Written by Mark Andrews on Tuesday 19 August 2014
Solvency II (SII) programmes, it seems have been with us forever. The end, or rather the beginning of the directive is now in sight as the implementation deadline is moved for ’one last time’ to 1st January 2016, according to Michel Barnier, European Commissioner for Internal Market and Services.
It was back in the mid-late ’noughties’ when Chief Finance Officers (CFOs) were signing off on budgets for SII programmes with expectations of a bells and whistles working model. However, as well as the capital adequacy requirements for Pillar 1 there were promises of improved data insight, accelerated product development, and a more adaptable risk model. Solvency II became synonymous with data transparency and everyone wanted a slice of the pie. When the full scale of the compliance challenges started to become clear and SII deadlines were pushed further out, programmes de-scoped many of the bells and whistles and focused only on the core requirements.
2014 is all about the ORSA
The key challenge for insurers right now, as they head down the SII home-straight is ensuring they effectively understand, build and embed their ‘Own Risk and Solvency Assessment’ (ORSA), but this is not as straight forward as it appears. Pillar 1 (capital adequacy) and Pillar 2 (risk management) are largely understood, according to a survey by Ernst & Young with nearly 80% of European insurers expecting to meet SII requirements before the new deadline. In addition to the quantitative requirements on asset and liability measurement, insurers must report on their risk management system and produce a ‘Forward-Looking Assessment of Own Risks’ (FLAOR) and this means they need to understand their operating systems and processes and the impacts these have on their risk profile. Some European regulators have commented that the draft ORSAs they have seen are “just collections of unrelated documents” whereas what they want to see is a consistent living document owned by senior management and showing a realistic appraisal of the insurer’s position.
Solvency II reporting poses new challenges for the business as a whole. Pillar 3 is largely about the data needed for disclosure requirements, meaning – more data, more regularly and with more transparency. Data that is required from across the business, rather than just focussing on the Finance and Actuarial functions will create significant impact across the wider operating model. Indeed, CP14/016 reiterates that insurers will need to report on operational factors which affect their ORSA and demonstrate how their system of governance is integrated into their general management process.
The Prudential Regulation Authority’s (PRAs) eyes will be firmly on Solvency II programmes over the coming 18 months and the transparency of the insurers’ ORSA/FLAOR. Having a clear operating model is essential for demonstrating that the insurer has clearly understood the impacts and adapted their business accordingly.
Solvency II Opportunities
With implementation having been put back year after year and SII programmes de-scoping requirements, this final deadline presents an opportunity to deliver some of the historical benefits outlined all those years ago when SII was first envisaged.
Read more from our insights page: Altus Insights – Solvency II