Time’s running out on Solvency II compliance

29 September 2015

The new rules come into effect this January but are European insurers ready?

Solvency II’s implementation deadline is approaching fast.

In January 2016 the new insurance industry regulatory regime will establish EU-wide capital requirements and risk management standards designed to increase policyholder protection. By requiring insurers to hold enough capital to absorb significant losses, the rules aim to reduce the possibility of consumer loss or disruption in the event of a large-scale meltdown.

Comprised of three key ‘Pillars’ -- Financial Requirements to ensure adequate liquidity; Governance & Supervision to improve risk management; and Reporting & Disclosure to improve transparency of market risks – Solvency II compels insurers to undertake a serious re-think of their business processes.  Pillar 3 however comes with technical complexities that could make it the trickiest to resolve.

Under it, insurance companies will be expected to demonstrate that all data received from administrators and data vendors is complete, accurate and appropriate.

Since the January 2016 implementation deadline was announced corporates have been scrambling to get solutions in place that support multiple data reconciliation criteria, and reporting tools that can produce fast and flexible data analysis.

Now that timelines have been defined - with the quarterly submission timeline shrinking from the initial 8 weeks to about 5 weeks in 2019. Processes will need to be improved to make submission timely and efficient.

For Solvency II compliance it just won’t do. No matter how many weekends staff work, the harsh reality is that simply pushing existing systems and processes harder won’t be enough to address the demands of new regime’s rigorous reporting cycle.

Pillar of pain

The new reporting requirements focus on the construction, implementation and supervision of the risk models used for capital requirements. Data needs to be extracted from multiple sources and compiled in a consistent manner to feed the two main narrative reports: the Solvency and Financial Condition Report (SFCR) and the Regular Supervision Report (RSR).

Both cover quantitative and qualitative components, introducing more than 60 templates comprised of 20,000-plus data points. Ensuring data integrity for that many inputs really needs a level of automation, from validating standard Solvency II ETLs to performing basic validations like completion checks. You’ll also need to cross-check data entry between the two reports.

The bulk of the work around Pillar 3 then will come from gathering, consolidating, reconciling and validating data from a variety of sources. That means ETL, data entry, calculation, and consolidation with stringent audit trails and traceability -- all on a potentially bruising schedule. Frequency of reporting depends on the size of a company’s market share and can be annually and/or quarterly.

This gets even more complicated for insurance groups, where consolidation is required before group reporting. Security and access to sensitive financial data included in the reports, such as asset values, becomes an issue as well. Will your approach to Solvency II compliance allow you to restrict relevant data to relevant users?

Most in-house-developed, and virtually all spreadsheet-based systems, will groan under the weight of these requirements

What can be done?

Finding and implementing a solution for Pillar3 that suits existing processes and still ticks Solvency II’s working-day timetable box is going to be a challenge for any insurance company. A European Solvency II Survey conducted by Ernst & Young shows that preparedness for pillar 3 remains relatively low and with 5 months to go, action is needed by companies to meet the requirements on time.

Building your own solution as a stop-gap could be an option, however an automated system centred on a reporting database is the optimal choice. Reporting needs to be repeatable and auditable on a regular basis, and spreadsheets require manual intervention that consumes loads of staff resource, and the evolving nature of regulation means future-proofing will always be required of the software. Are you prepared to keep up with EU regulators using internal resources?

There are many Pillar 3 solutions available in the market and understanding the pros, cons and level of suitability to your business for each option takes time – which is quickly running out. Obviously it is essential to conduct a thorough analysis of the options and consider the likely ease of implementation. This analysis requires CFO as well as IT input.

Any such solution needs to deliver, at minimum:

  • Pillar 3 reports that require minimal effort from the business
  • Integrates well with current IT systems and software
  • Has built-in validations and data integrity checks
  • Is capable of flowing through results from Pillar 1 and other analysis
  • Is user friendly and maintains auditability and traceability of results
  • Contains consolidation functionality to make group reporting easier

We know now that many companies addressed late year’s interim reporting requirements for Solvency II by waiting until the last moment, rushing to create a manual submission first, and then automating the process later. This strategy turned out to be more expensive, more time consuming, and less accurate than automating the process from the outset.

Insurance companies should not make the same mistake with Solvency II’s compliance deadline looming. Automate now to reduce your cost and risk.

By Alice Allegrini, Sales Director, Tagetik

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