Welcome to Global Actuarial
The Global Perspective
Welcome to the June 2012 issue of The Global Perspective, Global Actuarial’s Newsletter that looks to promote views and experiences to support the growing operational requirements of the Financial Services sector. Our theme over the next few months will be: how can businesses use Solvency II to add value to their operations? In this issue, we begin to answer that question by defining the regime as more than just a box-ticking assignment.
SII: compliance exercise or value-add opportunity?
‘Solvency II’ seems to have taken over from ‘commutation function’, ‘Zillmerisation’ and ‘MCEV’ as the mot du jour of European Life Insurers. The term has also been the subject of many water-cooler grumblings and has a seemingly insatiable hunger for resources and funds (the FSA has estimated implementation costs in the UK to be almost £2bn over 5 years).
But this overhaul of capital adequacy regulation for long term insurers – the biggest of its kind in recent memory – presents the opportunity to be more than just a box-ticking exercise in compliance. Companies willing to look past the red tape and reams of instructions can use Solvency II to add real, lasting value to their operations, engage in better risk management and even gain a competitive advantage.
A bitter Pillar to Swallow
Until now, many companies have focused much of their resources (in terms of time and budget) on Pillar 1. Vaults of money have been poured, sometimes unnecessarily, into developing complicated internal capital models, with expenses being exacerbated by inadequate data and inefficient processes.
The thing is, most of the value to be derived from the Solvency II regime lies in the implementation of Pillars 2 and 3. While Pillar 1 covers the Quantitative Requirements of the regulation, Pillar 2 deals with the Qualitative Requirements (including governance and risk management) and Pillar 3 encompasses disclosure. So doesn’t it make sense to allocate just as much, if not more, thought and resources to these two pillars as were directed at the first one?
The time has come for companies to start focusing on their path towards a coherent Enterprise Risk Management system, using Pillars 2 and 3 requirements as a framework.
Solvency II ERM ASAP Most companies will need to have implemented the full Solvency II requirements by January 2014. This means that even though companies will all be at different stages of their development of optimal risk systems, they will soon have to make some fundamental and long lasting decisions about Solvency II and their approach to ERM.
The objective of implementing an ERM strategy is to maximise the value of a company. Enterprise Risk Management must mean more to value creation than capital requirement calculations. To optimise value, management need to make informed decisions. Informed decisions rely on high quality data. And high quality data can only result from efficient processes, systems and people.
A company may view the pressure imposed by Solvency II deadlines as a welcome excuse to, inter multa alia, redefine its risk culture, involve employees in daily risk management, educate its board members about their roles and responsibilities under Solvency II, design an effective governance structure and review its risk appetite.
Therefore, implementing Solvency II effectively can have far reaching positive effects across the entire operation. For example, efficient data management, systems and processes developed under Solvency II can also be applied to underwriting, quotation systems, marketing and pricing and claims management. These, in turn, could result in improved customer loyalty and insight. Given efficient systems and processes, instead of quarterly (as prescribed under Solvency II), companies may be able to produce monthly, or even weekly reports; which can lead to even better decision-making.
Is it too late? The Solvency II term was coined in 2001, which means that companies have had a while to think about and implement it. Deadlines have been pushed back more than once though, which has bought some time.
In retrospect, it might have been more useful first to tackle Pillar 2: lay down the rules, risk management strategy and processes, and then design internal models based on this groundwork. But that’s just a lesson for next time. Now, almost half way through 2012, will companies who haven’t made much progress in their Solvency II implementation, still be able to derive lasting value from the regime? The answer is, (a qualified) yes.
If they can prioritise the development of a coherent risk management system and not become paralysed by the awe-inspiring volumes of specifications heaped before them, insurers can take advantage of the value-adding opportunities Solvency II presents. A good place to start is by examining, improving, and perhaps revamping existing systems and processes.
In future issues we’ll explore the power of efficient processes and look at using technology and systems to draw optimal value from Solvency II.
If you would like to discuss how improved processes and systems can benefit your organisation, please contact:
Director: Operational Excellence
+ 44 (0) 7855 260476
Director: Actuarial Services
+ 44 (0) 7702 918862