Data quality for Solvency II – ignore it and get left behind

£200m, with as much as 65% of spending allocated to technology. This high portion allocated to technology is not surprising perhaps, given the reporting burden under the regulation. Insurers will have to produce five reports per year, four quarterly reports and an annual report. The first report is due with the regulator on 14 April 2013 – less than two years away. But like the proverbial elephant on the horizon, the deadline is deceptively close. Firms will want to produce at least a few dry runs before the first submission. And, according to Mr Smith, they will eventually want to move to daily risk reporting, which will increase the reporting burden.

Understand your business

What makes reporting under Solvency II so challenging is not sheer volume, but the need for senior management and the Board to really understand how the data relates to the business. “What has changed under Solvency II,” John Smith, Associate Partner, Insurance Strategic Business Solutions at IBM said, “is that the board will no longer be able to treat the balance sheet as a black box. The Board has to know what impacts positively and negatively on the internal model. What impacts positively and negatively on their business performance. This requires data to be accurate but also traceable.” Under the new regime, the regulator can question the meaning of each item on the report, whether a firm uses a standard or an internal model. This requires a deeper grasp of the data and understanding the firm’s business model beyond the actuarial function. It will require a cultural commitment from the Board to engage with the business.

Benefits beyond compliance

Complying with the regulation may not be enough. Some argue that firms must harness the data gathered for Solvency II in order to give the business a competitive edge. The event coincided with the launch of an IBM Business Analytics white paper, ‘Beyond Compliance: Differentiation through Solvency II technology investment’ by Douglas Shillito. The paper shows how, and why, the involvement of the Board and senior management in Solvency II is crucial not only for successful compliance but also for the success of the business as a whole. “Data must be translated into actionable information and intelligence through the application of analytics so that an insurance company will be more agile,” the paper states. The Board and senior management play a pivotal role here in using the data to educate and integrate different parts of the business. Solvency II is not only a regulatory issue but a strategic one. Knowledge and front-line understanding of the business at high levels of management will give the firm the differentiating factors to drive its success. As the report notes: “Insurers who are able to successfully develop an enterprise-wide plan of action for Solvency II will emerge as strong, more agile and effective competitors. Those who do not may put their very existence at risk.”

IT the key to data quality

Compliance and competitiveness put data at the heart of Solvency II. IBM views information technology central to managing and maintaining that data. The IBM reporting dashboard, featured at the event, can enable firms to trace back any item in the final Solvency II report to its component sources. The dashboard uses IBM Cognos, business intelligence and performance management software. Data collected and managed through the system can be used to run and test different risk scenarios required by the regulator and produce the appropriate reports. The reporting dashboard forms part of a suite of Solvency II capabilities developed at the IBM Laboratories in La Gaude, France over the past two years. “The demonstration showcase is based on a real dataset, and not only allows us to demonstrate an end to end solution, but also has helped us in maturing our thinking on this subject,’ said Mr Smith. The showcase is currently being extended to incorporate IBM’s recent risk management acquisitions of Open Pages and Clarity.

Models run on data but data comes from the business

Good data quality means knowing where the information came from and how it relates to the day to day running of the business. It will enable the Board to deal with the regulator confidently and have the added benefit of providing an understanding of the business and maintaining the firm’s strategic edge. As the report states: “Models run on data but data comes from the business.”]]>