If your eyes glaze over when the subject of capital modeling comes up, there are some enormous business benefits to what can seem like a regulatory compliance exercise. Capital modeling draws yawns or technological anxiety in even the most seasoned insurance executives, but you owe it to yourself to peer behind the veil that sometimes exists in this arcane world. Executive SummaryBill Keogh, CEO of Ultimate Risk Solutions, describes the evolution of risk modeling. Starting with dynamic financial analysis models and their specific application to regulatory compliance tasks, models now provide enterprise risk analytics, which can be applied more broadly to evaluate income statement and balance sheet implications of business strategies. He also gives practical guidelines for starting an ERA process.
Why the boredom and anxiety? Capital modeling brings to mind stacks of incomprehensible regulatory guidebooks, accelerated and then delayed implementing of capital requirements, and a mess of acronyms from every corner of the regulatory bureaucracy. So, just leave it to the actuaries.
It may be a well-kept secret, but there’s more excitement involved in capital modeling than you might imagine. The fun begins when you realize two key elements of capital analytics:You can control the process. Designed to address your concerns, capital modeling will help you run your business by quantifying the impact of the most important and time-sensitive decisions you face.
First, what do we mean by capital modeling? In short, all activities of an insurer or reinsurer consume capital. Since the temporal and spatial relationships between various activities present correlation issues, a sophisticated mathematical approach is needed to allow you to attribute capital to each activity and to understand the risk-adjusted returns. Within this framework different assumptions can be stressed, tested and simulated so you can see possible outcomes—either scenarios or a probabilistic view.