By Larry Jacobson, Insurance Consultant at analytics provider FICO
How big a financial headache is Solvency II? The Financial Services Authority estimates that higher technology spend and greater use of external consultants will drive the costs past £2bn. This is quite daunting for European insurers – 10% of which would currently not meet the capital requirements.
Solvency II is inevitable but as the deadline is likely to be pushed back, it opens up an opportunity for insurers to take a fresh look at how to cut the cost of compliance. Why overhaul your systems when you can merely update them using something as (relatively) simple as a good business rules management system?
Let’s look at how a common business rules management system can bring down the costs of five key challenges that insurers face with Solvency II.
1. Bridge the silos!
Most insurers still work with disparate systems across lines of business, process areas or even geographies. As insurers often need to react quickly to changing market conditions and regulations, this creates serious challenges. With a number of organisational silos these strategy changes require implementation across multiple systems in order to be fully effective. Extending decisions across new channels can also necessitate duplications in various technologies, again increasing the cost of managing change.
A single view across the entire organisation, enabled by a decision orchestration “layer”, can be an effective and low cost remedy. Without any further hardware investments, this allows insurers to implement strategy changes once so decision applications can be deployed without modification across any operating environment. This reduces the costs of updating policies and decision strategies, but also makes it easier to pull data from disparate systems for the models and reports needed for Solvency II.
2. Connect your legacy assets
The insurance industry is challenged with maintaining a plethora of legacy technology assets. In many cases these are needed as policies stored on these systems, such as life insurance policies, won’t be closed for decades to come. This makes any business change an expensive, time-consuming exercise in technology terms. Solvency II, if addressed correctly, means significant changes to core systems, interfaces and databases/warehouses. In addition, the new technology insurers have implemented to support Solvency II, may not be well connected to legacy systems, which makes updates and reporting a challenge.
It is therefore important to look at ways to tap into those legacy assets by improving interoperability. A rip-and-replace approach is not necessary, nor always possible as in the case of life insurance policies.
Utilising technologies that can tap into standard and proprietary data sources, from various legacy systems, databases or other documents can aid in the extraction of value from legacy assets making more accurate, timely data available.
3. Improve data quality and analytic performance
Insurers have used dozens of data sources including paper, microfiche, text files and structured relational databases. The industry by its own admission is data heavy, rather than data rich. Data extraction, transformation and load (ETL) tools have been adopted with limited success, as has the implementation of specific Solvency II data warehouses. It is difficult to collate information from complex and intertwined systems.
A step in the right direction is to use a centralised framework built on technologies such as business rules management systems, which can read different databases and any number of data sources, such as spreadsheets, documents, data management systems, etc. Governing this data in a single centralised system will create a central “repository of truth”. This reduces the costs of reporting, and of making sub-optimal reserving or other decisions because of poor data quality. Furthermore, it can reduce the time and expense needed to format data for modelling purposes — typically the longest part of any modelling project.
4. Business ownership and control
Another important aspect for compliance is control. Solvency II rules are still evolving and are certain to change as the framework is tested. Changing business rules and decisions usually requires extensive reprogramming efforts and can even involve reverse engineering. A lot of time and expense will be poured into the IT support queue here, not only delaying changes but also restricting the productivity of the IT group.
Business rules separate decision logic from the hard-coded policy system, enabling business users to make changes independently. We have seen that when business users can change and deploy rules without much IT intervention, they can save 40-50% of the total cost of change.
This is not only important for Solvency II compliance but also because insurers need to be agile enough to react to dynamic market conditions. And IT teams don’t need to fret about surrendering control to business users — business rules systems include safeguards and process checks to make sure changes meet auditing standards.
5. Audit and transparency – reduce opportunity costs
The Solvency framework places great importance on transparency. Internal model validation is a key issue addressed in pillar 2 of the regulation and requires that models be examined for accuracy on a regular basis. To avoid unfavourable audits – which cost time and money – most insurers are keen to demonstrate automated model accuracy.
Business rules systems not only create consistency, they create unparalleled transparency. They give insurers the ability to demonstrate how business policies reach right down to the decisions on any given policy. If you need to interrogate a complaint related to a decision from 2-3 years ago, or show how your policy changes were implemented, the decision logic and audit trail can be called up in seconds. Insurers that can show this kind of quality in their risk management framework, who can trace every penny that comes through the door, will win the confidence of regulators.
Solvency II is inevitable but the compliance challenges are not all doom and gloom if addressed early enough with the right tools. Besides a reduced price tag of the new regulation insurers will also welcome the increased operational efficiency this can achieve.
Larry Jacobson, Insurance Consultant at analytics provider FICO
www.fico.com
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