Calculating complex figures for the past, present and future

The future of regulatory reporting and forecasting, with a special focus on Solvency II.

In Release 6.3 of SimCorp Dimension, coming out in February 2018, we will be introducing the Strategy Manager to our Middle Office offering. The idea is to use reported analytics definitions paired with user-specified scenarios of potential future market input and asset allocations to calculate potential analytics of the future and analyze the investment strategy.

With 6.3 the focus is on the Solvency II regulatory market risk figures and the future scenarios are represented with what if simulations on market data and holding changes. The focus with this is not on what happened between now and that future scenario, but on what would the resulting capital requirements be in that scenario.

This will enable users to try out different strategies and observe and analyze the consequences these strategies would have on the capital requirements of Solvency II. By doing such analysis, pension funds and insurers would be better prepared for large market changes and could steer their strategy and larger investments towards lower capital requirements – or at least be prepared for the capital consequences of strategy changes. With this kind of analysis, users would be compliant with Pillar 2 whereby firms are required to analyze the consequences of investment decisions on the Solvency Capital Requirement figures.

Future enhancements

With Release 6.5 of SimCorp Dimension, and subsequent releases we turn our attention to figures of the accounting universe where particularly portfolio returns (portfolio yields) are a key measure for the estimated performance of the portfolio. In order to estimate these types of figures it becomes important to know how you get from now to that future scenario. We will therefore not only shift the focus of the figures we analyze but also for the what if scenarios introduce external cash flow simulations as well as including estimated cash flows from future dividends, coupons and expiries.

This, combined with the what if analysis and user defined reinvestment rules will provide a trail from the date you take as an outset, to the future point in time. With this you can start seeing the consequences of future scenarios adding the complexity of investment timings and external cash flows. The users can thus analyze the portfolio returns of future scenarios, as well as trying out different investment strategies within a particular range of portfolio yields in the years to come. Finally, there will also be a feature to monitor and manage cash flows of the horizon period you are analyzing and thereby be prepared for periods of low liquidity. 

There are five key benefits that we provide with Strategy Manager:

  • Audit proof definition and calculation of standard and complex analytics for reporting
  • Controlled flexibility to change analytics and compare with ‘official’ analytics
  • User friendly analysis of analytics definitions and calculation contributions
  • Analytics in what if simulations combining market data and holding changes
  • Horizon analysis with security and external cash flows plus configurable reinvestments rules (6.5+)

Supporting user requirements

Developing the Strategy Manager, we had three key roles in mind. They are listed below.

  1. Risk/Compliance/Regulatory Controller – Producing and understanding Solvency II
  2. This user needs an end-of-day (EOD) calculation platform to analyze the ‘official’ Solvency II figures before distributing them in reports to management and clients. This needs to be in an audit-proof solution where the user can explain all calculations – also for historical reporting dates. I.e. control and transparency. This user needs to understand the official figures in details and be prepared for potential future changes to (a) the figures definitions (b) the holdings, and (c) the market data influencing the values.

  3. Portfolio, Strategy, Risk and/or Compliance Manager – Investment decisions and what if analysis
  4. This user also needs to understand the official figures well and be prepared for potential future changes to the figures definitions, the holdings, and the market data. The analysis is relevant when moving into a new business area; a new specific exposure and/or reallocate the assets considerably where the user would like to see the effects on regulatory figures. Regulators, like EIOPA (via Solvency II, Pillar 2), have requested that firms use the regulatory measures more actively in investment decisions, meaning that these complex analytics in what if simulations of larger investment decisions must be included.

  5. Strategy Manager, Accounting Controller – Accounting, asset and liability analysis
  6. This user’s time horizon is typically yearly for up to 5 consecutive years. For the user, it is important to analyze the investment options the firm must do to reach the target range of Portfolio Yields including actual and the forecasted P/L for the current and future years. For each year this user has estimations of market data, asset and liability cash flows and target asset allocation bands, as well as a portfolio return (realized P/L over Average Balance sheet) that the user needs to target trying out different investment strategies. It is important to not only forecast portfolio returns but also to have an overview of the asset and liability cash flows during the future years (in time buckets decided by the user; e.g. per month).

Client engagement

Over the past years, we’ve worked closely with clients, including a dedicated development partnership with a large Austrian insurance company to develop this solution. The response so far has been good and we look forward to clients moving into production with this new solution for regulation, reporting, analysis and forecasting.