Unlike the rules-based approach ofits predecessor, Solvency II follows a vastly more complex set  of requirements which rely heavily on firms employing sophisticated and robust software tools to analyse, collate and provide quality reconcilable clean meaningful data. George Crooks, Business Analyst at Wolters Kluwer Financial Services’ FRS Global, explores just how integral the right software is throughout the three pillars of Solvency II.
When planning a programme for Solvency II, firms are faced with key decisions on the type of technologyto choose from theoutset.For example, analytical software is needed to run various scenarios even when decisions are made on which approach to take - internal model, partial model or standard formula. Further, the level of accuracy necessary to calculate the Solvency Capital Requirements (SCR) and Minimum Capital Requirement (MCR) could not be achieved without the speed and resourcefulness provided by innovative software solutions.
The static approach of Solvency I regulation is primarily driven largely by both the combination of historical approximation of the balance sheet, results from accounting systems, adequate pricing mechanism to calculate premiums and the use of specialist techniques and resources to predict future liabilities. Consequently, through adjusting and reformatting statutory reporting results, the calculation of capital requirements and regulatory returns could fundamentally be achieved with relative ease.
By contrast, the Solvency II calculations requirements, on the other hand, are far more dynamic and reflective of current economic and market conditions. Solvency II regulation attempts to approximate real economic and market conditions by both capturing and reporting on the performance of these highly volatile variables overgiven points in time. Given the amount of financial, economic and marketing data that has to be gathered, it is quite implausible to imagine that any meaningful results could be arrived at without the employment of essentially high quality, reliable, tried and tested software solutions.
By introducing variable economic conditions into the assessment of the assets and liabilities within the balance sheet,regulators are effectively placing even greater demands and challenges on insurers. In the new regime, for example it is not sufficient for management to simply understand and acquire knowledge about the values of the assets as reported in the Solvency II Quantitative Reporting Templates (QRTs). Under Solvency II, regulators have gone beyond the surface of the report; firms in these circumstances are expected to have detailed working knowledge and understanding ofhow assets are made up and compiled, taking into account various factors including the geographical location, and the denomination of the assets at all times. For most insurers, this level of granularity regarding investment portfolios is a very daunting prospect. However, with the appropriate software in place; the pains of achieving these requirements are virtually diminished.
Solvency II, as mentioned on numerous occasions, is not just all about numbers. The Own Risk Solvency Requirements (ORSA), governance reporting and disclosure requirements of Solvency II no doubt require the imputed figures from the pillar I calculations. Operational risks and enterprise risk management are further examplesof specialisms which must be employed to produce the Solvency Financial Conditional Reports (SFCR) and Regular Supervisors Reports (RSR). The populations of the QRTs are all dependent of well-developed advanced integrated data repository systems designed to meet the Solvency II requirements. Considering the vast amount of data which must be captured, processed and analysed in order to support the results for SCR and MCR, insurers must have at their disposal, - in house or via outsourcing - access to highly developed data management and logical data interrogation systems to achieve the reliable and high standards expected by the regulators.
Software is no doubt crucial to the success of Solvency II and there are very few aspects of Solvency II where software does not play an influential role. Regardless of how or where it is implemented, it can only add value if it gives assurance of data quality, traceability, integrity, consistency and there is an inherent history or track record of its reliability. Given the details and complexity that run throughout the Solvency II requirements, added to the tight deadlines insurers are up against, there is clearly no room or scope to enlistuntestedor unfamiliar software solutions. Insurance firms must move forward with the knowledge and assurance that, regardless of whether they are using in-house or a third party solution,the software in use must be fully vetted and crucially grounded in order to meet the demands of the Solvency II requirements.
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