The data challenge

Solvency II compliance demands better data management, quality, governance

There’s a saying, “bad data in means bad data out.” In the case of Solvency II compliance, data quality – good data, not bad – will be critical. Even though all of the details haven’t been fully ironed out yet, firms are trying to get a handle on how this directive will impact current data management processes and technology. Without wading through the specifics of the directive and its timeline, let’s talk a bit about data management and data quality changes that could be done now to ensure your firm is not only compliant, but sees new opportunities from the experience.

During implementation of the Basel II requirements, banks found that data management activities were critical, accounting for 80 percent of the work toward compliance. Data management activities ensure that data is consolidated, managed and validated prior to starting work on risk calculations. With Solvency II, there is an even greater emphasis on the management and quality of data since Solvency II recognizes data as critical to first-rate risk management practices and calculations.

Because of the nature of the insurance business, data quality and governance are even more important than was the case for banks during Basel II implementation. When valuing assets and liabilities, insurers need to look back over longer time horizons – a process that is complex and sensitive to erroneous data.

Many organizations are strangled by their current focus (actually the lack thereof) on data quality. There’s also minimal data governance and little collaboration between IT and business units. For a few organizations, meeting the data management requirements will mean only process changes and modernization, but many others will have to start from scratch.

This will require a strong data management strategy, coupled with a strong data quality and data governance strategy. IT departments have to deliver a more robust data management and data quality platform that allows IT and business workers to collaborate, but IT alone cannot be solely responsible. Potential challenges may include:

Business

  • No domain-based entity definitions.
  • No corporate glossary of terms.
  • No tracking of terms as they change over time.

IT

  • Application-based data models.
  • Manual translation of business terms to IT definitions.
  • Multitude of (legacy) source systems to extract from and integrate.

This is a joint problem that will need commitment and collaboration of both IT and business users.

The Solvency II directive is the first insurance regulation to introduce strict requirements for data management, but it also represents an opportunity for many organizations. Combining a regulatory challenge with a proactive approach can yield benefits well beyond just meeting the regulatory requirements. Effective data management has a cascading effect: Reliable data results in reliable model output, and more confident forecasts based on internal modeling ultimately leads to better risk decision making, reduced likelihood of regulatory-imposed capital add-ons and increased return on capital. Aside from risk, improved overall health of the data can yield organization-wide results including higher return on marketing campaigns, more accurate calculations of customer lifetime value and better detection of claims fraud. Regulatory compliance and competitive advantage from one directive. Excellent!

Where are you in your Solvency II transformation? Download the free whitepaper, Accelerating Solvency II Compliance with SAS®: Building the bridge to competitive advantage, to learn more about the competitive advantages that the proposed extension of Solvency II may provide for your organization.

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