Time for a risk rethink in the insurance sector

Insurance companies have been relying on the same legacy technology for many years now, but it is increasingly clear that what has kept their businesses running smoothly for so long will not be up to the daunting challenges of the future. 

For one thing there are new compliance and regulatory hurdles ahead that need computational and analytical capabilities far in advance of the systems that most insurers currently have at their disposal. These new regulatory pressures include more stringent requirements for internal capital assessment as well as risk profile calculations. Insurers, and reinsurers, need better plans for handling actuarial modelling and risk modelling, and they must find ways of expediting the process of regulatory compliance and of improving ratings and agency scores. In an ever more competitive world they also need technology that helps improve their profitability, for example by allowing them to bring new products to market faster.

In addition to this long list of worries, there is now an important conversation to be had regarding sustainability and ethics. All over the commercial world we see a heightened focus on the environmental and social impact of business. There is a rising tide of calls for corporate disclosures on environmental, social and governance (ESG) issues coming from governments, investors and consumers.

Why does this necessitate action from insurers? ESG poses challenges to anybody in the business of managing assets and dealing with risk. Volatility of any kind is a red light for the insurance sector. It must now manage its exposure to new kinds of risk, from climate-driven Californian wildfires to the navigation of ethics around investment funds.

There’s a regulatory dimension to ESG too. From the end of 2021, for example, UK insurers will be required by the Prudential Regulatory Authority to implement a firm policy on managing climate-related financial risks. Several large insurers have started to implement climate strategies. Insurers are also taking an active stance on social matters. Consider Aviva’s position on treatment of workers in the gig economy as an instance.

Surviving all this pressure requires the right compute power at your disposal. Insurers need IT that can help them:

• Increase the accuracy of their calculations and drive down unmanaged risk while meeting a growing need for speed and capacity;

• Handle compute-intensive workloads such as actuarial analysis;

• Improve the run-time rates of actuarial applications for financial projects;

• Make predictions that determine premiums and benefits for policyholders so as to correctly price products;

• Run ‘what if’ scenarios that potentially impact a policyholder;

• Improve the customer experience and ensure customer retention remains high;

• Process computations for thousands of possible economic and environmental outcomes; and

• Enjoy the benefits of next gen innovations like digital twinning and digital resilience.

All these jobs entail levels of flexibility, granularity and sheer power that can’t be supplied by a single mainframe in the basement. So, what’s the alternative?

Grid computing is already proving to be an effective solution to challenges just like those faced by insurers. In short, grid is all about the pooling of compute resources from not one or two but potentially hundreds of different computers located in any number of widely distributed places. 

With the right high-performance computing platform, you can model scenarios in hours, or even in near real time, that would once have taken days. An actuary can push a calculation onto a grid-powered platform and receive an answer pretty much at the flick of a switch. Grid can enable this by dividing complex calculations into smaller units, then parcelling them out to different nodes.

It’s about so much more than internal efficiency. The power of grid enables more efficient customer service, and allows a better job to be made of tasks like calculating risk and optimising cash flow. It leads to policies that are more tightly underwritten and therefore more profitable. It supports regulatory reporting requirements with ease. It performs analysis with the depth and speed needed to maximise returns and minimise exposure. It leads to faster and better decisions by employees and allows customers to self-serve effectively and with high levels of satisfaction. The right grid platform bestows the ability to change risk appetite up or down according to the needs of the moment. This means insurers can dictate how their business is driven strategically through the power of data.

Let’s look at one example from the real world. TIBCO recently worked with a leading US-based insurance giant to deliver the benefits of grid on the TIBCO platform. This firm serves the lifestyle protection, retirement income, investment and mortgage insurance needs of more than 15 million customers globally. It needed a way to increase the accuracy and speed of its actuarial calculations and drive down unmanaged risk, all while ensuring that customer retention remained high. It found that the cost of deploying processing across a grid was nominal compared to that of building out a clustered configuration, or adding new hardware. Cycle times of its actuarial projection software were reduced from days to minutes, giving the actuarial team improved performance and control in determining premiums and optimising cash flow while minimising risk.

It is not so very long ago that none of this would have been possible. Now there is no reason for hesitating over its deployment. After all, seven of the top 10 banks in the world leverage grid platforms. Quite simply, the better an insurer can quantify risks and manage assets, the more profitable they are and the better placed they are to face immense competitive, regulatory and stakeholder pressures. And there is no sense in letting the grass grow under their feet while competitors achieve this goal ahead of them.