Regulatory developments mean that failure to make proper use of business intelligence systems and actuarial consultancy to assess risk could lead not only to significant financial losses but also to disciplinary penalties for insurance underwriters and brokers, according to leading accountant and consultant Moore Stephens.
John Harbor, head of the Moore Stephens Insurance Industry Group, says, "Professional risk analysis and modern data management techniques are
designed to support the development of effective reserving and forecasting procedures. They are now an essential part of insurance industry practice. Today it is possible, using the latest On-Line Analytical Processing (OLAP) techniques together with dynamic forecasting modelling, to build customized data warehouses, which can be updated on a daily basis and used as a vital
component in business intelligence and risk management techniques."
Moore Stephens recently set up a dedicated business intelligence unit, headed by Steve Downing and Paul Latarche, who both have a background in IT solutions for the insurance market, to complement the firm's existing
analytical and risk management services.
Steve Downing says, "The
insurance industry must embrace a centralized approach to risk management, one which has the ability to analyse data in a flexible way, to search for trends and patterns, to analyse productivity and to help business planning and forecasting. And it has to be accessible to all of an organization's key decision-makers."
The insurance industry's approach to sophisticated business intelligence
technology may in any case soon cease to become a matter of choice and become instead the subject of regulation. The UK's Financial Services
Authority has recently published under CP 136 its proposed framework for individual capital adequacy standards (ICAS) which sets out a
self-assessment process requiring firms to consider capital add-ons to minimum solvency requirements to address business, systems and control risks.
John Harbor says, "For insurance firms, this will be a major new development as the current EU directive on solvency requirements for the insurance industry is not specifically risk-based. Firms will need to document how risks have been addressed and develop internal capital models, using stochastic techniques, to self-assess their capital requirements."
The capital add-ons are designed to reflect exposure arising from operational risk and systems and control weaknesses. The FSA considers the adequacy of systems and controls to be fundamental to the capital adequacy
assessment process. It acknowledges that its approach will need to be consistent with the capital adequacy requirements being developed by the EC. But it says the ICAS framework will not be delayed until completion of the latest EU solvency review, which is not expected before 2005 at the earliest, but will be introduced instead some time in 2004.
"Time is of the essence for the insurance industry and those companies which will need to prepare for the new requirements can ill afford to lose any time," concludes John Harbor. "And business intelligence is an idea whose
time has come."