The future of risk modelling in insurance
Risk modelling is one of the fastest growing workloads in insurance – and the cloud is helping insurers to manage it in a way that delivers immediate value to the business and its customers
In risk modelling, speed and capacity are the keys to business value. The faster you can run your models and the more scenarios you run within them, the more accurate your models will be. But there is no value in managing an infrastructure to deliver capacity that you only use sometimes – and that’s where the cloud can make a real difference.
In a recent calculation conducted by Willis Towers Watson, the team established the cost of insuring the world’s population to be approximately $190 trillion, or roughly 2.5 times the world GDP (with a standard deviation of roughly 15% of world GDP). The calculation, run on the Microsoft Azure cloud platform, involved an analysis of the insurance cost of providing each of the world’s 7.3 billion people with a $100,000 whole-of-life insurance policy and took under two hours to execute. Microsoft Azure enables that level of performance, either through a software-as-a service model with all your software and data in the cloud, or through an infrastructure-as-a-service model that enables you to burst to the cloud when you need additional capacity.
That on-demand capacity makes a significant difference in terms of speed to value and total cost of ownership (TCO). If an insurer normally uses 2,000 cores, but needs 5,000 to run quarterly or annual risk models, then it’s much more cost-efficient to pay for that extra capacity only when they need it. In a TCO analysis for one customer we estimated that continuing to run their modelling onsite would cost the customer $5.5m a year, while providing that same compute capacity in the cloud would cost $1.7m a year, with no up-front investment for the on-premise servers required to expand the grid. The cost of the compute capacity to support the additional runs is 45-65% less expensive. In the cloud, the customer isn’t managing the infrastructure. The customer is consuming the compute to support the modelling run times.
In addition, with the availability of the G-Series boxes, customers access the compute power needed for even the most complex models. With 30 data regions globally (22 online today), Microsoft can support insurance customers globally with high performance computing grids in the cloud that are often very close to where customers want to support their risk modelling runs.
Regulatory demands are also driving insurers towards the cloud. Motivated by some of the major issues we’ve encountered over the last few years, new standards such as Solvency II, Dodd Frank and the International Financial Reporting Standards mean that insurers are now being asked to run more complex models, more often. In order to achieve this, many insurers have no choice but to expand their existing infrastructure – which can take six to nine months before the system can deliver value to the business – or to look for another way to add the capacity they need. The cloud enables insurers to spin up a new environment in minutes, delivering capacity as and when it’s needed so they can stay focused on their business rather than on developing their infrastructure.
Trust is key when committing to a new way of doing business. In an industry where companies value and evaluate risk daily, it’s natural for them to look at the risk of doing these types of workloads in the cloud. Insurers often ask: is the cloud secure? Does it meet regulatory requirements? Can it satisfy the needs of users? And is it equivalent to or better than what can be provided in-house?
The answer is yes. At Microsoft, we work with regulators, deal with compliance and make sure that we meet all of the appropriate security standards. And we provide detailed security, privacy and compliance information about our cloud services through the Microsoft Azure Trust Center, to help customers make their initial regulatory assessments. In most instances, companies find that the cloud provider has more stringent security standards and requirements than their own data centre. Given the regulatory, privacy and security requirements of our financial services customers, Microsoft has implemented a compliance programme specifically to address customer requirements related to these concerns.
Early adopters have already found out how the cloud can transform their business, and we’re seeing a huge rise in the number of customers investigating the possibilities of the cloud to manage their risk workloads. Some are choosing the software-as-a-service option and picking solutions that enable them to manage the entire risk modelling process in the cloud rather than consolidating the disparate systems they manage onsite. And in many cases, customers find that the cloud enables them to make use of existing technology investments – for example, with Cortana Analytics and PowerBI they can use powerful mapping visualizations and analytics to do catastrophic risk modelling, enabling them to put measures in place to minimize losses and manage the amount of claims related to an event.
The partners we work with at Microsoft are key to ensuring that Microsoft Azure delivers all the benefits we’ve discussed here, enabling rapid time to value. Over the coming weeks, we’ll be sharing examples of how some of those partners are working with insurers to enable reduced calculation times, increased efficiencies and lower costs – and how they can provide you with an upgrade path to the cloud so you can stop worrying about your infrastructure and focus with confidence on your business.
Find out more by downloading : Microsoft’s Perspectives on Insurance Risk Modelling
