Showing posts with label answer. Show all posts
Showing posts with label answer. Show all posts

Oct 15, 2010

Questioning Solvency II?

Every now and then, when you're in the middle of some-, any- or every-thing, it's wise to sit back and ask yourself some basic questions:

Is what I'm doing still adding value?
If so, what's that value and for who?
If not, how can I add value one way or the other?
If not, stop!

A Solvency example...
Suppose you're up to your neck in a solvency II project and you've not really seen your family for two weeks. Just sit back, relax and simply ask yourself the next questions:

  1. Why are we implementing Solvency II
    (Better: What's the goal of Solvency II)
  2. Are the reasons for implementing Solvency II valid and sound?
  3. Is it possible and profitable to define and measure detailed risks at company level?
  4. What's the RETURN on Solvency II for policyholders and shareholders?

The official (CEA) answer to question I reads in short:
We implement Solvency II because the current framework is too simple and does not direct capital accurately to where the risks are.

Key question (II) is: Are "too simple" and "more detailed directing capital" valid or sound reasons........?

A more valid reason for implementing Solvency II would be something like:
Recent decades have shown an increase of Insurance Companies Bankrupts (or Insolvencies) to a level of x% p.a. (measured in value instead of numbers). Solvency II intents to bring down this x% risk to (x-y)% in Z years by means of a more detailed capital-risk approach.

The estimated costs of this yearly y% reduction by implementing and maintaining Solvency II, are estimated at z% p.a. .

Main challenges implementing S II at company level

  1. Capital allocation
    At an individual company level, the effect of Solvency II on shareholder and client value will only be negative. More 'dead capital' has to be allocated, decreasing shareholder value and decreasing clients profit share.

  2. Revenues
    Pricing Solvency II, will increase premium/contribution levels. However higher contribution levels will have a negative net impact on sales and revenues.

  3. Capital Inadequacy
    On top of, the extra solvency created by Solvency II will turn out to be inadequate at an individual company level in case the deTAILed risks actually affects (hits) a company. A more (inter)national reinsurance program could bring help here. However, these kind of reinsurance programs turn out to be expensive. Moreover, take care that these deTAILed risks don't turn out to be systemic risks in the end....

It's clear that the Solvency II goals are not smart formulated. Nevertheless, Solvency II seems an irreversible process.

Therefore the key question is:
How can you use Solvency II to add (long term) value to your clients and shareholders?

The art of asking the right question
Now you've replaced your fuzzy feeling and foggy discussions about the goal of Solvency II, by a leading question.

Answering and discussing this question will turn out the way to create efficiency and joy in your project and time for your family.

A lot of colleague actuaries can help you on discussing and answering this question.

Start discussing this question in the company board's next meeting!

Risk management Moral
In fact Risk Management in general is more the art of asking the right question instead of giving the right answer. This is well argumented by Professor Stefan Scholtes (University of Cambridge), who states that what we need is a complementary balance between modelling and intuition; models that relate to and enforce our mental abilities, not replace them.

We actuaries can learn from that. Actuarial questioning turns out key. Next time you have to give a (Board) presentation, start by asking the right (effective) questions instead of giving answers straight away.

One last tip: Never ask 'Why questions', instead ask 'What questions'....

Related links
- CEA Why Solvency II?
- Prof. Stefan Scholtes: The art of asking the right question
- Asking the right questions