Comply with Solvency II and boost profits too

WITH Solvency II set to come into force at the end of 2012, insurers need to make themselves compliant with a new wave of regulatory requirements, aimed at revising capital requirements and risk management, supplanting the existing Solvency rules.

But rather than simply being an exercise in regulatory compliance, applying the directive should be seen as an opportunity to think about the entirety of your infrastructure and how it can be made more robust and efficient to deal with shifts in the regulatory landscape, while at the same time improving the service that you are able to offer to customers and the efficiency of your business.

Pillar II of Solvency II covers enterprise risk management (ERM), internal audit, compliance and actuarial issues and it is on this tranche of the regulations that the significant investment in IT systems is required to ensure robustness of the workflow and the process. Solvency II compliance programmes will vary in size depending on insurers’ current IT systems. Some will require modification while others may require replacement. In some cases, a whole new system may be required in order to achieve compliance in terms of the level of visibility, transparency, control and reporting required by Solvency II.

In order to effectively manage risk and meet regulatory requirements, a central, globalised plan is needed. Insurers need to take into account people, processes and applications which form the core of a well defined enterprise architecture. Without this structure, it becomes nigh on impossible to measure and report risk across business lines.

For some large insurers, the cost of compliance with Solvency II could be as much as £85m, whereas in the mid-size insurers, the costs are more likely to be in the region of £20-30m and for smaller firms as little as a few million. It is important that insurers get a payoff from this expenditure.

The archiving requirements involved in the insurance sector are enormous. Whereas financial institutions are dealing with electronically storing records of executed trades for seven years, on the insurance side of the fence they have to deal with archiving hard copies of policies for 20-25 years. And at the same time these records need to be accessible quickly in order to manage risk exposure. Information from business lines needs to be collated, archived and also made sense of – and at an ever-increasing frequency. As improved IT infrastructure speeds up this process and provides enhanced analytics, it aids businesses not just to achieve compliance, but also to better understand their risk exposure.

Achieving regulatory compliance doesn’t come cheap. That’s why financial institutions need to ensure that they get it right. But if done properly, they can boost their management of risk exposure and improve communication across all areas of the business. In doing so, they can gain a competitive advantage against those companies that see Solvency II as just a box-ticking exercise.

Solvency II

Pillar 1
Quantitative Requirements

- Technical provisions

- Investment rules and ALM

- Capital rules

Financial resource requirements for solvency purposes

Pillar 2
Supervisor review

- Internal controls and sound management

- Supervisory intervention

Additional capital evaluation based on internal assessment of risks and controls, subject to supervisory review

Pillar 3

Requirements Disclosure:

- Frequent

- Forward-looking

- Relevant

Requirements to disclose information relating to risk and capital levels, designed to help exert discipline of market influence