Regulations are often regarded by insurers and business managers as an additional cost of doing business, having a drag effect on the speed with which the organization can innovate, as well as tending to drag on the organization’s profitability. Excessive regulation may be viewed by business managers as limiting strategic potential and by shareholders as weighing down earnings per share (EPS). In light of these facts, a fundamentally important question is: What value should be accrued in one’s planning for Solvency II?
Benefits of an enterprise data management framework
Data management and data quality are no longer optional components of a regulatory solution; they are essential. Solvency II’s more sophisticated approach to capital adequacy, risk management and governance, and risk disclosure requires insurance companies to put comprehensive standards, policies and processes in place for the use, development and management of data. The legislation calls for data relating to risk to be generated more frequently and more thoroughly to support the new processes. Firms will need to demonstrate that they have instilled risk awareness and sensitivity in all core activities. In fact, CEIOPS has enforced the importance of data quality, which in the committee’s experience is a major area of concern for European insurers. More generally, supervisors increasingly expect insurers to implement an enterprisewide data governance framework and to maintain a data dictionary of all data sources and attributes.
Insurance companies are continuously trying to make better business decisions faster. However, many insurers spend so much time manually gathering and cleaning data and creating reports that there is little time left to explore data for insights that can have a positive impact on the bottom line. That is why a holistic, unified approach to data management, which ensures a smooth flow of information throughout the organization, is a critical part of a true risk management system. This approach will enable decision makers to glean key insights from the data and then combine those with insights from other business functions, such as marketing, claims and underwriting.
Benefits beyond Solvency II
Insurance executives must make a declarative choice in developing the Solvency II business case. A firm can elect to do the minimum required to implement the legislative change to ensure compliance, which is less expensive in the short term but is bound to entrench a disadvantage over the long term, as it implies a higher cost of capital and results in less sophisticated risk management capabilities. Or firms can invest in enterprise technology and integrate risk management into their core business processes to achieve competitive advantage and, as a result, maximize potential benefits. By investing in an enterprise risk management solution, insurance companies can optimize the use of Solvency II resources and turn the compliance burden into a number of strategic opportunities.
Insurance companies can seize the opportunity presented by the Solvency II regulations to build a brand that is recognized for its strength of capital position, transparency in its operations, and sound risk management practices. The benefits of such a brand are apparent in increased market share and retention of existing customers. In addition, rating agencies are encouraging insurers to manage risk and capital in a way that enhances the quality of earnings. According to rating agency AM Best, an insurer that can demonstrate strong risk management practices integrated into its core operating processes and effectively execute its business plan will maintain favorable ratings in an increasingly dynamic operating environment.
Realizing the return
Solvency II is considered an exceptionally ambitious project, the objectives of which have been designed to generate benefits to both policyholders and insurance companies. If the directive is executed properly and the anticipated benefits are realized, it could have a dramatic impact on the European economy.
From a macro perspective, the advent of a true single market in financial services is anticipated to result in more efficient capital allocation and usher in greater transparency across the industry, which will almost certainly lower the risk of company failure and create greater confidence in the industry. From a micro perspective, the regulations present insurers with the opportunity to embed sophisticated risk management capabilities across the organization, allowing the insurer to gain a single client view, generate exposure data by risk type and risk subtype, and have access to consistent reporting across risk, finance and actuarial disciplines.
The regulation of industry has in the recent past been regarded as an unnecessary hindrance to the dynamism of economies and the natural tendency of firms to innovate and expand. By taking an early and proactive stance toward the implementation of Solvency II, individual insurers can achieve the sustained benefits of competitive advantage through improved business intelligence and management information systems.
Learn more about how data management and transparency fit into Solvency II and your organization’s future competitive stance in this free white paper, Data Management and Solvency II: A Critical Partnership. Download it today.