We are currently in the midst of the second wave of Current Expected Credit Losses (CECL) adoption. While it may not be top-of-mind for insurers, regulators and investors alike focus on investment risks and take notice of the information from CECL disclosures when they make investment decisions. Investor expectations are a significant reason why insurers should take CECL seriously, treating it as more than a regulatory check-mark. In this article, we explore some of the challenges to be aware of as well as solutions.
Challenge 1: A fundamental pivot from the previous incurred loss model
The legacy model relied on historical data while the new model requires insurers to generate forward-looking life-of-instrument credit loss estimates and to develop forecasts for losses based on “reasonable and supportable” economic forecasts. The change has added a new layer of difficulty for institutions since future conditions require a supportable and controlled economic model based on the best available information. In the current economic environment, which is unlike any we’ve seen in the past, predicting the future is more difficult than ever and solidifies this need.
Challenge 2: Data input complexities
In complying with CECL, insurers face the obstacle of increased breadth and depth of required data inputs. CECL requires more instrument-level detail, better segmentation reflecting borrower creditworthiness, and greater understanding of the dimensions and drivers of repayment and prepayment risk.
Challenge 3: A lack of standardization
Adding to the challenge, CECL is a concept-based standard with no regulatory roadmap or mandatory approach, so there are many different models an institution can use. This puts a lot of emphasis on management’s judgment and decisions, and compels companies to develop their own forecasting methodologies and supporting rationale. Without a standard model, financial intuitions must—on a recurring basis—construct a narrative that explains CECL results and what happens as a result of the forecasting decisions. Providing disclosures that are both compliant and useful to investors and regulators is crucial.
Challenge 4: Models and requirements are still evolving
Additionally, the past few years have resulted in uncertainty on many fronts. Many investors are wondering whether they should ignore the last three years when calculating future expected losses. Companies need continual documentation and reasoning to justify the methodologies they implement, even as those methodologies vary from year to year based on the company’s view of future market conditions. Meanwhile, as more and more insurers and other financial institutions adopt CECL, new perspectives and thoughts around the concept emerge. For instance, disclosure requirements continue to change, with three or four new disclosure reports required over the past year.
SS&C CECL Capabilities
SS&C satisfies all CECL requirements for the insurance industry. Our integrated cloud-based platform encompasses credit risk and finance as well as investment accounting and regulatory reporting. Unlike many of our competitors in this space who claim to support CECL but really only provide a small portion of what is needed, SS&C provides comprehensive end-to-end capabilities that integrate and automate all risk and finance processes related to a loan, investment and reinsurance receivables, etc.—from data capture to back-end reporting and analytics.
We incorporate built-in allowance methodologies, including CECL and IFRS9, to help automate the entire reserving process, from data management to model execution. Our innovative platform hosts all model types for reserving and credit risk management, including SS&C standard proprietary models, custom models, industry-leading vendor models and client-built models, and allows for different model types to be used for diverse portfolio segments. Additionally, in line with guidance on loss allowances specific to Available for Sale (AFS) debt securities, SS&C’s platform calculates the loss allowance based on expected cash flows and prevents the loss allowance from exceeding the unrealized loss of the security.
Our technology allows insurers to weight scenarios, run a variety of macro-economic scenarios, and apply qualitative adjustments at any level. All SS&C models are fully transparent, independent third-party reviewed, and fully validated. With all the methodologies available within the platform, SS&C allows for built-in challenger models to allow for risk modeling. The system’s detailed reporting capabilities empower insurers to thoroughly understand their allowances and effectively explain them to auditors, regulators and investors.
SS&C works with insurance companies to help address CECL challenges. Our deep industry expertise, advanced technology and value-added services can help you optimize your results. Request more information to learn more about how SS&C can help insurers navigate CECL requirements.
Written with with insights from Chris Travis, Sales Associate
