Solvency II's Impact will Affect Process Efficiency in Insurance

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Published: 19th September 2012
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Solvency II's Impact will Affect Process Efficiency in Insurance
Will Your Operational Viability and Reputation Survive in a Solvency II World?
The Solvency II framework is based on the three-pillar approach, almost similar to Basel II the banking regulation.

The three pillars of the Solvency II directive focus on the following areas:

Pillar I Estimation of the QUANTITATIVE requirements

Calculation of Solvency Capital Requirements (SCR)

Minimum Capital Requirements (MCR) using standard or internal controls

Pillar II Evaluation of QUALITATIVE requirements

Governance and risk management

Self-assessment of capital needs and capital

Risk management processes and procedures

Pillar III Disclosure of the institution's solvency and financial situation

Ensure transparency and adherence to the Directive

Solvency II Implementation
A Daunting Task Ahead for Insurers
Implementation of Solvency II is the biggest-ever exercise in establishing a single set of rules governing insurer credit-worthiness and risk management. This European Union Directive, which covers over 30 countries, primarily concerns the amount of capital that EU insurance companies must hold to reduce the risk of insolvency. The appropriate amount of capital is determined according to a set of principles and rules.

This planned regulatory overhaul for European insurers is well underway and the compliant deadline has been revised to January 1, 2014.

According to a recent Deloitte survey, many insurers are still grappling with the possible implications of Solvency II for their businesses. The survey reveals that for insurers the implications will be at the levels of capital requirements, company structures and revising products.



The new directive introduces a Solvency Capital Requirement (SCR) that is different from the target level that exists in most countries. Given the various levels of maturity and sophistication at which the member countries are operating, implementing the directive will be a daunting task for insurers and a possible operational headache!

The challenge for implementation is both at the qualitative and quantitative levels and insurers will need to attain new capabilities or at least transform existing systems and processes for a successful and meaningful implementation of the directive. Robust systems and procedures must be in place by the revised deadline of January 1, 2014.

The challenges relate to the requirements and approaches of the Solvency II directive are shown in the diagram below:

Solvency II Implementation
New Opportunity for Insurers
While Solvency II implementation presents some strategic and tactical challenges, it also opens up new opportunities for insurers to innovate and adopt a well-thought-out approach for a successful implementation. Insurers who are agile enough to respond swiftly to the changing scenario will clearly be at a competitive advantage to outperform.

As a part of an insurer's compliance efforts, an integrated capital performance and risk management framework should be implemented to augment the insurer's capital models to meet regulatory requirements.

To be able to achieve this goal, capabilities will need to be overhauled in the following areas.

1. Internal models

2. Risk management

3. Information technology and data

4. Reporting compliance and disclosures

1. Internal Models

The Draft Directive of Solvency II suggests a two-tier approach for determination of regulatory capital adequacy. The first tier is the Minimum Capital Requirement (MCR), the threshold below which an insurer would not be able to write business. The second tier is Solvency Capital

While Solvency II implementation presents some strategic and tactical challenges, it also opens up new opportunities for insurers to innovate and adopt a well-thought-out approach for a successful implementation. Insurers who are agile enough to respond swiftly to the changing scenario will clearly be at a competitive advantage to outperform.

As a part of an insurer's compliance efforts, an integrated capital performance and risk management framework should be implemented to augment the insurer's capital models to meet regulatory requirements.
2. Information Technology and Data

Solvency II sets out the requirements for companies to establish systems, processes and controls for effective risk management.

It influences many existing IT applications and requires development of additional functionality. It is prudent for insurers to take early action in investigating their company's data availability and quality. In addition to data systems, the insurance industry is expected to make significant investments in actuarial models,

IT and risk management systems.

Insurers may need to seek assistance with implementing the information systems and technology requirements across the three pillars of the Solvency II framework.

Effective Data Management

Data is at the very core of meeting Solvency II requirements, and it is clear that any Internal Model Approval Process (IMAP) will focus heavily on the quality of data inputs to the models. It is widely recognised that the increase frequency of Solvency II reporting will require firms to collect and prepare data faster and accurately than they do today. Moreover, they need to aggregate or segment data in new ways and source additional data which they have not done previously.

The European Insurance and Occupational Pensions Authority (EIOPA) has set out a number of requirements for assessing the quality of data.

Ensure appropriateness, completeness and accuracy of data used in the valuation of technical provisions

Implement a robust quality management framework, including definition of the data, assessment of the quality of data, resolution of material problems identified and monitoring data quality

Establish a comprehensive data policy for the collection, storage and processing of data, including the data provided by third parties (intermediaries, for instance) or through electronic sources (Internet for instance)

Agree with the role of internal and external auditors in validating data quality

Assess data deficiencies and analyze options to increase the quality and quantity of internal data, including the review of internal processes

Document the adjustments made to the historical data, in particular the correction of any data errors and omissions, and use of external data / market benchmarks

External data and market information used to complement internal data needs to be assessed on data quality appropriateness, completeness and accuracy


An Integrated Approach

For most insurers, a detailed assessment of current systems capability brings forth two important observations:

Most insurance companies maintain multiple databases by source and function (risk, finance, actuarial and so on). This makes data integration and getting a single view of customers, a challenging task.
2. Considering the requirements that the directive spells out, it will be a challenging proposition to have a single end-to-end technology solution to meet all Solvency II requirements. An integrated approach is what will be the most appropriate.

Insurers will need to deploy teams of actuaries, business stakeholders and IT specialists to integrate existing systems that will now be required to work together, changing the existing systems as necessary and adding new tools where existing technology cannot be used to meet Solvency II requirements.

A schematic view of IT architecture in a post-Solvency II environment can be depicted as follows:

4. Reporting Compliance and Disclosures

Under the Solvency II regime Pillar III deals with the requirements for supervisory reporting and public disclosure. The objectives are to harmonize reporting, promote comparability of valuation and reporting rules with International Accounting Standards and ensure efficient supervision of insurance groups.

The key reporting requirements are as follows:

Solvency and Financial Condition Report (SFCR)

Public disclosure is expected to be made available via electronic publication. The SFCR will be required within three months of an insurer's financial year end. The SFCR must follow a prescribed structure developed by The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) covering the following areas: Business and Performance, System of Governance, Risk Management, Regulatory Balance Sheet and Capital Management

Reports to Supervisor (RTS)

The RTS is not public and is communicated only to the firm's supervisor. In broad terms, the private RTS requires information on the following example areas which are not included in the public SFCR such as business strategy, legal and regulatory issues, variance against plan, projections of future solvency needs, and future risk exposure
Insurers must implement a robust Pillar III program covering the following main themes:

Disclosure Impact Assessment

Identify the impact of the proposed requirements on existing reporting procedures (systems, data, people, processes and controls).

In Conclusion

Insurers are spending millions in order to comply with the impending Solvency II regulatory regime. Solvency II should be seen as opportunity to refine internal processes rather than merely a tick-box exercise, and those who embrace the regime will be able to demonstrate sound operational control and efficiency.

Many European insurers will not only benefit from reduced operational risk and capital adequacy requirements, but also lower operating costs, improved customer service and greater operational insight and to look at outsourcing as a business strategy.

Insurers who are agile enough to respond swiftly to the changing scenario will clearly be at a competitive advantage to outperform.

Insurers able to meet this challenge will find themselves in a position to achieve significant competitive advantage and improved stakeholder confidence. The solution in place to address operational efficiency needs to have the flexibility to take your organization to Solvency II and beyond, providing a platform for continuous process improvement and operational viability.

About WNS
WNS (Holdings) Limited, is a leading global business process solutions company. We offer industry-specific solutions to nine, including Banking and Financial Services; Healthcare; Insurance; Manufacturing; Retail and Consumer Products; Shipping and Logistics; Telecommunications; Travel and Leisure; and Utilities. We also offer horizontal solutions, including Finance and Accounting; Research and Analytics; and Contact Center. We have professionals working across delivery centers in Costa Rica, India, the Philippines, Romania, South Africa, Sri Lanka, UK and USA.
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