Along with the turbulent stock market and threats of terrorism, the Sarbanes-Oxley Act of 2002 is putting heightened pressure on insurance executives for improved management information."The broader use of stochastic models by senior management is essential in today's uncertain environment," says Jack Gibson, North American life insurance and financial services practice leader at Tillinghast - Towers Perrin, the New York-based actuarial and management consulting firm.
"By their nature, insurance companies have uncertainty about their future," he says. "And stochastic modeling enables them to better understand what their most significant risks are, what might cause their earnings to fluctuate, or what might cause value to erode-not on a product by product basis, but across the entire company."
It's a fallacy to have a risk-bearing enterprise sign off on their financials, says Bret Price, senior vice president of SS&C Technologies Inc., a Windsor, Conn.-based investment and financial management software vendor. "Insurers assume a risk today that they'll pay a liability in the future. And most companies don't have that as their business model."
SS&C offers a high-definition financial forecasting system, called Finesse HD, which enables insurers to subject their investment portfolios to a range of scenarios. "It's only a matter of time before a disclosure of ranges for reserves and investments is going to be part of the reporting process for insurers," says Price.
"If you can report on a range, such as, 'We expect our reserves to be at $2 billion, but they can get as high as $3 billion or as low as $1.5 billion,' at least investors and policyholders will have a clearer understanding of the inherent volatility of reserve levels."
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