1. 14/11/2000 Association of British Insurers 1 Rounding: the problems in data conversion and wrapping Mike Bell Enid Jones Association of British Insurers FEE Paris Conference

2. 14/11/2000 Association of British Insurers 2 Rounding: The Problems in Data Conversion and Wrapping Introduction Definition of terms Data conversion Wrapping Does it matter - and why? Conclusion

3. 14/11/2000 Association of British Insurers 3 Introduction ABI EMU Working Party Help UK insurers plan for a potential UK entry to ensure a smooth transition for the industry’s customers and business partners The Association is neither in favour of, nor opposed to, UK entry Competitive issues excluded - practical issues only

4. 14/11/2000 Association of British Insurers 4 Definition of Terms Horizontal error (reconversion error, round trip error) €5,000.00 = £3,271.63 = €5,000.01 Difference €0.01 Vertical error (calculation error) €100.00 = £65.43 £65.43 * 12 = £785.16 = €1199.95 €100.00 * 12 = €12,000.00 Difference €0.05

5. 14/11/2000 Association of British Insurers 5 14/11/2000 5 Association of British Insurers Definition of Terms Two types of wrapping: –At application level –At database level Wrapper: a piece of software which surrounds an application or database and converts all financial inputs and outputs from one currency to another

6. 14/11/2000 Association of British Insurers 6 14/11/2000 6 Association of British Insurers Wrapping Application Wrapper Database Wrapper

7. 14/11/2000 Association of British Insurers 7 Rounding: The Problems in Data Conversion and Wrapping Introduction Definition of terms Data conversion Wrapping Does it matter - and why? Conclusion

8. 14/11/2000 Association of British Insurers 8 Database Conversion What’s the problem? Solutions…

9. 14/11/2000 Association of British Insurers 9 Data Relationships

10. 14/11/2000 Association of British Insurers 10 Database Conversion

11. 14/11/2000 Association of British Insurers 11 Solutions Adjust the data Do nothing and accept the differences

12. 14/11/2000 Association of British Insurers 12 Adjust the data It is only possible to convert data according to the conversion and rounding rules, without adjustments, at one level of the hierarchy Above that level, totals must be recalculated Below that level, either –Add additional reconciling items –Adjust individual items –Ignore the rounding differences

13. 14/11/2000 Association of British Insurers 13 Adjust the data - Example 1

14. 14/11/2000 Association of British Insurers 14 Adjust the data - Example 2

15. 14/11/2000 Association of British Insurers 15 Adjust the data - Example 3

16. 14/11/2000 Association of British Insurers 16 Adjust the data - Summary

17. 14/11/2000 Association of British Insurers 17 Do nothing No database integrity Systems may fail May be difficult to prove conversion Data inconsistencies on outputs

18. 14/11/2000 Association of British Insurers 18 Rounding: The Problems in Data Conversion and Wrapping Introduction Definition of terms Data conversion Wrapping Does it matter - and why? Conclusion

19. 14/11/2000 Association of British Insurers 19 Application Wrapping Application Wrapper

20. 14/11/2000 Association of British Insurers 20 Application Wrapping - Rounding Problems Horizontal rounding errors Vertical rounding errors Data discrepancies Comparisons Thresholds and ranges

21. 14/11/2000 Association of British Insurers 21 Application Wrapping Popular misconceptions: –If the currency inside the wrapper has the greater granularity there will be no rounding problems –Wrapping is cheap and easy –It’s possible to leave NCU systems wrapped to EUR after E Day

22. 14/11/2000 Association of British Insurers 22 Application Wrapping - Horizontal Errors €5,000.00 = £3,271.63 = €5,000.01 Difference €0.01 Affects only Belgium, Ireland and Luxembourg (and the UK if it joins) Impacts? Solution –System and database to three decimal places

23. 14/11/2000 Association of British Insurers 23 Application Wrapping - Vertical Errors Will affect all wrapped systems Cannot be avoided by higher granularity inside wrapper

24. 14/11/2000 Association of British Insurers 24 Application Wrapping: Data Discrepancies Existing £ data processed or viewed through a EUR wrapper will be out of balance in EUR

25. 14/11/2000 Association of British Insurers 25 Application Wrapping - Comparisons Example: –Tax limit = EUR 5,000.00 –In wrapped £ system this is £3,271.63 –But £3,271.63 = EUR 5,000.01 The system will treat EUR 5,000.01 wrongly Is this acceptable?

26. 14/11/2000 Association of British Insurers 26 Application Wrapping - Ranges If the currency inside the wrapper has the lower granularity (e.g. £), gaps may appear in range boundaries and EUR range boundaries may be indefinable EUR 1,000.00, EUR 4,000.01 and EUR 8.000.01 are undefined

27. 14/11/2000 Association of British Insurers 27 Application Wrapping - Summary We do not recommend this approach because... In order to achieve accuracy you need to –Do all calculations in euro, and – Store data in euro or in NCU to 3 decimal places, and – Adjust existing £ data to make it balance in EUR (but it will then be out of balance in £)

28. 14/11/2000 Association of British Insurers 28 Database Wrapping Database Wrapper

29. 14/11/2000 Association of British Insurers 29 Database Wrapping Popular misconception –If an NCU database is converted to EUR early and wrapped back to NCU, it is possible simply to remove the wrapper when the application is changed over to EUR Reality –It is necessary to carry out what is effectively a second conversion when the application is changed over to EUR, to re-establish the integrity of the EUR database

30. 14/11/2000 Association of British Insurers 30 Database Wrapping 59.14 + 27.40 = 86.54 59.14 * 12 = 709.68 Etc. The database is out of balance

31. 14/11/2000 Association of British Insurers 31 Database Wrapping - Summary Early conversion and wrapping of databases requires the same decisions and actions as discussed under ‘Data Conversion’ A wrapped database is out of balance When the wrapper is removed it is necessary to recalculate totals and adjust data to bring the database back into balance

32. 14/11/2000 Association of British Insurers 32 Rounding: The Problems in Data Conversion and Wrapping Introduction Definition of terms Data conversion Wrapping Does it matter - and why? Conclusion

33. 14/11/2000 Association of British Insurers 33 Database conversion - Do nothing No database integrity Systems may fail May be difficult to prove conversion Data inconsistencies on outputs Errors obvious to customers, suppliers, tax authorities...

34. 14/11/2000 Association of British Insurers 34 Database conversion - Options None of the options is wrong The choice must be a business decision The choice should not be left to IT

35. 14/11/2000 Association of British Insurers 35 Database conversion considerations The right business input is essential The business must understand: –the data –the problem –the ‘ripple’ effect on other databases –where accuracy is necessary and where it is not Solutions must be consistent & simple Avoid variable treatments by product or customer types

36. 14/11/2000 Association of British Insurers 36 Database conversion considerations Understand resource constraints - business & IT The conversion approach will affect training requirements The business must manage impact on customers –The conversion approach will lead to rounding discrepancies

37. 14/11/2000 Association of British Insurers 37 Application Wrapping Considerations There are unlikely to be significant cost savings The same level of analysis is required as for data conversion –Target fields must still be identified –Inputs and outputs will be affected by rounding & reconversion differences Processing and database changes may be required –Must calculate in euro & store data in euro or in currency which has the greater granularity – sterling values would need to be increased to 3dp ‘Gap Fields’ and indexes do not solve the problems

38. 14/11/2000 Association of British Insurers 38 Application Wrapping Considerations Processing time will be increased Disc space requirement may be doubled High risk of data pollution –User programs –Mixed currency processing Data conversion problems must still be addressed at the point of conversion MUST convert on ‘E’Day –Not legal to stay in NCU in most countries

39. 14/11/2000 Association of British Insurers 39 Conclusions The complexities of application wrapping outweigh possible benefits Data conversion requires business decisions on how to convert and how to treat the roundings Before deciding to accept rounding differences, assess business and technical issues Any approach requires customer management

40. 14/11/2000 Association of British Insurers 40 Recommendations Minimise rounding problems by adopting a phased conversion approach with bridges Categorise databases –those which must stay in balance –those which are used only for management information/statistics Ensure you can audit your conversions Archive all possible data prior to conversion Keep it simple

41. 14/11/2000 Association of British Insurers 41 www.abi.org.uk/euro enid.jones@yahoo.com mike.bell@prudential.co.uk Welcome to the ABI’s Euro Area