Meeting Solvency II Requirements through an Enterprise Risk Management Technology Platform

By Glenn Lottering, Senior Director EMEA, Oracle Insurance – October 2012

The Solvency II directive– expectedfor implementation in January 2014 – represents the most significant regulatory change in the insurance sector for more than 30 years.  Insurers writing business in Europe need to comply with its regulations, but the challenges are many: data consolidation across multiple entities, multi-jurisdictional compliance, multiple risks, transparency, auditability, and that is just to name a few.Carriers in non-European jurisdictions face a challenge associated with regulation alignment between jurisdictions and the question of equivalence, for which there are still many discussion papers being published by regulators, specifically the European Insurance and Occupational Pensions Authority (EIOPA).

Implementing a full Solvency II programis a major undertaking, particularly for multinational insurers and those with complex business structures. While the immediate focus will be to meet the compliance deadline, in the longer term, insurers can and should also look to utilize the Solvency II requirements as a means to deliver significant benefits to the business. In a classic case of turning challenge into opportunity, insurers can gain a better understanding of risk and makemore effective use of capital. This canenable more profitable products, efficient reinsurance capabilities, competitive advantage and ultimately, improved shareholder value.

Compliance through Technology
Technology plays a key role in both short-term regulatory compliance and long-term risk-based capital management.  To meet the initial requirements, insurers will need to enhance existing desktop and manual systems with modernrisk/financial modeling technologythatprovides the computing power and compliance controls required.  However, in the longer term, insurers should look to build a risk and finance platform to replace their existinglegacy technology solutions.

Risk and financeconsolidation will be essential to provide the consistency and compliance that Solvency II demands, but consolidation will also lower implementation costs.  In addition to cost control, insurers will ultimately be able to make more informed business decisions across a range of functions – including strategy development, product pricing, profitability, reinsurance, and performance management.

Steps to an Enterprise Solvency II Platform
An enterprise risk management platform can be broken down into six keyareas,including:

1. Reporting– Featuring robust and flexible report process management and report creation (e.g.for Quarterly Reporting Templates, Solvency Financial Condition Reports, Report to Supervisor and Own Risk Solvency Assessment reporting) to support report submission and risk management processes.In addition to dedicated Solvency II reports, this capability should include advanced analytics and graphics, including dashboards for key performance indicators, such as risk-adjusted performance measures, Solvency and minimum capital requirements, and risk-adjusted return on capital.
2. Risk and FinanceData Warehouse – Encompassing aSolvency IIrisk data warehouse with built-in data management tools. Thisprovides a centralized repository for data such as policy, finance, assumptions, and scenario data,as well as a warehouse to store actuarial modeling results. The data warehouse framework needs to provide quality checking, reconciliation, and data cleansing, as well as extract-transform-load capabilities, so that CFOs, CROs, and Chief Actuaries can confidently use the information in making business decisions.
3. Risk/Actuarial Calculation Engine – Providingactuarial models that value assets and liabilities on a market-consistent basis for market, insurance, and counterparty riskmodeling.
4. Audit, Security, and ControlCapabilities– Including full audit, tracking, and security controls necessary for transparency and compliance.
5. Compliance andGovernanceCapabilities– Including enterprise deployment capabilities for integration into existing risk and financial systems and environments and to enable access to risk information across the business for use test purposes and beyond.
6. Scalable Technology Platform – Necessary to run the ever more complex actuarial/risk models quickly and on an “on demand” basis.

While insurers generally have a number of these components in place, they are typically a mix of desktop and manual systems based on different technologies with little or no integration and limited scalability.A common, enterprise-class risk and financeplatform that incorporates detailed actuarial models will enable insurers to integrate the risk-based capital thinking that Solvency II requires throughout their organizations. However, it will also be critical to business success as insurers seek to gain advantage by analyzing blocks of business separately and holistically seeking offsets.

The market is ever-changing, but one constant goal for any insurance executive is to operate organizations for growth.  Increasingly, carriers are finding that their core IT systems do not provide the agility that is needed to offer competitive or innovative products quickly to market, or to provide outstanding customer service.  However, in the need to comply with regulations such as Solvency II, lies an opportunity for carriers to prepare themselves to meet current and future growth challenges by implementing a standards-based, integrated IT solution, that will allow for nimble business processes and the ability to comply with future regulation without a need for a wholesale system redesign.

While Solvency II is a regulatory initiative, insurers should utilize this opportunity to step beyond mere compliance, and deliver real benefits to the business. By managing and understanding risk and using risk information, insurers will be able to make more informed business decisions across a range of functions, from product pricing and reinsurance through to capital allocation and ultimately, profitability.

For many insurers, deploying an integrated enterprise risk and financeplatform is a longer term goal, with their short-term focus firmly on immediate regulatory compliance. But to remain competitive in a market with ever-tightening regulatory requirements that can negatively impact working capital for growth, insurers will need to invest in enterprise risk and finance platformsthat will not only support Solvency II and whatever comes next in the global insurance market, but also ensure their ability to optimize their businesses under changing regulations.