Solvency II: Can Your Risk Processes Meet the Test?

The Solvency II directive, which has been in the works for more than 10 years, now looks unlikely to be implemented by 2016, as the industry as a whole has become concerned about how insurers will apply the principles in practice.  For some insurers, the delay merely means the possible elongation of projects with increased costs; others are putting their projects on hold and allocating the budget to alternative projects.

However, regardless of the overall delay, EIOPA is moving forward with its own reform by proposing partial implementation in January 2014 via local regulators.  Through these mandates, EIOPA will require insurers to produce ORSA reports in some local regulator regimes, and in others commencement of interim reporting.  Therefore, it is imperative that insurers continue moving their Solvency II programs forward, despite the delay.

In a classic case of turning challenge into opportunity, the general delay may mean that insurers have time to implement a more strategic data management and reporting environment that enables them to move beyond merely complying to achieve real business gains.

Understanding Business Benefits

Insurers can look at the Solvency II requirements as a means to gain a better understanding of risk and make more effective use of capital.  This informed approach can enable more profitable products, more efficient and strategic reinsurance capabilities, competitive advantage and, ultimately, improved shareholder value.  For insurance carriers, allocating capital and reserving it for reinsurance when creating new products as well as assessing risk profiles for products has proven challenging.  These processes, however, are a best practice and are now required by ORSA.  This is also the crux of the solvency requirements by regulators, rating agencies and shareholders indirectly.

To achieve these benefits, insurers require accurate and timely risk and capital data and the ability to make this intelligence available to the business in a readily understandable format.  To do this, however, they must first be able to:

• Define the precise information required to facilitate better decision making
• Put in place the actuarial tools and model to generate that information
• Effectively store, query and make available the data to the business as a whole

Next Steps on the Solvency II Journey

To meet these challenges, insurers need to consider an analytical data repository suitable for storing capital and risk data – which primarily consists of actuarial, finance, investment and asset data.  This is something most insurers rarely have, but undoubtedly need.  Currently, many insurers have some form of data warehouse in place that they typically use for operational data such as customer relationship management data and claims.  In this context, however, an analytical data repository is a very specialized repository, since storing actuarial model input and output data and investment data is particularly complex.

An analytical repository can facilitate regulatory reporting and provide a foundation for moving the business forward by aggregating critical capital and risk information that can yield more informed decisions.  Specifically, it can:

• Extract, transform, and store data with full lineage, auditability and data quality tools
• Feed actuarial and reporting engines
• Provide capital risk and performance data for business decision making
• Store governance, risk and compliance data for ORSA

To meet regulatory and business intelligence goals, the analytical data repository must contain several types of information, including the data required to aggregate and publish results around solvency and financial condition reporting (SFCR), regular supervisory reporting (RSR), ORSA and standard quantitative reporting templates (QRT).

Though insurers can leverage existing regulatory data, Solvency II and broader business goals will require new data, such as projection of Solvency Capital Requirement (SCR) over multiple years, risk adjusted-capital measures, risk correlation factors and the output of an economic capital aggregator. The repository, and its underlying data model, should also have the flexibility to accommodate additional types of information as needed over time to meet evolving regulatory and business needs.

The analytics that sit on top of the repository are the final piece of the puzzle as they translate the rich data in the warehouse to actionable information.  They should enable flexible and extensive reporting capabilities across business performance, risk profile, technical provisions and capital adequacy dimensions to allow business users to gain complete transparency into Solvency data. The ability to view data across multiple dimensions such as line of business and legal entity is also essential.

How Do We Get There?

Insurers have three choices when creating an analytical repository.  For those with advanced data infrastructures, they can choose to leverage an existing operational data store, but the nature of an actuarial, finance, and risk repository is much different from an existing operational data store, and amending the existing operational data store has proven very challenging.  As a second option, they can begin from scratch, which can be an expensive and time-consuming process.  Building a comprehensive data model that can accommodate the many types of data required today and has the flexibility to readily accommodate new types of data as needs arise—specifically with the unpredictable nature of regulatory changes—can be a complex and arduous task that delays time-to-value and consumes precious IT and financial resources.

The third option is to look to a commercial-off-the-shelf solution that includes an industry-specific data model and pre-built analytical applications, which can accelerate time-to-deployment, provide a long-term path forward as well as external support.

Each approach has its own merits and the decision will be dependent on several factors including suitably of existing technology, expertise, and resources available and of course, cost.  Regardless, of which approach an insurer chooses, we offer a checklist of core requirements, which include:

• Unified view of risk for in-depth analysis and regulatory requirements
• Industrialized physical and logical data model allowing for changing needs
• A robust, analytical, industry-specific data foundation, built with flexibility for modular consumption of applications and scalability for volume growth
• Pre-configured reports that support Solvency II Pillar 2 and Pillar 3 requirements
• Capabilities for monitoring and managing various risk measures
• The ability to audit all actions taken, security to control action and use of systems and governance capabilities to manage compliance processes
• Capabilities to perform stress tests in a timely, transparent and repeatable fashion across models and processes
• Integration into finance systems to ensure consistent reporting across finance and risk operations to support compliance with IFRS, GAAP, Solvency II and ORSA

Spending the time now to build an analytical repository will not only help insurers prepare for the eventual implementation of Solvency II and ORSA, but also to build up a store of capital and risk data that can evolve into a single version of the truth to support business decision making. 

To remain competitive as well as meet more immediate mandates (like EIOPA regulations), insurers can use the Solvency II delay to step beyond mere compliance and put in place the technology that will not only meet long-term Solvency II needs, but provide invaluable information to run their businesses more efficiently.