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Written by Stephen Whitfield on Monday 8 September 2014

With the implementation date firmly set Solvency II will become reality, making 2015 a crucial year for insurers.  To successfully embed SII principles in the running of the business and realise business benefit, a number of key operational challenges will need to be considered that go beyond the regulatory requirements of the three pillars. 

It has been a long time in the making but the Solvency II implementation date of 1st Jan 2016 is now well established. Nearer still is the April 2015 final deadline for IMAP submissions, and while the bulk of large insurers have already received approval for their Internal Models, many smaller companies are still busy refining and validating theirs.  Meanwhile organisations are already producing ORSAs and their plans for governance structures and internal controls are mostly well advanced.

With so much early focus on meeting the quantitative requirements in Pillar 1, and the mechanisms for governance from Pillar 2, there has been a degree of over-confidence that Pillar 3 reporting would fall in to place.  After all, numerous software solutions have emerged to cater for the mechanics of XBRL report production and linking model outputs and qualitative reports to one of these tools should take care of compliance. Unfortunately, insurers are now discovering that there is significant work to do themselves in order to take advantage of these and to ensure reporting is accurate, consistent and repeatable.

Surprisingly, in our experience most firms have also yet to seriously consider their overall Solvency II operating models: how the significant investment they have made best exists within their current operating business and where changes will be required in order to accommodate it – and benefit from it.  The regulations are not a one-off hit in 2016, but an ongoing change in the way insurers have to operate.

Whilst focusing on achieving Solvency II compliance we see a number of key operational challenges that insurers also need to consider in 2015:

  • Production of actuarial models and subsequent reporting has for most been fraught with challenges – the sources of data used, and the systems used to clean and manipulate them, typically include spreadsheets and other end user computing solutions not centrally managed by IT support.  All the links in the production chain need to be managed and version controls implemented during 2015, to ensure resilience in BAU.
  • Use of Internal Models and Solvency II principles need to be embedded both operationally and culturally.  Governance structures are only part of the picture. Models must demonstrably be in use for making strategic and propositional decisions at board level, and their messages about the organisation’s risk culture must filter right down to operational, customer-facing and technology support roles.
  • Pillar 3 reporting can and should be automated, giving careful thought to ensuring the statutory reports can be produced accurately, more frequently than before (and ad-hoc if requested) within the new shorter deadlines and allowing time for checking. The process needs to be adequately documented such that an expert outsider could understand and in theory reproduce the results.
  • A Solvency II operating model needs to be defined and integrated with the businesses' own operating models.  Once there is no SII programme, how will model production, validation and use of output work in BAU?  Firms need to decide what new processes and capabilities are required and what is the optimal organisation design needed to support these. 

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