No one questions the need to ensure capital adequacy, more informed risk management and more transparent financial decision-making. Those are the goals of Solvency II's new, strengthened EU-wide requirements for capital adequacy and risk management. Achieving them will require significant effort and have an unprecedented impact on insurance and reinsurance companies as they strive to meet the 2012 compliance date. Interim deadlines and potentially high non-compliance costs add to the pressure.
Beyond the change it will bring to individual companies, Solvency II also has important ramifications for the global insurance market. Governments and ratings agencies around the world are watching. Will it work? Can it be used as a template for multi-national insurers? Regulators implementing similar initiatives in their respective regions will be scrutinizing the implementation process…and the benefits Solvency II offers both insurance businesses and their policyholders.
For the estimated 5,200 insurers and reinsurers operating in the European Union (EU), Solvency II, sets the stage for the future; these will be the best practices and enterprise risk management (ERM) systems that most likely will become templates adopted by insurers worldwide.
Here are some important points about Solvency II that you need to know right now:
Implementation Milestones Are in Force
The deadline for Solvency II compliance is two years away, but there are interim mileposts that insurers need to meet if they are to reach the December 2012 deadline with the requisite systems, risk assessment processes and capital management practices in place.
Already deadlines have passed for (re)insurers to send QIS5 submissions to national supervisors substantiating that they have capital on hand to cover damages for the risk they have assumed and for country supervisors to review individual submissions and send their QIS5 findings to the E.U. governance board CEIOPS (Committee of European Insurance and Occupational Pensions Supervisors).
That leaves little more than a year to prepare for next milestone.
February 2012: Adoption of 3rd country equivalence proposal – Insurers must have available resources sufficient to cover both a Minimum Capital Requirement (MCR) and a Solvency Capital Requirement (SCR). Insurers’ capital reserves to risk ratio must be equivalent to a pre-set standard for another insurer to come in and assume that risk. Insurers will need to set up a formula to quantify their capital reserves, then submit their calculations to their local country supervisor.
October 31, 2012: Solvency II implementation date – Insurers should have everything in place—people, processes and information systems—to comply with Solvency II. They should have met the above milestones and submitted an “Own Risk and Solvency Assessment” (ORSA). Their paperwork should be acceptable to both their local country supervisors as well as CEIOPS officials.
December 2012: Solvency II adoption complete – While December marks the final deadline for Solvency II, it’s really the embarkation point for ongoing Solvency II management. Insurers will have demonstrated that they are measuring and managing their risk and regularly reporting their findings to the relevant authorities.
Compliance Requires Time, Budgeting and Planning
Because most current risk management systems and processes are disjointed and unable to provide the full transparency and audit capability required by Solvency II, compliance will require a significant investment of time, money and people—particularly for the IT department—to develop new tools, processes and procedures. A 2010 SunGard study found that insurance IT professionals are behind the curve in Solvency II planning. Whether this is because business teams have been late to invite IT to the party, or because IT has been slow to respond is unclear.
Key needs include:
- A controlled, auditable IT environment to support enterprise-wide decision-making;
- A comprehensive enterprise risk management framework that supports risk modeling for value capital, assets, liabilities, liquidity, credit, market and insurance risk;
- Robust data governance and control measures to better manage the flow of information and support risk reporting;
- An enterprise-wide data warehouse to provide a 360° view of risk;
- Standardized extract/transform/load (ETL) strategy to validate accuracy and relevancy of data;
- Powerful analytics tools to empower informed, C-suite risk-based decisions;
- A high-capacity platform to shorten reporting cycle times and accelerate the risk management process.
Solvency II presents an opportunity to design and implement an integrated risk management strategy that goes beyond regulatory compliance as there is no single, comprehensive solution designed specifically to help insurers with the transition. CIOs need to create a plan of action that assesses the state of current enterprise applications, identifies functionality gaps and creates an implementation plan for the needed systems and infrastructure upgrades.
To be continued.
About the Author: Petra Wildemann, Global Director of Actuarial and Solvency II Consulting Services for iWorks Prophet, has extensive international experience in the insurance industry and has delivered large-scale global business and transformation programs with Accenture, FJA and IBM and insurance customers worldwide. Prior to joining SunGard, she worked for six years at Hewlett Packard as the Worldwide Director for the Insurance business.