Comparison with other Modeling Products
There are essentially two approaches in general use to creating a computer program to model the Assets and Liabilities of a (re)insurance entity. These can be summarised as
- The Special Programming Environment (or ‘Toolbox’) approach; and
- The fully integrated Compiled Program.
Each of the above has advantages and disadvantages. However, URS’ view is that the latter approach is the most suitable approach for the modeling of Assets and Liabilities of (re)insurers mainly due to the greater structure it gives to this important process but also for a few more key reasons.
How Do the Two Approaches Differ?
The Special Programming Environment can almost be described as a ‘do it yourself’ or ‘DIY’ approach where the user assembles the components of their company from a set of modules or components. Persons familiar with spreadsheets know that they can link together whatever cells they like and format these as they please. Also, spreadsheets contain some pre-programmed functions that canbe used to add more sophistication and improved functionality, repeating tasks and calculations as needed.
Some Toolbox-type software products that help (re)insurance companies create their Asset-Liability models require users to program each component or some components in the model using their built-in scripts or programming languages. Other Toolbox products go a stage further in that they offer some pre-built components that are specific to risk modelling such as Frequency & Severity modules, Cash Flow Vectors and other insurance related modules. However, the user needs to specify how these components link together so as to create the overall Company. Standard insurance financial statements also need to be assembled. The visual representation of these models is usually of the form of boxes and nodes connected via a series of arrows to represent the relationship between the various sections.
An advantage of this approach is that a small model used to look at a few lines of business can be created, by an experienced user, in a free format without much structure that presumably allows for modeling flexibility. Also an experienced user who succeeds in creating a large and complex model will certainly know how the model is built and will derive great satisfaction from having achieved the end result. However, therein lies the significant disadvantage of a ‘toolbox’ approach.
The integrated approach is the one favoured by URS and is deployed in Risk Explorer. It is a fully integrated program which allows the user to focus on the parameters of the risks within their business and not worry about having to link components together, not to mention having to program those components, to produce simulated Company-wide financial statements and other standard outputs. Once the parameters of company’s risks, assets and ceded or assumed reinsurance contracts are entered into the model, the simulation can happen immediately and produce the resulting
- Income Statements;
- Balance Sheets;
- Profit & Loss accounts;
- Cash-flow statements; and
- Other required outputs.
Moreover, the calculations of items such as net of reinsurance results, required solvency capital, and allocation of such capital all happen automatically as do admin items such as currency conversions, discounting and consolidation from a LoB or segment level.
Some integrated approaches suffer from lack of flexibility that a toolbox offers, but Risk Explorer does not have such problems because of the patented technology contained in Translator++ for Excel. Using this technology, any nonstandard form of Asset, Reinsurance Structure or Risk Source can be specified in the familiar environment of Microsoft Excel and then ‘translated’ into compiled code for use within Risk Explorer. Indeed, we believe that there is no structure so complex that it cannot be integrated into Risk Explorer using an Excel sheet as a composition tool.
Ability to expand the standard features of the software by compiled Excel spreadsheets gives Risk Explorer flexibility that, in fact, is much greater than the flexibility offered by toolbox products. That is because nothing is more flexible than Excel and any Excel model, at a click of a button, can become a natural compiled extension of Risk Explorer‘s functionality.
The integrated approach offered by Risk Explorer has the great advantages of
- Integrity of model
- Speed of execution
- Speed of model building
- Ease of learning
- Powerful pre-built point-and-click functionality
- Scalability to very large sizes
- Complete set of documentation
- Ease of Audit and understanding
- Controlled access to environment within a Company structure
- Integration within an existing IT infrastructure
- Continuous improvement & support from a professional software Company.
An integrated approach would therefore be a more industrially strong and robust method for creating company models. Risk Explorer combines all above listed advantages offered by the integrated approach with all the flexibility of Excel.
We liken the difference in approaches between toolbox and integrated product to the difference between buying a fully assembled, fine-tuned and well running automobile as opposed to purchasing a ‘Kit Car’ which is a set of parts from which the client would then need to assemble the vehicle using his own time and resources. Both approached are valid and will probably enable you to get from A to B. The purchaser of the Kit Car Components will have derived great satisfaction from building up the car piece by piece and also great enjoyment from driving the finished car that he assembled himself. However, assembling the vehicle from the parts as well as subsequent testing and ongoing maintenance is a time- and resource-consuming exersize that will end up with a heavy price tag on a purchaser.
The person buying a fully assembled car will know that their car is likely to perform well with little or no ongoing maintenance. The car will come with a complete set of specification documents and service manuals. The person buying a finished vehicle will also be spared from the costs of building, testing and maintaining it – both in direct financial terms (cost of hiring a team of engineers, mechanics and road testers) and in terms of time and resources that can be better spent on other vital needs of the company. Such costs can be quite significant especially for large companies with complex modelling needs.
In summary, having a choice as to the two differing approaches is good and each approach will appeal to different users with different needs. URS believes, however, that the very rigorous requirements of performing internal modelling of (re)insurance companies for statutory and rating purposes may be easier to achieve and more cost effective by adopting the integrated approach.