Thursday, December 22, 2011
Insurance, Solvency and Enterprise Architecture
I have been spending some time noodling the requirements of Solvency and believe there are a few fundamental flaws in how reinsurance carriers are approaching this problem space.
Generally speaking, the reinsurance industry introduced the notion of models as a way for private equity and hedge funds to measure the potential risk of loss. The folks who created Solvency requirements seemed to have latched onto the same level of thinking. The challenge as I see it is that carriers are attempting to produce a single model instead of having multiple.
Consider the fact that for facilitative insurance, the re-insurer gets to see the flow as they are afforded and easier and reliable accumulation control where in treaty, at best they only get the information used for underwriting the portfolio at a macro-level. This results in a approach of comparing a scenario where you have high data fidelity with one where their is lower data fidelity.
Another gap as I see it is that the model doesn't drive underwriting and tends to be an after the fact event. Once an underwriter accepts the risk, the reinsurance carrier is committed, then and only then can they incorporate the data entered for the deal into the model. If the goal is to reduce risk, don't you think this process should be inversed?
I also agree that the models fail to account for the differences of property where their tends to be more of a repeatable loss history than on the casualty side.
To argue from the other side of the table, we could also end up with a scenario where the "numbers" and actuarials could over-dominate the human judgement of a skilled underwriter. When we become too numbers focused, we end up with suboptimal results. Look at what has happened with the state of IT for a prime example. Regardless of where you land philosophically, I have been scratching my head attempting to figure out why I have not ran across any online discussions where the practitioners of enterprise architecture have discussed the impact of Solvency on their organization? I cannot think of something that could potentially change how the business works than this. Are all of my insurance EA peers asleep at the wheel?
| | View blog reactionsGenerally speaking, the reinsurance industry introduced the notion of models as a way for private equity and hedge funds to measure the potential risk of loss. The folks who created Solvency requirements seemed to have latched onto the same level of thinking. The challenge as I see it is that carriers are attempting to produce a single model instead of having multiple.
Consider the fact that for facilitative insurance, the re-insurer gets to see the flow as they are afforded and easier and reliable accumulation control where in treaty, at best they only get the information used for underwriting the portfolio at a macro-level. This results in a approach of comparing a scenario where you have high data fidelity with one where their is lower data fidelity.
Another gap as I see it is that the model doesn't drive underwriting and tends to be an after the fact event. Once an underwriter accepts the risk, the reinsurance carrier is committed, then and only then can they incorporate the data entered for the deal into the model. If the goal is to reduce risk, don't you think this process should be inversed?
I also agree that the models fail to account for the differences of property where their tends to be more of a repeatable loss history than on the casualty side.
To argue from the other side of the table, we could also end up with a scenario where the "numbers" and actuarials could over-dominate the human judgement of a skilled underwriter. When we become too numbers focused, we end up with suboptimal results. Look at what has happened with the state of IT for a prime example. Regardless of where you land philosophically, I have been scratching my head attempting to figure out why I have not ran across any online discussions where the practitioners of enterprise architecture have discussed the impact of Solvency on their organization? I cannot think of something that could potentially change how the business works than this. Are all of my insurance EA peers asleep at the wheel?
