Unipol Financial Group: Risk and yield in the era of Solvency II

Unipol Financial Group, a leading insurer on the Italian market, transforms compliance with Solvency II into strategic leverage to optimize production factors and align capital management with business performance. In the interview below, Renzo Avesani, Risk Management Director, and Mario Bocca, IT Systems Director, offer scenarios and outlooks.

Some institutions interpret conformity with Solvency as a mere bureaucratic compliance, others as an opportunity to revisit organizational processes. How does Unipol see it?
Renzo Avesani: In our case, Solvency II represented an opportunity to promote a jump in quality in the company's organization, from a culture that views capital purely as a regulatory requirement to a vision focused on optimization of the use of production factors.

Our belief is that at any time in which capital becomes a costly, scarce asset, we should be able to allocate it to the various lines of business based on its current and prospective yield. In this sense, conformity with Solvency II implies the need and desire to manage capital based on an evaluation of business performance, therefore on the risk-yield ratio.

This seems to me the underlying theme posed by Solvency II, that the determination of risk and therefore capital is inextricably tied to the analysis of yield. And that, vice-versa, the calculation of yield cannot be separated from the determination of risk.

Does development of the Solvency II project realized by Unipol respond to this vision?
Renzo Avesani: Two immediate consequences result from this reasoning. Firstly, risk management must accompany and stimulate that cultural change that I was speaking of, adopting a management approach to the theme of capital usage. And secondly, the evaluation of risk, capital and yield must take place contextually within the same information system in order to avoid inconsistencies.

Given these requirements, we learned, along with the IT division, that a permanent connection exists between quantitative evaluation methods/management and technology, and we created a joint working group for realization of the project.

A joint approach that undoubtedly smoothed the road to project realization ...
Mario Bocca: After the phase involving collection of the requirements and conceptual establishment of the project, we defined the system architecture and identified the best applications to respond to the optimization requirements for quantitative analysis, modeling activities and flow integration and control.

At the beginning of last year, we thus started off on a road that led to the preparation of infrastructure, installation of applications and realization of prototypes and system-input flows. This road was made more complicated by the decision to focus conformity not only on calculation of the standard formula, but also on adoption of the internal model.

Renzo Avesani Director, Risk Management

The decision to go with the internal model as compared to the standard formula – where did that originate?
Renzo Avesani: Although the standard formula does involve a risk-adjusted evaluation of the absorptions and performance, only the internal model allows us to accurately interpret and evaluate the company's specific risk drivers.

This decision has certainly introduced an additional element of complexity, because it requires not only guaranteeing the traceability of data, but also demonstrating to the supervisory authorities the capacity of the model to adequately represent and evaluate historical events.

This has led to the need to revisit the databases and management aspects to perform cleaning, standardization and functionalization operations on the data structure, in relation to the purposes of the model.

How is the project articulated from a technological profile?
Mario Bocca: To very briefly summarize, the system architecture is focused on a middle level, represented by the SAS Risk Management for Insurance solution which receives numerous information flows from the various operating systems (P&C, life, claims, etc.) for the various group companies, performs a "cleaning," rationalization, cataloguing and mapping of the incoming flows to guarantee the quality of data, and feeds the vertical calculation engines.

The engines then calculate the risk profiles for the various areas (life, P&C, operational risk, credit risk, market risk) based on the specific internal models and resends the results to the SAS solution, which proceeds with risk aggregation and supervises reporting activities.

Within this type of framework, the themes of data quality and data governance certainly acquire considerable importance...
Mario Bocca: To give an idea of the complexity of which I was speaking, you need only consider that the system has to manage approximately 200 different information flows, each of which is composed of a significant amount of data that transits through the integration framework and regarding which the automation of exchanges, quality control, tracking and completeness, consistence and accuracy of the elaborations performed must be managed, including as required by regulations.

It is undoubtedly complex, articulated work, but is also an opportunity to complete that important road of renewal and rationalization of the group's information systems, which we performed in recent years and which led to the reconstruction of network and elaboration infrastructure and the P&C, life and administrative/accounting operating systems, and to the construction of a new CRM system and a new group call-center platform.

From this viewpoint, the Solvency II project also constitutes an opportunity to complete this renewal and rationalization work.

Does reporting also provide a supporting role for the decision-making process?
Renzo Avesani: The system was designed to produce dual results. On one hand, with the risk aggregation, it acquires sector calculations, aggregates them and provides a global evaluation of risk exposure. On the other hand, with the reporting, it offers the lines of business operational information on capital requirements. It is thus configured as a tool that is operational, management-based and executive all at the same time, because it allows for one business activity to be compared with another in terms of risk exposure, resource consumption and overall profitability.

To give an example, in the case of automobile liability rates or life insurance policies, it is this tool that enables us to define and activate pricing policies better aligned with the level of costs, including that of capital.

Within such a complex reality, was it difficult to ensure the uniformity of language and approach?
Mario Bocca: The group's current structure is the result of an evolutionary process within the company's structure, and it is therefore normal to find various "characteristic languages" both in the various lines of business and in the various companies from which they originate.

An important aspect of work performed on the project was that of defining common nomenclature standards to univocally identify data and measurements, which was necessary to ensuring unambiguousness in the interpretation of data and the accuracy of calculations and evaluations.

With regards to this approach, I have to say that the project was presented by senior management as a group project from the outset, and this facilitated unity of the approach to a problem that, due to its very nature, has many aspects and transversely involves all the group divisions.

In particular, a joint team was established between the Risk Management and IT divisions for the realization of the project, and numerous training routes were initiated, focused on the cultural and technological issues related to Solvency II.

This story is a translation of a story that originally appeared on ita.sas.com. 3/2011

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