Taking control for confident decision-making under Solvency II

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A Solvency II white paper from SecondFloor Introduction: Why Solvency II Reporting Demands an Automated Approach Logo_SF_frameSolvency 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
The Need for Effective Control For all but the smallest insurers, the size and complexity of the business (and its underlying IT systems) mean that automation through workflow, data governance and process control is the only way to ensure these four challenges are addressed to the advantage of the insurer.  While there are other potential technological solutions – such as replacing heterogeneous legacy systems with a single, integrated, enterprise-wide core insurance platform – they are prohibitively expensive and, initially, highly disruptive to the business. Insurers that are already well advanced in their preparations for Solvency II are demonstrating that incorporating robust controls and automation across excising systems not only ensures that the required data can be produced in time to meet supervisors’’ disclosure deadlines, but can also significantly increase senior management trust in the reports – enabling the information they contain to be used as the basis of internal strategic decision-making. Benefits of a Workflow-Driven Approach to Solvency II Reporting and Stress Testing Insurers that have embedded Solvency II reporting workflows around their “business as usual” systems and operations have the advantage of being able to run Solvency II-style reports whenever they need to, rather than the data having to be gathered and enriched manually every time it’s required. That delivers major advantages in terms of evaluating the organisation’s risk profile from a Solvency II perspective. A good example is stress testing, which many insurers find an onerous task to carry out manually, but which is something that is increasingly required by regulators and senior management, and can contribute significantly to the ORSA element of Solvency II’s Pillar 2. That’s important because it is Pillar 2 that really enables senior executives to understand the risk profile of the business from a holistic point of view. “Pillar 2 is really the cornerstone of what Solvency II should be aiming at. We’ve been spending a lot of time on Pillar I and Pillar 3 but the real essence of Solvency II is Pillar 2.” –Emmanuel Noblet, COO, SecondFloor The ability to conduct regular stress tests in a structured and documented way creates an opportunity to bring different areas of the business together to analyse the impact of a shock and discuss more effective approaches to capital allocation and risk management.  And the same applies at every level of the business. Organisations that have a structured and documented process in place for gathering and validating the underlying data, and a structured and documented process for applying risk analyses to it, find that senior management have far greater trust in the data produced and are far more willing to use it to make risk-based decisions.   That’s not only true of capital managers looking to make the best decisions about capital allocations for Solvency II, but also of senior finance professionals looking to comply with IFRS. Developing an agreed workflow to orchestrate all the systems, people, processes and data involved in reporting processes can help to harmonise Solvency II and IFRS efforts by enabling the organisation to generate, whenever required, a single view of the MVBS that everyone can agree on. Once that MVBS is in place, there can be consensus on what capital is, whether its fund or economic capital, which can lead to productive discussions about risk-based return. Process Orchestration is Critical All this will happen when the workflow is gathering the right data, ensuring it’s clearly validated, applying the right calculations, and presenting the results in a timely manner in a way that is useful to the business as well as to the external supervisor. The challenge for insurance businesses – particularly those with multinational operations, a complex legacy systems environment and multiple data models – is to decide what those data, calculations and presentation formats should be and, to orchestrate the workflow accordingly.  Fortunately the tools and expertise are available to enable this. There is a lot of talk about “big data” and the ability to generate insight from the vast amounts of data produced around the business every day. More important from a Solvency II point of view is to identify the “right data” and to have a process in place that works only with it.  That means starting with the outcome – i.e. deciding what information the business and the regulator need to know – and creating a process that focuses only on that. Once that’s in place, the organisation will benefit from “always-on” access to a single source of structured, validated, embedded data that can support confident decision-making and enable a more holistic approach to risk management across the business. Conclusion: Investing in Workflow Delivers Widespread Business Benefits Ultimately, Solvency II presents a great opportunity to bring senior management together to make informed capital and risk decisions based on a single set of agreed, reconciled and validated information about the business.  The challenge is to produce that information in a way that’s transparent and trusted by all areas of the business – and not just once, but on a repeatable basis and in line with regulatory disclosure timescales. None of this can be achieved by taking a manually intensive, ad-hoc approach to data gathering and reporting.  Insurers that want to use Solvency II as an opportunity to improve internal risk management must be able to embed the reporting process into “business as usual” operations – and that will only come from defining, agreeing and implementing a workflow that enables the data to be automatically produced and analysed any time it’s required. While defining and implementing the workflow can be a challenging project, the benefits speak for themselves: with a single source of truth about the business, insurers can not only efficiently meet regulatory obligations, but also make better risk management decisions, make more efficient use of capital, and identify opportunities for profitable business growth. Do you want to comply with Solvency II regulation efficiently and painless and avoid sleepless night? Contact SecondFloor today. For more information contact SecondFloor on +31 (0)20 6589 700 email SecondFloor  at [email protected] or visit visit SecondFloor website at www.secondfloor.com/solutions-overivew    About SecondFloor SecondFloor helps firms to comply and produce regulatory information efficiently, consistently. Companies that turn to SecondFloor’ solutions benefit from timely, complete, accurate, traceable, auditable and repeatable reports and analytics. Facilitating stress testing, economic capital calculations, and regulatory reporting in complex environments are key elements of SecondFloor’s credentials that have established it as a successful enabler of business analytics. www.secondfloor.com]]>