Utilising the Delay in Solvency II to your advantage
By Gaurav H on Jan 30, 2013
There is little doubt that the full implementation date for Solvency II will be put back to 2016. Whilst this creates a degree of uncertainty (particularly with several local regulators looking at some kind of partial implementation) I see major insurers continuing to invest significantly in their Solvency II programmes. For some, the delay merely means the possible elongation of projects with increased costs; others are putting their projects on hold and allocating the budget to alternative projects. The delay in fact gives insurers the time to consider a more strategic approach to Solvency II (SII) by implementing a more robust data management and reporting solution and move beyond merely complying and deliver real benefits back to the business which by the way has always been a major issue for Solvency II projects.
Driving business benefits is principally about the better understanding of risk within the business and its relationship to capital. To achieve this understanding you need accurate and timely risk and capital data and the ability to make it available to the business in a readily understandable format. This presents a number of challenges:
- You have to define the precise information it requires to facilitate better decision making
- You have to put in place the actuarial tools and model to generate that information
- The data has to be stored, queried and made available to the business as a whole
To me this all comes down to managing capital and risk data and making that data available to the business in a readily understandable format. The big problem is how to achieve this! So what is the starting point for embarking on this journey? What approach can insurers take given their current state of IT systems and processes?
I would suggest that what insurers actually need and rarely have is an analytical data warehouse suitable for storing capital and risk data – which primarily consists of actuarial, finance, investment and asset data. Most insurers have some form of data warehouse but typically this is for operational data such as customer names, CRM data, postcodes, claims etc. An analytical data warehouse in this context is considered to be a very specialised repository since storing actuarial model input and output data and investment data is particularly complex.
There are two aspects to an analytical repository – the first is the data required for regulatory compliance and secondly the data required to support better business decision making. Regulatory data is well defined but still complex – particularly the data for the QRT (Quantitative Reporting Templates) Extracting the data from the underlying systems, transforming it and generating the reports is a major task particularly for large scale insurers. However the real value of an analytical repository lies in its ability to produce the capital and risk information needed to run the business more effectively. Though regulatory data can be used at the same time some new data will be required – e.g. projection of SCR (Solvency Capital Requirement) over say five years, risk adjusted capital measures, risk correlation factors and the output of an economic capital aggregator. One of key problems lies in defining the actual business data required – this is not prescribed and may vary by insurer.
In building an analytical repository you have three key choices:
- Leverage an existing operational data store
- Build from scratch
- Buy from a specialist vendor
Each has its own merits and the decision will be dependent on several factors including suitably of existing technology, expertise and resources available – and of course cost. Returning to the original comment how can you benefit from the delay in Solvency II? I believe that by spending the time now to build an analytical repository will not only help you prepare for the eventual implementation of Solvency II but also to build up a store of capital and risk data that can evolve into a single version of the truth to support business decision making. There are also the additional benefits of providing much of the data required for the Use Test and the ORSA (Own Risk and Solvency Assessment)
So use the delay to step beyond mere compliance and put in place the technology that will ultimately meet your Solvency II needs but provide invaluable information to run the business better. This approach may even save you money too!
Do let me know your thoughts on how you are planning to address Solvency II.
Glenn Lottering is Senior Director, Insurance Solutions for Oracle.