Published today, the Clear Path Analysis report ‘Technology for Solvency II’, states that the full challenge of Solvency II compliance is now becoming clear. Some industry professionals are estimating that the cost of compliance for the UK’s largest insurers is likely to exceed £200m each – with as much as 65% of spending allocated to new technology.
Firms that fail to embrace Solvency II and the opportunity it presents to maximise the use of data across their organisations, will lose out commercially and see their market competitiveness erode. The focus to date has very much been on the liability side of the balance sheet – attention must now shift to the asset side. Market risk will account for two thirds of a Life Company's Solvency Capital Requirements (SCR) and one third for a Non-Life Company.
The report analyses the key issues in utilising technology to meet and satisfy the upcoming Solvency II framework and requirements leading up to enforcement. Solvency II will drive a renewed focus on data governance and data quality across the global insurance industry, regardless of individual insurer size or complexity.
Technology for Solvency II is the second annual report focussed on the role of technology in insurers’ organisations. Led by 19 of Europe's most well-known insurance experts, the report examines both the macro questions surrounding the changing nature of Solvency II right through to the micro issues of utilising technology across borders, product groups and to meet specific operational and risk challenges.
Andrew Waters, Vice President, Insurance Solutions at QuIC Financial Technologies, stressed that more interactive and frequent discussions between insurers and regulators will provide comfort as to how they are meeting the requirements: “Regulatory expectations differ from one country to the next and some insurers are taking a more conservative approach by targeting a minimum compliance standard formula for day one which will act as a stepping stone for an internal model approach at a later date. This provides a good foundation and infrastructure from which to build in the future as best practice emerges.”
Looking beyond Solvency II compliance and at the bigger picture, Waters said that while compliance was important: “This is really a once in a lifetime opportunity for insurance companies to change the approach to their business so you need senior management sponsorship of a vision that is meant to change the culture of the organisation which is no small task.”
On the subject of board involvement in high risk operations, Sanjay Kaul, Risk & Regulation Lead, UK Financial Services at Logica, was firm: “The board has ultimate responsibility for meeting a company’s obligations in the directive and that responsibility cannot be delegated under Solvency II.”
He went on to talk highlight: “The need to ensure that the right people, processes and structures are in place. It’s like trying to find the right school to put your kids into, you’ve got to carry out the due diligence and stay on top of it. You are ultimately responsible for the welfare and development of your child even though someone else is doing the teaching.”
On the subject of scepticism around the role of technology, Kaul felt that executives didn’t always necessarily have the aerial view: “To see what business problems were solved to establish the technology’s value. Instead, it appears that the technology is sometimes driving the business problems rather than the other way around.”
Paul Traynor, Managing Director, Head of Insurance EMEA at BNY Mellon, made the point that: “Market risk is a significant contributor to the SCR of insurance companies. The need to create a strong data governance model over asset data collection is of paramount importance.”
He continued: “Add to this considerations such as investment in alternatives, repos, securities lending and we begin to see the need for a robust, data-centric solution to meet the requirements of Solvency II.” Consequently: “Quality data is the lifeblood of successful Solvency II implementation and ensures the effective integration of risk considerations into the decision-making that underpins it.”
Finally, he warned: “Insurers should ensure their fund managers demonstrate not only an understanding of Solvency II and its impact on the insurers’ efficient investment frontier, but also the systems capability to model assets appropriately.”
In a detailed contribution ‘Solvency II and Data: Myths and Misunderstandings’, Christopher Saunders and Graham Olsen, Senior Managing Consultants at IBM Global Business Services (UK and Ireland), seeks to bring clarity and eliminate some myths head-on. Since Solvency II is considerably stricter and more comprehensive than previous regulations, few insurers currently have a data governance framework in place that is capable of meeting the new requirements.
The writers argue that: “Although enhancing data governance is a critical requirement for Solvency II implementation, it should not be seen as merely a necessary evil. Improved data governance enables continuous improvement of data quality, which can help reduce operational costs and significantly mitigate business risks.”
The authors warn that this can’t be left to IT only and that the business must focus on it: “Only those closest to the data can define it, set data quality criteria for it, manage, monitor and remediate it. Companies will find that a strong business / IT partnership is even more important under Solvency II than before.”
They go on to point out that you can’t rely on your subsidiaries to self-certify: “If the regulator can demand to see all documentation around the quality of data and any expert judgements applied to it throughout its lifecycle, then the insurer must be able to ask the same of its internal business units, regardless of organisational boundaries. This will also apply across international boundaries. This will be a considerable challenge to insurers whose business units have historically operated with a considerable degree of autonomy.”
They explain that Solvency II is a world where ‘black boxes’ are not permitted: “Insurers need to have ‘glass boxes’, in which all internal processes are visible, controlled and protected. In principle, this approach needs to apply from end to end, and aligns with the need for data used in the solution to be accurate, appropriate and complete.”
Roel Wolfert, Global Marketing & Strategy Director at Logica, wrote on ‘Governance at the Core’ and pointed out that risk management has come a long way in insurance, largely due to its separation from the front office and the fact that this is now typically a board level function.
He continued: “All too often in complex financial services structures there is no centralised, global view of risk. Inconsistencies in measuring and reporting risk across business lines and regions have made it near impossible to manage this effectively. If insurers are to prosper in today’s market and avoid fines, they need to ensure standardisation across the board.”
He concluded that there was opportunity for general business improvement here also: “Risk management shouldn’t just be about appeasing the regulator, as the cost for these projects is a significant part of the budget. Besides compliance it should bring about valuable analytics as well as integration and communication between key risk management stakeholders across the institution.”
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