy, new business volumes, hedging and reinsurance policy as they always have, but now with a risk and capital focus running through the decision-making process as required in the new environment.
A simulator promotes quick learning by encouraging management to use the tools and information available to them and to become familiar with the implications of Solvency II in an interactive setting through active discussion and decision-making.
Solution
This can be done in an instructive way as a business game consisting of several rounds in which participants make business decisions (see Figure 1).
The simulator has three parts:
1. A calculation engine that models the economics of an insurance group, produces reports and allows what-if analyses to support decision-making.
1. A calculation engine that models the economics of an insurance group, produces reports and allows what-if analyses to support decision-making.
2. Management information (MI) containing realistic risk dashboards (see Figure 2) and financial metrics simulating the impact of Solvency II and supporting the business applications.
3. Specific scenarios for each round, such as changes in the economic environment, commentary from analysts or a regulator visit.
Each team analyses the management information and inputs its decisions into the model. Then a new round starts, with new decisions required. At the end of the game, one team emerges as the winner. Participants are time-constrained and have to make decisions in a fast-paced environment while facing a relative information 'overload' - as in real life!
Benefits
By creating an immersive environment, a simulator can concretely demonstrate the effect that Solvency II will have on an organisation and how new processes will work in practice. Management teams get a realistic view of what their business will look like and how decisions will be made. The Solvency II programme can then accommodate any training requirements and changes needed to business processes.
Senior management also learn about new management information and decision-making. They experience simulated dashboards and decision-making tools that inform key performance, capital, risk and financial decisions. The effect of these can be observed in executive reports.
Management teams' understanding of the business should improve and, by helping to infuse a risk culture in the organisation, senior stakeholders will buy into theS olvency II programme and its benefits.
3. Specific scenarios for each round, such as changes in the economic environment, commentary from analysts or a regulator visit.
Each team analyses the management information and inputs its decisions into the model. Then a new round starts, with new decisions required. At the end of the game, one team emerges as the winner. Participants are time-constrained and have to make decisions in a fast-paced environment while facing a relative information 'overload' - as in real life!
Benefits
By creating an immersive environment, a simulator can concretely demonstrate the effect that Solvency II will have on an organisation and how new processes will work in practice. Management teams get a realistic view of what their business will look like and how decisions will be made. The Solvency II programme can then accommodate any training requirements and changes needed to business processes.
Senior management also learn about new management information and decision-making. They experience simulated dashboards and decision-making tools that inform key performance, capital, risk and financial decisions. The effect of these can be observed in executive reports.
Management teams' understanding of the business should improve and, by helping to infuse a risk culture in the organisation, senior stakeholders will buy into theS olvency II programme and its benefits.
Neil Reynolds is a principal in Oliver Wyman's Actuarial Practice
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