By Rob Stavrou, Commercial Director of integrated solutions at Northdoor, IT consultancy to the insurance sector
When Lloyd’s of London published its first detailed guidelines on reporting requirements for the technical provisions principles of Solvency II in March 2011, insurers quickly mobilised their technology departments to get the correct systems in place. Since then, additional requirements have emerged with both Lloyd’s and the European Insurance and Occupational Pensions Authority (EIOPA) updating their guidelines on a number of occasions along with various consultation papers being released. Many insurers therefore have to revisit the technology platforms on which their actuarial models are built in order to ensure that they are using the correct data for calculations and have the appropriate tools to report back to the regulators for compliance purposes. This is still a challenge for many insurance organisations – so what are the issues facing insurers today and how can technology help them to avoid reassessing their compliance strategy again in the future?
The technical provisions form the backbone for Solvency II compliance. Therefore, it is crucial for insurers to make sure that the data they are using for actuarial modelling is accurate and can be easily accessed. Data requirements, documentation, validation and calculation methodologies are all key aspects of technical provisions and the sooner insurers act to update and optimise their technology, the easier it will be for them to operate when the Solvency II end-state arrives. The technical provisions implementation is fast approaching and firms are still facing three key challenges.
Firstly, the insurers that started to address this area when the original Solvency II guidelines were released are now experiencing constraints, since those tools are no longer able to cope with the larger volumes of data that the additional reporting requirements demand. It is important to stress that there may be nothing wrong with the existing technological systems that the company has been using, but new tools will still be needed to help comply with the latest requirements.
Secondly, confusion around the various Solvency II guidelines issued means that while models may meet some of the regulatory requirements, they often fail to address some common issues. For example, many of the technologies can only be run for limited lines of business at any one time, and cannot facilitate risk classification codes or Solvency II Lines of Business, for example. Each new set of results therefore demands manual allocations, which is not ideal, as this approach causes fluctuations of the data being produced over time. Running the model for the whole account can also cause it to fall over.
Thirdly, these models are often built by actuaries using familiar desktop tools such as Microsoft Excel and Microsoft Access. While these tools are adequate for the relatively small amounts of data required when the guidelines where initially outlined, the latest Lloyd’s requirements mean that far greater amounts of data need to be processed, which quickly exceed the tools’ standalone capabilities.
So how can insurers address these issues? The key is to update and refresh the firm’s calculating and reporting tools in order to make them more robust, scalable and ultimately more reliable by addressing many, if not all of the shortcomings inherent in the existing systems. For instance, scaling up the capabilities of Microsoft Access and Excel with Microsoft’s SQL 2012 Server can deliver effective results without affecting the actuarial calculations. Solutions such as SQL are able to handle the vast amounts of data required for the new reporting procedures and also include built-in analytics and business intelligence capabilities. Not only does this strategy allow firms to make sure they are capturing all the correct data for compliance purposes, but it can also increase the overall accuracy of the actuarial modelling.
This modelling is already a time-intensive task without adding in the various regulatory requirements of technical provisions. Carrying out the processes manually will put a lot of pressure on timescales whilst affecting accuracy. Investing in speedy and scalable technology will not only ensure that the data quality is of a higher standard, but will also allow the actuarial and finance professionals to dedicate more time to their core roles.
Insurers adopting this approach have shown that it is possible to retain the flexibility that their actuaries need to build, maintain and enhance calculation models in a familiar environment. At the same time, this solution establishes a secure platform for the firm’s data and brings key capabilities such as the ability to demonstrate data lineage to the relevant authorities.
The technical provisions deadlines are fast approaching and firms should act quickly to ensure they have the most up-to-date reporting models in place. By engaging with IT and technology, insurers are able to quickly adopt more flexible and scalable solutions that can be adapted next time the inevitable further guidelines are announced and increase efficiency. The key point here is that this improvement is incremental and does not necessarily involve a drastic overhaul of current systems. Capitalising on integrated technologies allows actuaries to continue using Excel and Access for their modelling without needing to get to grips with new vastly different IT systems.
Technology and regulation often make for a confusing equation. The sooner insurers realise that IT can help make the compliance process easier, the better positioned they will be to operate in the post-Solvency II world.
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