ADVERTISEMENT
A Solvency II white paper from SecondFloor Introduction: Why Solvency II Reporting Demands an Automated Approach Solvency II requires insurers to disclose an unprecedented amount of reliable information to regulators, senior management and the public on a quarterly basis. Manually producing that information each time as a discrete activity is almost unworkable, as it relies on many people taking time out of the business to gather, calculate, reconcile, validate and present the information in the specific formats in which it is required. A vastly more efficient approach is to automate as much of the process as possible, embedding it into the existing governance and risk management framework, and making Solvency II data gathering and reporting an integral part of the organisation’s “business as usual” operations. This approach not only ensures that a complete and accurate set of data can be disclosed in a timely manner (a major challenge in itself, given the aggressive reporting deadlines imposed by the new regime), but also provides senior management with “always-on” access to a single, reliable source of information about the organisation’s risk profile from a solvency perspective. Beyond Box-Ticking: Getting the Full Benefit of Solvency II Reporting Such insight delivers benefits far beyond the ability to provide solid reports to the supervisor. Crucially, it can also guide strategic decision-making by offering perspectives on the business that are not well illuminated by existing internal risk management approaches, methodologies and systems. The ability to make strategic decisions that benefit the business, while increasing protection for customers and the industry itself, is the ultimate goal of a firm’s Solvency II regime. This paper looks at how insurers can best approach the task of automating and embedding Solvency II processes into everyday operations, the risks of not doing so, and the benefits of having “always-on” access to a set of reliable solvency analytics and management reports. It is based on a webinar discussion hosted by Insurance Risk in October 2012, and contains views and insights contributed by the participants in that discussion, including Emmanuel Noblet, Chief Operations Officer at SecondFloor and former deputy Chief Risk Officer at ING. Four Core Challenges for Insurers While insurers generally welcome the introduction of Solvency II and the protection it provides for policyholders and the industry, there is a widespread sense that the new regime must be adopted in such a way that it delivers real, tangible, strategic value to the business. Most insurers already have mature, robust and proven systems and methodologies in place for analysing risk, calculating capital requirements and delivering reports to supervisors, markets and internal management. In the vast majority of cases, the data required under Solvency II already exists within the organisation, as does the technical, professional and intellectual capacity to use it for informed, responsible, strategic decision-making. However, even given this existing landscape, Solvency II introduces four core challenges for insurers. The first is to extract, organise and present data in the dimensions required under the new regime, which may not correlate with the dimensions or structure in which it is currently organised and analysed internally within the organisation. The most obvious example is that Solvency II requires risk to be reported from a legal entity perspective, whereas most insurers tend to analyse risk from a business unit perspective. The second is to intensify the integrity of the data – through the use of governance controls by which the data and calculations can be fully validated, comprehensively audited, and traced back to their source (not just to the source system or calculation engine, but to the person who provided the data or submitted the calculation). A further challenge – and one whose ramifications may not have been fully appreciated as insurers focus on getting the initial framework in place – is the requirement to disclose the required information on a high-frequency repeating basis and within very tight deadlines; in all likelihood just a few weeks from period-end. That means not just getting it right for the first time of filing, but getting it right every single quarter from then on. If significant events occur that threaten the stability of the firm, the supervisor can also demand more frequent or ad-hoc reporting. Insurers that rely on a manually intensive process to gather and organise data from myriad systems across the organisation will find that process under severe strain when trying to meet the deadlines, potentially affecting the quality and completeness of the information submitted. And fourthly, there is the challenge of making internal, strategic use of the data produced under Solvency II, rather than treating it as a box-ticking exercise that creates work without creating value. The Pillar 2 own risk and solvency assessment (ORSA) process aims to ensure data used for disclosure is also used for managing the business. Also, by putting the emphasis on the organisation’s overall market-value balance sheet (MVBS) rather than the P&L of individual business units, Solvency II creates an opportunity to bring together key functional areas – finance, actuarial, investment and risk – to develop a unified approach to risk management that benefits the business as well as protecting policyholders. “The beauty of Solvency II is that it’s creating opportunity, both inside and outside the organisation. And it does so by putting the balance sheet back into the centre of the playing field.” – Emmanuel Noblet, COO, SecondFloor In summary, then, insurers will have to:- Extract and present data in the dimensions required under Solvency II
- Prove that the disclosed results are based on accurate and validated source data
- Disclose the required information frequently and within very tight deadlines
- Make internal strategic use of the information produced