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Financial services

Capital Modelling – now and in the future

Simon Sheaf Simon Sheaf

We surveyed the general insurance market on their capital modelling capabilities and processes. They shared their most significant challenges and their future plans for development and enhancement.

Capital models have taken centre stage in the business planning, reinsurance planning and risk management activities of many insurers in recent years, largely driven by Solvency II. This increase in the importance of capital models has inevitably resulted in greater pressure on modelling teams to make continual improvements to the sophistication, reporting capabilities and validation of models.

We asked insurers how they feel about their capital modelling capabilities and processes, about the key challenges they are facing and how they are looking to improve. We received responses from a wide variety of general insurance companies, Lloyd’s managing agents, composite insurers and reinsurers.

Where are we now?

On average, reviewing and updating modelling assumptions accounts for around 70% of the capital modelling team’s time. This is a significant amount of time to devote to this task, however in our view refining the assumptions feeding the model is one of the key areas in which capital modellers can add value to the business.

Survey participants ranked data issues as the most significant challenge to their Solvency II reporting process. This is understandable as capital modelling teams rely on information from a number of different areas of the business and our results indicate that the process of gathering that information is not as streamlined as it could be and that there is still a question mark on the quality of some data.

The most common uses for modelling outputs are the ORSA process, reinsurance purchase and optimisation, business planning, risk margin calculation and risk appetite management.

Looking ahead

Further embedding the model and increasing the range of its uses are priorities according to 62% of participants.

The speeding up of capital modelling processes remains front of mind, with half of the survey participants looking to streamline the assumption setting process and half aiming to reduce model run times.

Not many insurers said that their models require urgent re-engineering which is unsurprising as Solvency II would have prompted a huge amount of work in this area. However, 56% of participants expect their model or modelling process to require re-engineering within three years.

Download Capital Modelling – Where are we now? (PDF) [ 2465 kb ] for a detailed analysis of the survey responses. This includes findings regarding how insurers calculate their regulatory capital requirements, the number of people involved, how often insurers run their models and the number of simulations that are used for each run.

In addition, the report investigates some of the most common uses for the capital modelling results and the challenges that insurers face. Finally, it looks at insurers’ plans for the development and enhancement of their capital models.

To discuss the survey results or capital modelling more generally please contact Simon Sheaf, Bharat Raj or Sophie Weisenberger.