There is no doubt amongst insurers that Solvency II has required them to reflect on how they run  their businesses. Despite the challenges the new regulation will bring there are considerable potential benefits, especially when it comes to managing risk, says RSA’s Group Chief Risk Officer Jon Macdonald.
With its aim of creating EU-wide risk-sensitive capital requirements and risk management standards that will replace the current solvency requirements, Solvency II offers a real opportunity to raise the profile of risk within a business and to demonstrate that it is very much about working alongside, and not against, existing business strategies.
Risk managers quickly realised that in order for the new regulation to be successfully embedded into businesses, meaningful consideration had to be given to how the risk appetite of the company would co-exist alongside technical Solvency II requirements. By addressing the risk question early on, insurers have understood from the outset the impact new requirements will have on their business and how to extract genuine value from this.
The industry has also made the most of this understanding by engaging early with regulators to address concerns. This has been hugely beneficial to insurers. By making its voice heard, the industry has at times managed to change the shape of the regulation to better suit working practices, and continues to do so as the scheduled implementation date gets closer.
Addressing the issues
There is an industry fear that Solvency II requirements encourage pro cyclicality and can lead to the situation where insurers have to sell assets at the bottom of the market due to the regulatory rules not being sufficiently appropriate to a stress situation. For risk managers, finding a resolution to the pro-cyclicality issue is a top priority. Risk and governance around models are being enhanced to meet both internal needs and those of the regulations.
Similarly, disclosure requirements are still evolving which provides significant challenge. There are a number of potential issues in disclosure requirements that need to be addressed as part of the current consultation exercise. This includes the significant asset data disclosure requirements and whether this is practical for insurers and fund managers to achieve.
Moving forward
Overall, the industry has broadly had one voice when it comes to highlighting the benefits of Solvency II. As with any new regulatory requirement, the industry has faced some big challenges but insurers are working with regulators and politicians to address these issues. There is still some way to go before these concerns are fully resolved but so far discussions have demonstrated that progress can be made.
For now the industry is very much focused on next steps, with the Internal Model Approval Process (IMAP) top priority. Currently insurers are working out what they need from their IMAP when Solvency II goes live – it has to deliver on many levels from signing it off, to embedding it into the business and for its output to be useful to the business when it is fully implemented, no easy feat for one model.
Creating these processes and the infrastructure for Solvency II reporting is expensive and there is not always a tangible benefit to the commercial requirements of the business. This means that it is crucial for modellers to establish models that are appropriate to the business, identifying the key elements of the process and its effectiveness, as well as providing information on the forward looking risk capital, whilst making it business relevant. In addition, regulators will need to be comfortable with the approach taken by the insurer and the wider risk management process.
Industry opportunities
There are real capital and risk management benefits to come out of Solvency II. For insurers operating in a number of countries, the regulation has been an opportunity to strengthen the individual country boards and their understanding and commitment to fundamental risk-thinking of the business. This will bring about a real strategic benefit to the business, as moving forward, more key decision makers will be aware of creating synergy between the business goals and its overall risk strategy and appetite.
Understandably there is concern over how much time and money has, and will, continue to be spent on implementing Solvency II. Risk functions are busy creating frameworks and policies for the new regulation in addition to still doing their day jobs. There is huge pressure on the industry to get this right and avoid some of the perceived failure that blighted Basel II. But ultimately Solvency II is here to stay and insurers are paying close attention to making sure implementation works for the good of their businesses.
This article first appeared in our February digital magazine- Predicting what's at the end of the road: General Insurance which can be viewed by clicking on the cover below:
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