General Insurance Article - Solvency II Pillar 3 – Unravelling the Technology

 The EU parliament finally approved the Omnibus II Directive on March 11 2014, which effectively brings Solvency II into force from January 2016. Many insurers slowed down their Solvency II programmes when there was uncertainty over the final implementation date. Pillar 3 reporting now requires focus because it was often put on hold during the uncertainty. Now, insurers need to react and make progress on Pillar 3 reporting.

 Most insurers have Q3 2015 targets to hit EIOPA guidelines but larger insurers and the Lloyds of London market (dry-run required for Q3 2014) have accelerated deadlines. It is clear that 2014 is the time to work on Pillar 3 ahead of full implementation next year.

 Why should actuaries be interested?

 Actuarially estimated numbers in the Pillar 3 reports are some of the most material. These must be reported accurately and actuaries have a leading role in ensuring this. As would be expected, actuaries understand Solvency II liability requirements better than their IT colleagues and need to provide actuarial input into the Pillar 3 project for it to be successful. Actuaries should be involved in the analysis to make sure that the end state Pillar 3 reporting will be:

 1. Simple to use so that output numbers can be accessed easily.
 2. Traceable so that output numbers can be checked back to source.
 3. Automated as far as possible, once the preceding Solvency II analysis has been completed.

 If actuaries are not involved in specifying the Pillar 3 solution, there will be more work each reporting window (and remember, the reporting is regular and this can add up to a lot of extra work!). Actuaries and Finance colleagues working together to provide business input can make a big difference to the success of a Pillar 3 reporting project.

 What are the main challenges?

 That said, most of the Pillar 3 challenges are data and technology related, meaning that a Pillar 3 project is principally an IT one. Data needs to be extracted from multiple sources and compiled in a consistent manner to feed the Pillar 3 reporting. This gets more complicated for insurance groups, where consolidation is required before group reporting. Finding and implementing a Pillar 3 solution that fits well with existing processes and meets the Solvency II working day timetable requirements is a challenge.

 Dry runs of the QRTs become very important so that insurers are aware of the time needed to collect, validate and reconcile the data. For example, Solvency II has introduced rigorous asset reporting requirements on a ‘look-through’ basis. The volume of asset data required from asset managers for Pillar 3 has increased dramatically. This challenge is especially relevant to Life insurers and will become clear only during dry-runs.

 Choosing an appropriate solution

 It is also not immediately clear to insurers what to implement for Pillar 3 reporting. Building a solution is an option, although a robust and automated one centred around a reporting database is recommended instead of a series of spreadsheets. This is because the reporting needs to be regularly repeatable and auditable, and manual intervention in spreadsheets will consume a lot of manpower in the long run.

 There are many Pillar 3 solutions available in the market and it is not straightforward to navigate the pros and cons of each. In fact, the suitability of each solution will vary between insurers and it is important to conduct thorough analysis of the options. This analysis requires business as well as IT input, and actuaries (and accountants) are encouraged to attend the demonstrations to help assess the tools. Here are some examples of where actuaries have responsibilities in the selection.

 Working with IT

 Actuaries needn’t worry about being out of their comfort zone when working with IT and its associated terminology. Explaining clearly what you need from the system will help the vendor selection (or build) process enormously. IT projects work most effectively where there is significant business input. Otherwise, how can it be guaranteed that the IT delivery will meet the business needs?

 Where can actuaries contribute?

 Actuaries can make valuable contributions throughout a Pillar 3 implementation project and, in particular, during the following project stages:

 1. Defining business requirements for the solution.
 2. Providing feedback on demonstrations of proposed solutions.
 3. Planning the transition to end state by proposing interim reporting solutions.
 4. Reviewing the end state architecture to see if it makes sense from a business, as well as a technology perspective.
 5. Specifying the expected numerical output, given a set of inputs to the reports.
 6. User Acceptance Testing of the delivered solution.

 There are also some areas that actuaries do not need to get involved in. If you find yourself in a deep conversation about XBRL tagging, then it’s best to excuse yourself. Just make IT aware of the XBRL requirements and leave the technological practicalities of this up to the experts.

 Clearing the technological hurdle

 The goal for actuaries should be to get a Pillar 3 reporting solution that doesn’t impact their other duties, minimises manual intervention and comfortably meets the Solvency II reporting deadlines. The technology hurdle shouldn’t prevent actuaries from playing a key role. A Pillar 3 project can even be seen as an opportunity for actuaries to broaden their horizons and learn a bit more about technology. A joint actuarial, finance and IT team are the best ingredients for Pillar 3 success.

 This article was writte for Actuarial Post by Marc Fakkel, a life insurance Partner and Graham Robertson, a general insurance Senior Manager in Deloitte’s Actuarial & Advanced Analytics practice.

 Marc Fakkel

 Graham Robertson