Tapiola comply with Solvency II to create commercial value

The Tapiola Group The Tapiola Group insurance and financial companies operate on the basis of mutuality. The customers own the mutual insurance companies who in their turn own the rest of the group companies. Profits are used to develop customer benefits and services. Visit Tapiola

Tapiola Life were pioneers in highlighting risk and solvency issues. In their eyes, the new rules were never the driving force behind the focus on risk.

– In focusing on developing business by improving corporate management as well as profitability and risk analyses, we are now in compliance with the new Solvency II requirements. As part of the process we achieved our objective of Regulatory compliance, says Erkki Kautto, Chief actuary at Tapiola Life.

An important aspect of the new Solvency II regulations, which are expected to come into force last of December 2012, is the insurance companies' ORSA (Own Risk and Solvency Assessment). Erkki Kautto argues that ORSA is a key to Solvency II.

– ORSA is simply another way of saying corporate governance in the terminology of Solvency II. Those who emphasize on developing corporate governance will develop their operations and, at the same time, gain insight into the Solvency II regulations and ORSA in particular, he says.

New questions from the board
Already in the nineties Tapiola Life improved their risk processes to also include an Asset & Liability Management (ALM) perspective.. Actuaries started to receive a new kind of questions from the board; How to manage the integrated interest risk? How to allocate bonuses between different portfolios? How to calculate profitability for different policy types? As there were no tools for providing well-founded answers to those new questions, a number of measures were initiated at Tapiola Life.

– In order to answer those questions, a broader approach to balance sheet assets and liabilities was needed.

Traditionally, actuaries are good at calculating liabilities whilst investment managers deal with investing the assets. The two sides have experienced difficulties communicating with each other, says Erkki.

As early as 1997, an ALM team was formed in order to gain a more comprehensive view of assets and liabilities. This team started developing models for a test environment – long before Solvency II was even contemplated.

The importance of good IT support
Erkki Kautto also stresses the importance of having good IT support for risk and solvency management. In 2006, Tapiola Life made an important investment in data warehousing and new data flows, in order to facilitate and enable historical follow-ups and to get a better view of risk and return.

– It is essential to think through all the data flows that need to be in place and get help from people who are good at this. Talk to the IT experts and leave architectural planning to them, says Erkki.

Another important step for Tapiola Life was the reorganization of the company based on the new approach. In 2007, they formed the Asset & Liability committee and since 2008, they have an Enterprise Risk Management committee in place. We worked extensively on establishing a new risk culture throughout the organization.

– We had a long To-Do list for our actuaries, investment managers, IT people and others. Team work was essential – the actuaries cannot do everything themselves. Also, it was necessary to bring about collaboration between actuaries, investment managers, IT managers and the executive management, and ensure that the teams could communicate, Erkki tells us.

Thus, the most important lesson Erkki Kautto learned from working with risk and solvency issues at Tapiola Life is to start from a corporate governance perspective, rather than a regulatory perspective. By controlling risk and solvency processes, you create a better basis for decisions in areas such as pricing, profitability assessments, product development and dividends. This promotes business as well as solvency regulations.