At SAS, we regularly engage with our insurance customers to understand the challenges that Solvency II presents. What is increasingly clear is that the more progress insurers make, the more they realize they have to do.
This anecdotal evidence is supported by the findings of the FSA Solvency II: Internal Model Approval Process Thematic Review, which found that some firms “judged themselves to be already close to Solvency II standards but, on closer questioning, were not able to provide evidence to justify this.”
By combining the experience of our customers with the FSA’s findings, we have identified six key challenges that insurers must address immediately to meet Solvency II standards in time.
Challenge 1: Data management — The directive requires data to be accurate, timely and appropriate for all stakeholders, across actuarial, risk and financial functions. But, in many firms, siloed use has led to disjointed data. Many insurers have made plans for improved data management, but have stumbled at the implementation phase. The FSA commented that most firms “have overstated their current level of preparedness against Solvency II criteria.”
Challenge 2: Meeting Solvency II capital requirements — In the past, insurers have used numerous, separate actuarial models to calculate capital requirements and project cash flow for individual products or subsidiaries. This siloed approach has meant that balance sheets – and therefore regulatory capital – have not always truly reflected all of the risk undertaken by the business (e.g., market, credit, underwriting, liquidity and operational risk).
Solvency II requires all insurers to integrate the models used to calculate their solvency capital requirement (SCR) to produce an accurate balance sheet that is reflective of all risk taken at product, subsidiary and corporate levels. This applies to all firms, regardless of which approach insurers base their capital requirement calculations on: internal model, standard formula or a combination of the two.
Challenge 3: Risk management — To produce a complete risk profile that is both compliant and strategically valuable, the Solvency II standards and ORSA (Own Risk and Solvency Assessment) must be calculated and managed consistently. Risks identified by ORSA should be included in a firm’s Solvency II model, and resultant capital requirements will directly affect financial planning. This is a great opportunity to develop one calculation engine to help produce both the SCR and the economic capital requirements under the ORSA.
Challenge 4: Compliance reassurance — Solvency II compliance is not just about establishing and implementing a compliant business process. Insurers are required to demonstrate how they arrived at this process, that the implementation of the system is valid and consistent, and that it has been fully embedded into the firm’s working processes.
That begins during the days leading up to the deadline: Insurers will need to be able to quickly and easily provide regulators with regular implementation updates as the go-live deadline approaches. After implementation, regulators will conduct frequent assessments through the Supervisory Review Process where it will be vital for insurers to explain how they comply with the rules, detail their processes and justify their internal models.
Challenge 5: Reporting — Greater transparency, through public disclosure and reporting requirements, is one of the central foundations of Solvency II. Insurers will be expected to produce more reports than ever before with turnaround times that have been cut from months to days. Also, final reporting requirements will not be defined until Solvency II enters the final Guidance phase.
Meeting the new reporting standards will require an unprecedented amount of work, in a time of immense pressure and limited resources. For many insurers, reporting is the final hurdle to compliance – and they stand to fail if they do not put sufficient reporting tools in place now.
Challenge 6: IFRS reconciliation — The move to Solvency II and the upcoming IFRS accounting changes will both have huge implications for how insurers measure their performance and are viewed by the financial markets and regulators. Failure to communicate capital management and value creation effectively will lead to greater market scrutiny and an increased cost of capital.Firms must therefore be able to report both standards clearly, and help the market and regulators understand any discrepancies the two methodologies create.
SAS anecdotal evidence and FSA findings indicate that time is of the essence if insurers are to meet minimum requirements to be Solvency II compliant by January 2014. And there is still much to do. While considered an exceptionally ambitious project, Solvency II was designed to benefit policyholders, the market and insurance companies. Its implementation should make the European insurance industry more competitive while opening the door to many new opportunities.
Here’s the white paper I promised you: Download Accelerating Solvency II Compliance with SAS®. This white paper gives you more detail about the six challenges and offers recommendations for approaching each obstacle. It also outlines a framework that provides a solid foundation for improved capital and cost-efficiency, and continuous product innovation long into the future.