Beyond compliance – Added value in a Solvency II implementation
Solvency II implementation costs may shave a few cents off earnings per share, but this cost should be balanced by the benefit of a far more transparent – consistently transparent – set of reporting requirements than before. This valuable information will lead to improved economic planning and insight, and the ability to embed early-warning mechanisms.
The structure of data is critically important to any Solvency II solution. Hence, insurance companies should start early to design a data management framework that is flexible enough to support Solvency II and anticipate future risk management requirements. Choosing the right enterprise technology in which to build the data extraction tools, workflows, reporting templates and other enterprise features is a key step.
The approach to data management should be holistic and unified, as data silos stymie the flow of information and prevent employees and managers from seeing a complete picture of the organization’s risk exposure and overall business. An insurance company’s data management framework must:
•Be open and scalable.
•Support multiple risk management functions and business applications.
•Provide analytical capabilities, including stress testing, and solvency capital requirement and minimum capital requirement calculations.
•Produce reports for a variety of internal and external parties.
A data-driven approach accrues significant benefit to any organization. It will create the capacity for improved strategic planning, performance management, and remuneration strategies that add value to the organization on a risk-adjusted basis. In many cases, it will allow the organization to identify portfolios that are less than optimal in their performance and to focus on building portfolios that are more advantageous to the long-term sustainability of the insurance entity. From the perspective of the organization, it will also embed the creation and maintenance of corporate history, in the process removing significant key-man risk and dependence on the islands of data and information ownership that continue to plague large organizations.
Performance attribution, allocation of resources, internal efficiency, strategic planning capability and overall operational management will significantly improve in organizations that have made the effort to collect all necessary underlying data for Solvency II purposes in a single, managed, consistent data-driven environment.
Red flags avoided
Solvency II forces consistency in terms of the classification of risk, the granularity at which that classification takes place, and the measurement of risk, albeit on a principles-based versus rules-based approach. Such a regime would have resulted in red flags being raised on AIG far earlier than was the case, owing to AIG’s significant concentration of CDS asset class. On a comparative basis, the information gathered by regulators through the Solvency II reporting process will allow them to observe distortions on either the asset, liability, or both, sides and to elicit distortions on a jurisdiction basis between countries.
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. Examples like AIG and Equitable Life, have highlighted the damage and loss of trust in management that inadequate risk management can cause. Hence, relevant and accurate disclosure of risk and capital management can improve confidence and restore reputation.
In addition, insurance companies can use 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.
Author: Stuart Rose is Global Insurance Marketing Manager at SAS. He began his career as an Actuary, and now has more than 20 years insurance experience working in the UK, South Africa and US. Rose has been published in many leading insurance journals and co-authored the book Executive Guide to Solvency II. Also find Rose at The Analytic Insurer blog. firstname.lastname@example.org