 By John Lunn, Executive Director, Moorhouse
The long wait for Solvency II is ‘undermining investor confidence in the sector’ says Standard and Poor’s latest research on the future of this regulation. Their findings show that uncertainty around the regulatory timeline and requirements are ‘delaying the restructuring of business models and investment decisions’ and dampening strategic change and business transformation agendas.
The ambiguity around SII is frustrating for organisations that have already taken significant – and costly – steps to address its requirements. Andrew Bailey, deputy governor of the BoE and CEO of the PRA, stated that SII may be costing the industry as much as £200million a year in the UK, causing premiums to increase 0.1% just to cover the cost of compliance.
But the outlook is not entirely bleak; organisations can still develop a competitive advantage and business improvement through Solvency II if they act smartly.
It is well understood that to meet the extensive Solvency II requirements, organisations have embarked on large scale changes to their operating models; redesigning their processes, systems and organisational structures to deliver compliance. Most organisations have invested significantly in this change agenda and are currently struggling to assess what the best next step is now the ‘target’ date is unclear.
There are some fundamental questions that need to be addressed - do they shut down the programmes managing Solvency II entirely and risk losing the skills and capabilities required? Many will be tempted to ‘cut their losses’ in this way but this puts at risk the opportunity to derive value from the existing investment. Solvency II has already begun to drive an industry trend towards greater risk-based management and forces organisations to demonstrate financial robustness, effective risk management processes, a stable and successful business model and a strong client base.
Figure 1. Those with growth initiatives
The winners in the long term will be those organisations that establish an operating model that is able to flex to the on-going regulatory requirements, excel in customer service and provide innovation to the market. These drivers will be around long after the current crop of regulatory initiatives have been harvested by regulators – and there is evidence to show that high performing organisations are more likely to invest in growth based initiatives.
In our 2013 Barometer on Change we found that organisations are placing too much emphasis on cost reduction and not enough importance on initiatives to fuel growth. Over half (54 per cent) of the organisations have initiatives in place to reduce costs, compared to just 22 per cent with initiatives aimed at improving performance. These initiatives were also often not addressing the strategic challenges that the business faces. For examples, while culture change was cited by 31 per cent as a key challenge, only 13 per cent had programmes in place to tackle this.
Our research also found that organisations that have experienced higher growth in recent years (cumulative annual growth of above five per cent) are more likely to have initiatives in place that engage staff or pursue growth (figure 1). Organisations that have been less successful are more likely to be focused primarily on cost-reduction. Those that remain agile and view themselves as ‘pro-change’ are almost twice as likely to experience higher growth compared to organisation which see themselves as ‘anti-change (see figure 2).
Figure 2. How growth and attitude are related
So how does implementing regulatory requirements fit with strategic investments? In the case of Solvency II, the requirements around demonstrating an adequate system of governance and supervisory review processes are at the core of an effective operating model, and the investments made to date should be built on to drive the future business model.
However it would be a mistake to look just at the technical and process investments; depending on the approach taken to implementing Solvency II, there is likely to be an opportunity to build on the organisational capacity to deliver change. High growth organisations are much more ‘pro-change’ compared to others In financial services establishing this culture of change and building on the initiatives already invested in could be a key step to enabling this.
The only certainty in Solvency II is its eventual implementation. The pan-European nature of this regulation means it suffers from the delays and challenges of pan-European politics and the difficulty in creating rules which will hold up across different financial systems and heritages. Waiting for the new date of implementation however is a mistake in the same way Samuel Beckett’s characters waited in vain for Godot to appear; it is the bigger picture of taking stock of the investment made to date and using this to build an effective operating model and pro change culture that should be the prime focus.
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