Featured Product

    Spotlight on Suncorp Group

    In an effort to better understand some of the challenges facing industry leaders, Moody’s Analytics discussed banking and insurance solutions with Martin Lalor, Executive Manager - Group Capital, of Suncorp Group. Mr. Lalor has 20 years of experience in risk modeling within insurance and banking organizations, specializing in actuarial analysis, financial engineering, structured and alternative investments, and trading.

    He is responsible for the Suncorp Group risk-based capital (RBC) modeling framework and the Group’s stress testing framework. Both frameworks incorporate the modeling requirements of the Group’s general insurance entities, life insurance entities, and bank entity.

    The need for a risk modeling solution

    Suncorp was looking for a robust modeling solution to suit each of their businesses (Life, General, and Bank), rather than just one specifically designed for insurance. A key driver was the need for a “best practice” internal assessment of capital requirements (known as risk-based capital). It was also crucial that they establish a consistent approach to modeling risks within each of their businesses, as this would enable a robust assessment at the conglomerate (consolidated) level and would lead to the identification of the capital diversification benefits across their organization – and the potential to free up capital to yield higher returns.

    Prior to Moody’s Analytics, Suncorp was using multiple external and internal solutions, which had the potential to lead to inconsistent assessments of risk and internal capital requirements across the organization.

    The search for a solution

    After researching four to five Economic Scenario Generator (ESG) providers they selected a solution provided by Moody’s Analytics, which would help them consistently model economic risks across their businesses. Moody’s Analytics is well known in Australia and provides services in both the banking and insurance industries. The ESG service is particularly well known in the insurance industry, and staff at Suncorp had used the service at other institutions and regarded it highly.

    Furthermore, Suncorp’s assessment determined that the ESG had a long history of development and evolution, and a comprehensive online technical and research database of support. In addition, Suncorp determined that Moody's Analytics had significant ongoing research and model development capabilities, which Suncorp considered critical given the diversity of their businesses and a desire to continually evolve and enhance their own modeling frameworks.

    Solution benefits

    In addition to the comprehensive ESG solution provided to Suncorp, Moody's Analytics flexibility in adapting their models for Suncorp helped deliver a more suitable solution for the modeling of economic risks in each business. This was particularly relevant for their Bank line of business, which required significantly enhanced short-end interest rate models, as well as the development of models for key macroeconomic risk drivers for the bank.

    The ESG solution for economic risks (both market and credit risk) could also be integrated with the modeling solutions for the other financial risk types (e.g., insurance risk and operational risk), which together provided the RBC modeling infrastructure required by each business.

    The RBC modeling framework has enabled Suncorp to assess earnings and capital-at-risk metrics for each of its businesses consistently, as well as for the conglomerate as a whole. The framework is expected to provide management with a key tool to be used for strategic decisions, such as capital allocation and strategic asset allocation. In addition, the framework is expected to significantly enhance Suncorp’s articulation of risk appetite, and to facilitate improved risk measurement and monitoring processes.

    Of particular importance, an enterprise-wide ESG applied consistently has supported Suncorp in its objective to make tangible the diversification benefits that exist across their organization. For example, the profitability and capital requirements of a general insurer, life insurer, and bank do not necessarily respond to movements in interest rates in the same way – there are offsetting influences across the balance sheets. A consistent modeling approach and consolidation of results have enabled Suncorp to identify those influences and assess their impact.

    About ESGs

    An ESG is the cornerstone of the stochastic modeling approach. In particular, an ESG provides a best practice tool to help robustly measure economic risk from an integrated perspective.

    As well as being a tool for an efficient ALM strategy, it can be applied to the understanding of the market risk drivers embedded into complex life insurance products (e.g., variable annuities). ESG simulation forms the basis of a market-consistent valuation of the balance sheet and is a key prospective element in the context of Solvency II.

    Featured Experts
    As Published In: