Solvency II, the biggest transformation of European insurance legislation in almost 40 years, is set to come into effect on January 1, 2014. Designed to introduce a harmonized, EU-wide insurance regulatory regime that will protect policyholders and minimize market disruption, the legislation sets stronger requirements for capital adequacy, risk management and disclosure.

The recent proposal to extend the deadline for Solvency II compliance by one year reflects the finding of a report by the FSA (Financial Services Authority) in the UK that many insurers have much to do before they reach the Solvency II standards.

While the proposed deadline would give firms more time to prepare, it should not be cause for complacency. The challenges of meeting Solvency II requirements are incredibly complex, regardless of whether insurers are using their own internal capital model or the Solvency II standard formula. Embedding new solvency capital models, data management processes and reporting systems into day-to-day business, across multiple business lines and subsidiaries, is a complicated and sophisticated task. The extension should, therefore, be viewed as an opportunity to take a structured approach to the Solvency II transformation project; to use the space to make considered decisions that will not only lead to compliance, but also inform strategy and drive competitive advantage in the long term.

From planning to implementation

Once implemented, Solvency II will provide a solid risk- and capital-based foundation for the insurance industry for many decades to come.The EU-wide legislation will improve capital adequacy, risk management and accountability, thereby increasing protection for policyholders, giving clarity on insurers’ creditworthiness and reducing the risk of market disruption and business failure.It will replace the current 14 EU insurance directives with a single regulatory standard that will harmonize the rules for the insurance industry across Europe.

But the short-term challenges of meeting Solvency II requirements are numerous and complex. Beyond compliance, Solvency II solutions must be woven into an insurer’s daily operations. The deadline for compliance may potentially be delayed by a year, but insurers should not be lulled into a false sense of security. Failure to act now will only result in increased pressure in a year’s time.

Since the inception of Solvency II, many insurers have seen it as an opportunity to make important strategic decisions for the future. Much time and energy has been put into planning how the transformation to Solvency II can improve operational efficiency, or how new internal capital models can help insurers understand their business better, develop new product lines and gain competitive advantage.

However, the reality is that despite the time spent in planning the transformation to Solvency II, many insurers have found that the toughest challenge is implementation. Embedding new models, rules and processes into their multifaceted businesses is proving to be complicated and expensive. How can they build a platform that works for all stakeholders from actuarial to finance to risk and IT? And how can they build it cost-effectively and on time?

Evolving for future flexibility

There are many changes required to meet the Solvency II standards, including financial, actuarial, capital, risk management, audit management and management of the overall insurance group. Unfortunately, clarity and guidance from the EU and the European Insurance and Occupational Pensions Authority (EIPOA) will not be available for some time yet,¹ and insurers may also need to incorporate changes imposed by the revised International Financial Reporting Standards (IFRS).This means that platforms, systems and processes built now must be flexible enough to absorb changes to the requirements in the future.

In the short term, this transformation has become a necessary compliance exercise. But, by building a platform that can be quickly and cost-effectively adapted later, insurers can still invest in their long-term competitive advantage. Insurers are, therefore, seeking to build flexible IT platforms and data management frameworks that both enable them to be compliant now and provide a solid foundation for future innovation and development.

While working with insurers on Solvency II implementation, we’ve found that the more progress insurers make, the more they realize they have to do. Starting early is the key. This white paper identifies six key challenges that insurers must address immediately to meet Solvency II standards in time and outlines a framework that provides a solid foundation for improved capital and cost-efficiency, and continuous product innovation, into the future. Download Accelerating Solvency II Compliance with SAS®.