Volker Mohr is director of solution management for SAP AG'sInsurance Business Unit.

New and developing regulations are bringing fresh challenges tothe insurance industry. The new rules are impacting management ofrisk, capital, and data; accounting; and information technology.One of the most closely watched regulatory projects is Solvency II,a European Union initiative with implications for U.S.-basedinsurers.

Solvency II is designed to ensure the financial soundness ofinsurance companies with the goal of protecting policyholders andpromoting fair and stable markets. Solvency II uses an economicrisk-based approach for assessing capital adequacy.

Solvency II affects U.S.-based insurance companies that aresubsidiaries of a parent company located in the EU, as well as U.S.companies that do business in Europe. Beyond its effect onindividual companies, Solvency II is also expected to influence anyupcoming U.S. insurance regulation. Further, across the industryglobally, the fundamental changes and additional disclosuresrequired by Solvency II will create competitive pressures toimplement more sophisticated risk and capital managementsystems.

Similar to Basel II, which defined capital requirements forbanks, Solvency II has three pillars. Pillar one specifiesquantitative requirements for solvency capital. Pillar two sets outqualitative requirements, including an Own Risk and SolvencyAssessment (ORSA). The third pillar establishes regulatoryreporting and public disclosure mandates.

Right now, there is uncertainty regarding the finalimplementation date and several complex policy issues are stillunresolved. Recent discussions among EU officials and regulators,however, indicate that they are likely to agree to a phasedimplementation approach that will begin with qualitativemeasures.

Raising the bar for data management

Despite the lack of a clear timeline and unresolved issues,companies have begun working on Solvency II. The initiative raisesthe bar for data management. The quality of complex riskcalculations is dependent on the input data, necessitating a strongfocus on processes and procedures to ensure that the data isappropriate, complete, and accurate.

Data quality is just one of several technology challenges,however. Calculations require detailed data from a variety ofdifferent source systems. Reporting requirements are also becomingmore granular and frequent. Overall, the ability to efficiently andaccurately process and analyze big data will become more criticalover time with a general trend toward real-time reporting that canonly be achieved with new technology such as in-memory datamanagement

If data quality and processes are lacking, organizations run therisk of putting too much capital aside, negatively impacting theirprofitability, or facing consequences for having inadequatereserves.

One challenge to meeting Solvency II mandates is that currentinsurance IT landscapes are fragmented and unnecessarily costly.Many are characterized by inconsistencies in data definitions,processes and technology. There is plenty of opportunity for errorsand inefficiencies, including data quality issues stemming fromexternal data providers, multiple systems in diverse technologyplatforms, complexity of data transfer process, and processfailures, among others.

In developing their systems, insurers and reinsurers should beguided by data quality requirements from the European Insurance andOccupational Pensions Authority (EIOPA), one of the regulatorybodies involved with Solvency II. Among other tenets, EIOPAmandates that companies embed a system of data quality managementacross the entity. They must also define and monitor processes foridentification, collection, transmission, processing, and retentionof data.

Other requirements focus on transparency and monitoring. Forexample, companies must perform periodic data quality assessmentsand implement a process for identifying and resolving datadeficiencies. They must also document instances where data qualitymay be compromised, including implications and mitigating actions.The audit trail must be clear and transparent.

The uncertainty about both the implementation date and ongoingchanges to the legislation means that any quality and processrequirements will be even more costly and complex than they wouldbe otherwise.

Architecture to address SolvencyII

A simplified architecture to address Solvency II and otheranalytical topics will generally include the following layers:

• Source systems that create the transactional data needed forfurther valuation, risk calculation, and regulatory reportingpurposes. This is where the foundation for data quality, andtherefore quality of solvency calculations, begins.
• Source data layer that, following an extract, transform andload (ETL) process, contains all data needed for Solvency IIcalculations and reporting in the upstream process.
• Central calculation layer where all calculation tasks andvaluations are orchestrated in order to create key information suchas SCR/MCR (Solvency Capital Requirement/Minimum CapitalRequirement).
• Result data layer that stores key figures, accounting andsolvency information needed to create the economic balance sheet,external and internal reports.
• Consolidation layer, where consolidations for the groupreporting are performed.
• Reporting layer that provides capabilities to create regulatoryreports and visualize data from the source and result data layersfor internal and external analysis.

Solvency II compliance is fully dependent on each of theselayers and the data flow being designed properly. Meeting thesedemands is a complex undertaking that touches every corner of aninsurer's IT architecture. It is particularly difficult whentimelines and requirements are moving targets.

While implementation is a major effort, some insurance companiesare also seeing an upside in that Solvency II creates anopportunity to rethink data management in general and to implementa comprehensive framework for companies' data that can be usedbeyond the regulatory necessity.

Solvency II does not only have an impact on analytical, risk,and financial application. The advantages of a streamlined coreinsurance environment that supports configurable components such aspolicy management, claims management, reinsurance management,billing, and financial asset management become even more apparentin light of overlapping regulatory initiatives. A framework thatsupports Solvency II requirements can be the starting point forcreating standardized data models, processes, technology andinterfaces also on the core insurance side that can be used toquickly and efficiently meet other current and futureregulations.

The same is true for the other layers in the overallarchitecture. The lower the number and the higher thestandardization of systems, technologies, data definition andprocesses, the easier it will be to adapt to ongoing regulatorychanges and any new regulations or standards in the future.

By looking at Solvency II in a broader context, companies cantake the opportunity to build on the granular data they collect andleverage insights from real-time reporting. They can improve theirdata management, collect and analyze Big Data in myriad ways, andtake advantage of new technology, such as in-memory computing. Thiswill enable them to not only avoid redundant effort, but also gaina strategic advantage over their competitors.