• By Henry Umney, CEO, ClusterSeven

The Prudential Regulation Authority (PRA), via its recently published proposals to extend the Senior Managers and Certification Regime (SM&CR) to insurers, is looking to put the insurance industry under the same level of scrutiny as the banking sector.

Henry Umney

It aims to enforce individual accountability on underwriters and actuaries in an attempt to protect customers and minimise market abuse.The regulatory framework is also looking to ensure that the individuals who run insurance organisations have defined responsibilities and that they manage their business with integrity and honesty. Additionally, the rules are looking to proportionately enforce the Solvency II requirements, the harmonised EU insurance regulatory regime, for the smaller insurers who fall outside the latter’s scope.

SM&CR – an opportunity for IT-led actuarial transformation

While at this stage, the proposals are in consultation (until 03 November 2017) with the final rules expected to be published in 2018, actuaries should be proactively reviewing their processes to prepare for the SM&CRcompliance in the near future. This is a great opportunity for insurers to take an IT-led transformation approach to modernising and standardising modelling platforms, managing data and automating reporting to minimise operational risk and ensure compliance. A recent report revealed that over a quarter of the top 100 non-life insurers in the UK and Ireland have published quantitative reporting templates containing errors for Solvency II compliance.Inaccurate reporting is undermining the objective of the Solvency II directive, whose key aim is to ensure greater transparency.

Spreadsheet – the actuaries’ system of choice

A key element within this transformation programme is the Actuaries’ system of choice, the spreadsheet.

Insurance organisations deploy multiple systems to manage and ensure the accuracy and integrity of data in the business. However, insurers universally rely very heavily on spreadsheet applications for their day-to-day business processes, complex calculations and financial manipulations. Due to the complexity of the calculations performed by Actuaries, these files can be numerous with data being collated from a variety of internal and external sources. Often, knowledge of the existence of these files and the information they contain is not widely understood outside of the Actuarial function.

Transparency of the supervision and management of these complex spreadsheet files for data quality and integrity is essential to ensure compliance with the SM & CR and Solvency II.

A technology-led approach

Chief Actuaries should consider adopting automated spread-sheet monitoring and management. This will provide the visibility and deliver an in-depth understanding of the spreadsheet landscape actuaries are dependent on in running their day-to-day operations, to the rest of the organisation.

With technology, actuaries can create an inventory of spreadsheets, which is tiered based on criticality, to gain complete visibility of the business-critical files. Thereafter, technology can routinely automate the analysis of the data flows, identify the data lineages across the landscape; and continuously track and monitor data usage via precise change management processes. For data sources in spreadsheet applications, automated validation can also check the integrity of operational processes (e.g. timely spreadsheet submission), functionality (e.g. changes to formulae) and data (e.g. alerts on changes to static triangle data). This will ensure full transparency of the critical spreadsheet environment; the process of spreadsheet usage and management is streamlined end to end is routine; and the accuracy and integrity of information is maintained at all times. Additionally, the management information that will become available will be hugely beneficial for decision-making. In the absence of such processes, even a single error in a critical spreadsheet can potentially invalidate the accuracy of actuarial financial models and reports. In fact, technology can help present early sight of anomalies in the data sources that underwriters and actuaries are reliant on, saving hours of manual checks and paperwork.Actuaries will be able to truly focus their efforts on the more vital aspects of their job such as modelling and analysis.

Automation will also provide the evidence of controls actuaries currently have in place, which is required under SM & CR. For instance, actuaries can see the current previous values in their spreadsheet applications; and track changes to every defined attribute such as drop-downs, data-pickers and Boolean fields. It’s worth noting that transparency of the spreadsheet landscape will contribute to insurers’ wider model governance initiatives too such as BCBS 239 and SR11 -7.

SM & CR and Solvency II aren’t one off processes and non-compliance has personal implications for the Chief Actuary and other senior managers. They apply the Individual Conduct Rules to all staff, barring administrative employees, and a failure to comply can potentially lead to action against senior actuary executives. It’s not to be taken lightly.

By adopting a technology-led approach to compliance, insurers can achieve a sustainable methodology to establishing appropriate data and function checks and without compromising the business need to retain the flexibility to use and develop spreadsheet models, which is the preferred tool for complex calculations and risk assessments.