Solvency II: The Latest Developments from a Data Management Perspective

In pure Brussels' style, as Members of the European Parliament (MEPs) start packing to hit the campaign trail at home for the 2014 European election, many of the dossiers that have been lingering during the past legislature are being pushed across the finish line. Even Solvency II, which holds many sluggishness records, appears about to be resurrected from the induced coma it has suffered since QIS5.

Over the past couple of weeks, EIOPA published the interim measures followed by the European Commission's quick fix proposal which sets the implementation date to 1st January 2016. This legally final timeline and momentum is now in place to make this regulatory framework a reality. Obviously, as for all things Solvency II related "it ain't over till it's over" but some certainty is already emerging; and as I stated back in January, there are steps you can take now to ensure you are prepared for this delayed timing.

First, in a changing world there won't ever be such a thing as a final version of the regulatory regime. While the Solvency II framework is considered a model even beyond Europe and is promised to a long lasting legacy, some adjustments over time are inevitable. Not only between now and 2016 as level 2 and 3 are finalised, but also well after implementation.

In addition, Solvency II will undoubtedly lead towards greater convergence in the approach taken by the various National Supervisory Authorities (NSAs), but there is still room for some differences of interpretations. This is materialised by the "comply or explain" procedure during the interim period. Realistically, even after the implementation, some variations to the Solvency II requirements are expected to subsist for some time.

This ever changing and polymorph regulatory landscape requires some highly flexible IT infrastructure. When choosing to rely on a vendor, subject matter expertise along with long term commitment are key in order to be provided with regular updates which are in sync with the regulatory timeline.

Second, the countdown to implementation has already started. EIOPA guidelines published on 27th September give the industry a busy two years timeline in order to get ready by 2016:

  • The internal model pre-application applies from 1st January 2014 and should give rise to an ongoing dialogue between the firm and the regulator(s) on the firm's progression and on the step toward completion as well as contingency planning.
  • ORSA (Own Risk Solvency Assessment now rebranded Forward Looking Assessment of Risk or "FLAOR") is to be provided on a yearly basis from 2015 (based on 2014 numbers).
  • First Pillar 3 reporting dates:
    • Annual : 28 weeks after 2014 YE (i.e. July 2015 based on YE 2014)
    • Quarterly: 3rd quarter 2015

As already highlighted by the various industry representative bodies, the schedule is looking particularly tight. Especially considering that interim guidance primarily concern Pillar 2 and 3, which according to the major consultancies are the area that still require most of the remaining work.

While the majority of firms would have at least done a dry run of the ORSA and the Pillar 3, it is one thing to be able to produce a one-off report through a manual process and it is another one to establish an automated workflow able to cope with the reporting deadlines.

In this context, the IT environment supporting the ORSA and Pillar 3 needs to: easily integrate with the existing infrastructure, be customisable to fulfill the particular needs of each firm and have the ability to be gradually switched on as the firm progress on its roadmap towards full compliance.

Third, the strategic aspect of the changes induced by Solvency II. The ORSA is widely considered the measure that had the most profound effects on business practices across the industry. It places a greater emphasis on Enterprise Risk Management (ERM) and the need to have an alignment between risk appetite, available capital and underwriting.

Out of the prudential sphere, the other major change currently reshaping the industry is the greater reliance on digital interface to interact with customers. It provides a strong incentive to establish a digital underwriting cycle from end to end. A significant added benefit is that the data collected are easily usable for client acquisition/retention and to refine the underwriting and reserving models.

In this context, system integration is a must, but optimising the value added presupposes a robust yet flexible and scalable IT infrastructure with the ability to sustain gradual changes over time. A clear trend is that insurance companies are going to have to manage vastly increasing volumes of data in order to remain agile, competitive and compliant. Not using the current phase of regulatory driven changes to at least consider the broader design of the IT infrastructure could prove a costly missed opportunity in the long run.

For more information on the latest developments, visit here.

I would love to hear your feedback on this and how your organization is addressing this latest update. 

Glenn Lottering is the Senior Director of the Insurance Global Business Unit, EMEA at Oracle.  He can be reached at glenn.lottering AT oracle.com.

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