(Editor's Note: Mike Herling is vice president, consulting services for Princeton Financial Systems.)
While American insurers may take a blasé attitude about the upcoming Solvency II standards, for large multi-national insurers with operations in Europe and North America, the deadline looms and the time for implementation is growing shorter.
Meeting the Solvency II standards requires an industrialized methodology to regulatory reporting and accountancy. Without scalable IT infrastructure in place, insurers will find the re-designed regulatory landscape unmanageable. Most insurers, however, do not have the luxury or time needed to invest in a comprehensive, single solution. Rather, the cornerstone of success lies within building upon a firm's pre-existing technology foundations.
While most insurers have developed relatively progressive risk and capital analyses, companies continue to grapple with storing exponentially heightened volumes of granular data. This challenge is only further exacerbated by the fragmentation of records across disparate reporting systems and accounting processes. Notably, EEA-domiciled companies with American subsidiaries face the greatest operational hurdle – sourcing critical information from key jurisdictions outside the Solvency II regime before the deadline.
Multinational clients have vocalized the pressures associated with Solvency II data quality and reporting frequency. European insurance groups preparing for reassessment of their third-country operations are at particular risk for breaching the regulatory deadline.
As defined by the Solvency II framework, international companies must reconcile the reporting gaps between global outfits, while balancing international standards. The need to submit comprehensive balance sheet analyses within two to three weeks post quarter-end results requires a central alignment of risk assumptions and governance among Solvency II-based entities and non-EEA subsidiaries.
Consequently, insurers must adjust for variations among conflicting interest rates, reinsurance strategies, and currencies and time differences of multiple subsidiaries before the new regulatory deadline. The need to collect, translate, aggregate and store such detailed data has left many searching for a specialized engine of compliance—a scalable, enterprise-wide data warehouse system.
Initially, many insurers considered adopting a best-of-breed approach to cope with the exhaustive Solvency II data requirements. This process of complete system overhaul and re-engineering can greatly diminish the burden of implementing siloed solutions at an ad-hoc basis. However, the effort and budget needed to create, test and fully integrate a novel operating system into a current business landscape is immense. Insurers must delegate time wisely, as Solvency II enforcement is imminent.
Given the current time constraints, we suggest amending legacy systems as a pragmatic interim solution for firms endeavoring to meet the 2014, Solvency II deadline. By blending customizable vendor solutions with existing ledger infrastructure, insurers can create a tailored, cost-efficient platform that fits into companies' overall target operating models.
The key, however, is to identify data flow changes and possible interface overlaps, in order to create a harmonized, internal general ledger architecture. Management must promptly address current infrastructure limitations in order to identify strategic, interim solutions that will satisfy Solvency II requirements.
Therefore, while searching for potential vendors, it is imperative that management seeks technology providers who offer client-centered support and insight to correctly tailor products to existing organizational nuances. For example, many third-party solutions now feature Solvency II technology bundles, in which firms' current data warehouses and ETL software are incorporated into a company-wide ledger framework. Such products can greatly reduce time and effort of implementation, allowing management to focus on acclimating board members to new reporting standards and governance procedures.
Technology providers should also possess robust technologies that support timely and cost-effective data acquisition, aggregation and augmentation across multiple sources. We find the best solutions avoid dataflow limitations, which are often associated with rigid infrastructure. Rather, open-architecture platforms will decrease the burden of liaising among third-party asset managers and internal finance, risk and actuarial teams, eliminating frequent communication bottlenecks. Many of our clients seek such scalable solutions that will allow for uninterrupted and effortless collaboration between their varying data providers.
The bottom-up approach to Solvency II compliance mitigates gross risks by eliminating manual errors with data aggregation and updates. Notably, this IT model places the responsibility of system maintenance on the technology provider. Vendors will monitor and adjust technologies to meet the evolving regulatory demands of the market, such as the IFRS and local GAAP convergence, allowing insurers to remain at a competitive advantage point. Additionally, outsourcing IT oversight will minimalize disruptions to daily company operations, allowing management to focus on strengthening core business initiatives.
Meeting the demands of Solvency II compliance against a rapidly approaching deadline is achievable, but management must swiftly identify and rectify information and technology gaps. Insurers do not need a complete redesign of current in-house technology accommodations, however. Rather, the implementation of a pragmatic, interim solution will allow insurers to achieve Solvency II equivalence on time, while creating a sustainable framework for future expansion.
Mike Herling is vice president, consulting services for Princeton Financial Systems and is responsible for providing guidance and counsel to clients and prospects of Princeton's PAM of Securities System to ensure optimal use of the product. These efforts include business analysis, project planning and training initiatives across administrative, operational, portfolio management, accounting and reporting initiatives. Prior to his consulting position, Herling was responsible for the implementation group and the accounting outsourcing product at PFS. His 28 years of experience in the securities accounting industry includes positions at several major insurance companies. His education includes a BBA in Accounting and MBA in Finance from Temple University.
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