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Standard Formula Calculations made simple
With the Solvency II implementation date looming, firms must make sure their processes are ready to meet the requirements. A critical part of this, especially for firms using the standard formula to calculate their Standard Calculation Forumla (SCR), is setting up a robust process.
In this blog we will explore how a standard formula SCR calculation tool can be made as simple as possible for the end user.
Standard Formula Calculations Made Simple
In a previous article, we discussed how the standard formula may be standard, but it is certainly not simple! Standard formula calculations are a rather technical and potentially laborious task, albeit one that many firms have already tackled. However, arriving at your firm’s SCR number is only part of the battle – you need to understand it as well! This is especially important for the Own Risk and Solvency Assessment (ORSA) process, where firms will need to vary inputs and recalculate capital requirements under different scenarios.
Using well designed standard formula software can help with this. Based on our experience with standard formula calculations, an ideal tool should have the following features:
- easy to pick up: the user does not want to have to spend too long familiarising themselves with the tool, they want to be able to focus on the calculation itself.
- easy to navigate: the standard formula is a large calculation, and one that can easily become unwieldy - thought should be put into how to keep things manageable and accessible.
- transparent calculations: it should be clear to the user what they do and how they fit together.
- clear layout: closely linked to the above, it should be clear to the user what inputs are required from them, and where these are used.
- customisable: it should be customised to the firm’s business profile but remain flexible to add new lines of business or geographic location.
- as visual as possible: humans are better at interpreting diagrams and charts than tables of figures! Presenting results graphically makes it easier to get a feel for what really has an impact on the final number.
- auditable: user changes can be tracked.
- linked: to Pillar 3 reporting tool to make the whole Solvency II process seamless and streamlined.
We will use our own tool, SIIMPLIFY, as an example of how some of the above features can be built in Excel.
Our philosophy in designing SIIMPLIFY has been to keep the layout, structure and calculations as clear as possible, so that the user can make sense of what the calculations are doing.
Let’s see how we addressed the points discussed above:
- the tool is immediately accessible and easy to pick up
- it is very straightforward to get data in and out of the tool
- the calculations and formulae are visible to the users
- tabs not relevant to the currently selected tab can be hidden, and any modules not relevant for the calculation for your firm can be hidden.
- navigation bars can be used to ensure that all important results are never more than one or two of clicks away. This avoids overloading the user with too much information all at once, while ensuring that everything is accessible.
- Keep data input, external parameters and calculations separate. This makes it easier to ensure that nothing has been missed when inputting data, and makes the structure easier to follow.
- use colour coding and consistent layouts - this makes it easy for the user to see what is required from them and what the different parts of the spreadsheets are doing.
- for example, in SIImplify, user inputs are always highlighted in green, calculations in blue, and figures linked in from other parts of the model in yellow.
- streamline calculation sheets wherever possible, and avoid overwhelming the user with excessive detail.
- allow the user to customise the model – hiding irrelevant parts of the calculation, territories, currencies, and lines of business.
- implementing the model in Excel makes it straightforward to extend or customise the calculations if required.
All of the data and results relating to the SCR can be imported directly from SIIMPLIFY into Tabular (Solvency II Solutions powerful Pillar 3 reporting tool) at the click of a button. This greatly speeds up the arduous task of producing European Insurance and Occupational Pensions Authority (EIOPA)’s XBRL forms, and frees up valuable time to concentrate on areas that add more value to your business.
- information can be extracted to Pillar 3 tool with a click of a button - the information from the SCR tool is highlighted in purple below.
Finally, the standard formula is not simple, but having these features built into your tool will certainly make life easier.
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