By Ralph Baxter, CEO of ClusterSeven

The news that Solvency II is back on track surprised many in the insurance community who had considered a Solvency II ‘lite’ alternative as the most probable way forward.  Notwithstanding further delays, the key date is now 1 January 2016 – three years on from the original deadline – which means Europe’s 3,500+ insurers have just over two years to reach SII compliance across Pillars 1, 2 and 3.

Ralph Baxter CEO ClusterSeven

Europe’s insurers should already be aware of the intense need to ensure that they are reporting accurate data to their three core stakeholders: customers, shareholders and regulators.  While many of insurers have, over the past six or so years, invested significantly to comply with Solvency II guidelines, there are still questions about how best to manage, control and validate the vast amounts of data that insurance firms have to deal with.

Despite the extended deadline to January2016, insurance firms still have a great deal of work to do as many of the initiatives apropos Solvency II require firms to be engaged a lot sooner. According to PwC¹, despite the new timetable, insurers need to “prioritise Pillar 3 as annual reporting to the regulator starts from 1 January 2015”.  They also need to focus on the Own Risk and Solvency Assessment as “a credible ORSA is now essential from 1 January 2014”.

A surveyby PA Consulting Group published in November this year looking at insurers’ preparedness for Solvency, two thirds of insurers do not expect to be ready to meet EIOPA’s preparatory guidelines on the system of governance by 1 January 2014 for Pillar 2. Although the guidelines are preparatory, notes PA Consulting, firms must immediately build a credible plan to achieve compliance.

In relatively broad terms, at the heart of the Solvency II programme remains the management of an insurance firm’s data.  This pressure on firm’s to get their data in order is evident throughout much of the narrative from regulators.

In its consultation Solvency II: Applying EIOPA’s Preparatory Guidelines To PRA-Authorised Firms², Prudential Regulation Authority (PRA) states that the regulator expects firms to make progress “towards establishing systems and structures to deliver high quality information for supervisory purposes and to submit information to allow the PRA to review and evaluate the quality of the information and the progress made… As part of their work towards meeting this expectation, firms should conduct data validation checks.”

The key issue of data validation

Data validation – knowing that data is correct and that there is a full data audit – is fundamental to Solvency II.  Insurers have to contend with and manage millions of data files: many constantly changing and being fed from a significant variety of internal and external sources (e.g. brokers, cat models, clients, actuaries).

The immediate data challenge is the supervision of many thousands of data files such as spreadsheets.  Despite millions of dollars being spent on systems and solutions to better manage data over the past 10 years, insurers still rely heavily on spreadsheets for many of their day-to-day processes.

Research carried out by ClusterSeven on actuaries and financial professionals working at insurers found that around half (49%) of respondents use spreadsheets more than any other software application for modelling, data management and reporting activities.  Even for those where spreadsheets are not the primary tool, they remain significant carriers of business critical data – and very much in the spotlight of regulators and similar stakeholders.

ClusterSeven also found that over three quarters (77%) of senior level insurance executives would welcome more specific guidance on best-practice use of the spreadsheets in the run-up to Solvency II.

Many insurers accept this reliance on spreadsheets and have actively taken steps to maximise control and minimise errors of their data.  Under the auspice of Solvency II, most have hired (expensive) technical staff to manage the increased data demands.  Many firms are avoiding this cost with automatic data management and spreadsheet control systems.

For firms that have put the right system in place to ‘control’ spreadsheet usage and that have invested into defining, controlling and validating spreadsheet processes, the rewards are significant. Actuaries benefit from the ability to extract, manipulate and represent the data spreadsheets contain in very fast and efficient manner and to re-present this data as the business environment changes – without being delayed by unnecessary checks.

¹ http://www.pwc.co.uk/financial-services/regulation/other/finality-on-solvency-ii-timetable.jhtml

² http://www.bankofengland.co.uk/pra/Pages/publications/cp913.aspx