In the wake of the pandemic, how well equipped are you to model the next extreme event? Here’s what it will take to reinforce your approach to insurance risk management.
5 STEPS TO STRONGER ACTUARIAL modeling
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LET’S SOLVE INSURANCE RISK
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Look at the stresses you run on your models. How did any pandemic modeling compare to actual results and would it have protected you in past extreme events? Should you increase or more explicitly target your stresses and capture other risks?
Consider how well your stochastic and stress tests actually protected your company and whether you could have survived further shocks. With reverse stress testing, you can uncover hidden risks and vulnerabilities that may also cause insolvency.
EXTEND STRESS TESTING
Regulation has traditionally led a robust, controlled approach to risk modeling. But now you must look deeper to consider how you could improve your models – and resist complacency if everything worked well so far. Models that withstood COVID-19 may not survive a cyberpandemic: skyrocketing cyberattacks due to increased digital adoption and working from home.
You should also reflect on the changing nature of the workplace. Will there be a more permanent shift to working from home? Should SaaS-based platforms now form part of your business continuity plans?
REVIEW YOUR RESILIENCE
Think about layering on several mortality scenarios and also ensuring that scenarios include the correlation between different risks. COVID-19 has highlighted the need to model combined stresses and reinforced the strong correlation between some risk types.
You should also make basic assumptions about the pattern of mortality either worsening due to COVID-19 or improving because of better public health, hygiene and resistance to future viruses. But remember the dangers of over-modeling and spurious accuracy when there’s not enough data or knowledge to support more complex models.
RETHINK MORTALITY ASSUMPTIONS
How quickly can you answer senior managers’ most fundamental questions? At the start of the pandemic, C-suite executives were desperate to know what could happen next, the impact on their solvency ratio and whether risk teams could model all this remotely.
To consistently provide a rapid response in these kinds of circumstances, you need a risk platform that is well governed, scalable and accessible in the cloud, with the flexibility to model changes quickly.
DELIVER TIMELY INFORMATION
Solvency modernization is now a reality for insurers globally, with many countries rolling out their own versions. Regulators are also starting to enhance existing standards and add further stress testing requirements based on learnings from the pandemic.
Beyond compliance, these guidelines are helping create a stronger insurance sector by improving policyholder protection and the overall management of insurance companies. What better reasons to modernize solvency through your technology and risk models?
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