Solvency II's Impact will Affect Process Efficiency in Insurance


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WNS brings to you an extremely informative whitepaper on Solvency II, an European Union Directive that covers 30 countries. With the revised compliant deadline for Solvency II now set to January 1, 2014, this whitepaper talks about the required framework, internal models, risk management, information technology and data management, and reporting compliance and disclosures. Whitepaper is also available here

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Solvency II's Impact will Affect Process Efficiency in Insurance

  1. 1. Solvency II ImplementationSolvency IIs Impact will AffectProcess Efficiency in InsuranceWill Your Operational Viability andReputation Survive in a Solvency II World?
  2. 2. Solvency II ImplementationSolvency IIs Impact will AffectProcess Efficiency in InsuranceWill Your Operational Viability andReputation Survive in a Solvency II World?The Solvency II framework is based on the three-pillarapproach, almost similar to Basel II – the bankingregulation.The three pillars of the Solvency II directive focus onthe following areas:Pillar I – Estimation of the QUANTITATIVErequirementsCalculationn of Solvency Capital Requirements (SCR)Minimumn Capital Requirements (MCR) using standard or internal controlsPillar II – Evaluation of QUALITATIVE requirementsGovernancen and risk managementSelf-assessmentn of capital needs and capitaln managementRisk processes and proceduresPillar III – Disclosure of the institutions solvency andfinancial situationEnsuren transparency and adherence to the Directive
  3. 3. Solvency II Implementation Solvency IIs Impact will Affect Process Efficiency in Insurance Will Your Operational Viability and Reputation Survive in a Solvency II World?Solvency II ImplementationA Daunting Task Ahead for InsurersImplementation of Solvency II is the biggest-ever The new directive introduces a Solvency Capitalexercise in establishing a single set of rules Requirement (SCR) that is different from thegoverning insurer credit-worthiness and risk target level that exists in most countries. Givenmanagement. This European Union Directive, the various levels of maturity and sophisticationwhich covers over 30 countries, primarily at which the member countries are operating,concerns the amount of capital that EU implementing the directive will be a daunting taskinsurance companies must hold to reduce the for insurers and a possible operational headache!risk of insolvency. The appropriate amount of The challenge for implementation is both at thecapital is determined according to a set of qualitative and quantitative levels and insurersprinciples and rules. will need to attain new capabilities or at leastThis planned regulatory overhaul for European transform existing systems and processes for ainsurers is well underway and the compliant successful and meaningful implementation ofdeadline has been revised to January 1, 2014. the directive. Robust systems and procedures must be in place by the revised deadline ofAccording to a recent Deloitte survey, many January 1, 2014.insurers are still grappling with the possibleimplications of Solvency II for their businesses. The challenges relate to the requirements andThe survey reveals that for insurers the implications approaches of the Solvency II directive arewill be at the levels of capital requirements, shown in the diagram below:company structures and revising products. Estimation of the Evaluation of I II III QUALITATIVE QUANTITATIVE requirements requirementsn Calculation of Solvency n Governance and risk Capital Requirements management (SCR) n Self-assessment of capitaln Minimum Capital needs and capital Requirements (MCR) n Risk management using standard or processes and procedures internal controls Disclosure of the institutions solvency and financial situation n Ensure transparency and adherence to the Directive | 01
  4. 4. Solvency II ImplementationNew Opportunity for InsurersWhile Solvency II implementation presents some Requirement (SCR) below which an insurer willstrategic and tactical challenges, it also opens likely need to discuss remedies with the regulator.up new opportunities for insurers to innovate andadopt a well-thought-out approach for a According to the Solvency II Directive, firmssuccessful implementation. Insurers who are have an option to submit regulatory capitalagile enough to respond swiftly to the changing requirements (SCR / MCR) using the standardscenario will clearly be at a competitive or an internal model. Although the standardadvantage to outperform. formula is, by definition, more general and straightforward, there is a view that an internal model provides far wider business benefits suchAs a part of an insurers compliance as reduced regulatory capital, improved / widerefforts, an integrated capital risk management, operational effectiveness, stakeholder assurance and building a moreperformance and risk management risk-aware business culture.framework should be implementedto augment the insurers capital There is no exact regulatory definition of the Internal Model as such. Broadly speaking,models to meet regulatory however, the Internal Model is the collection ofrequirements. processes, systems and calculations that together quantify the risks faced by the business. Activities that will need carrying out include:To be able to achieve this goal, capabilities willneed to be overhauled in the following areas. Development n of actuarial systems (Prophet /1. Internal models Moses / MgAlfa / Igloo) to calculate best2. Risk management estimate liabilities, risk margins and stresses3. Information technology and data4. Reporting compliance and disclosures1. Internal ModelsThe Draft Directive of Solvency II suggests atwo-tier approach for determination of regulatorycapital adequacy. The first tier is the MinimumCapital Requirement (MCR), the threshold belowwhich an insurer would not be able to writebusiness. The second tier is Solvency Capital02 |
  5. 5. Solvency II Implementation Solvency IIs Impact will Affect Process Efficiency in Insurance Will Your Operational Viability and Reputation Survive in a Solvency II World?Developmentn and testing of various components of the Internal Model running various risk scenarios and calculations, replicating models, providing operational risk reporting and tax and capital rules, economic capital calculation engine / simulation, aggregation and diversification rulesTestingn requirements for supervisory approval: The Use Test - The insurer will have to show that the model is used as a decision tool in the companys daily risk management work The Calibration Test - The model must be calibrated using the risk measure and While an approved full internal model measures calibration level defined under Solvency II quantifiable risks, the ORSA should consider all The Statistical Test - It must be risks. ORSA is part of a wider risk management demonstrated that the model is based on system requiring all risks to be identified, relevant and quality-assured data measured, monitored, managed and reported.Managementn training and awareness Rating agencies, analysts, shareholders, and workshops around the internal models regulators are all taking more interest in capital models and risk management. Effective risk2. Risk Management management acts as the common link betweenAccording to the Pillar II requirements, balance sheet strength, operating performanceorganisations need to conduct an Own Risk and and business profile.Solvency Assessment (ORSA) to consistently The key components of effective riskassess their overall solvency needs and management programme are as follows:compliance with capital requirements. Align n risk appetite and strategyThe Solvency II Framework Directive proposal Enhance n risk response decisionsdescribes ORSA as a tool for risk managementsystems that require insurance companies to Reduce n operational surprises and lossesproperly assess their own short- and long-term Identify n and manage multiple andrisks and the amount of own funds necessary to cross-enterprise riskscover them. Improving n the deployment of capitalWith Pillar II it is crucial that an insurer We assist clients in developing ORSA framework,demonstrates that it has an effective risk embedding its implementation within a firmsmanagement system embedded in the business. decision-making process at management andConforming to this requirement of embedding operational level and developing effective MI forrisk management into the business or all the stakeholders.implementing the use test requires significanttime and resources. | 03
  6. 6. 3. Information Technology and Data The European Insurance and Occupational Pensions Authority (EIOPA) has set out a numberSolvency II sets out the requirements for of requirements for assessing the quality of data.companies to establish systems, processes andcontrols for effective risk management. Ensure n appropriateness, completeness andIt influences many existing IT applications and accuracy of data used in the valuation ofrequires development of additional functionality. technical provisionsIt is prudent for insurers to take early action in Implement n a robust quality managementinvestigating their companys data availability framework, including definition of the data,and quality. In addition to data systems, the assessment of the quality of data, resolutioninsurance industry is expected to make of material problems identified andsignificant investments in actuarial models, monitoring data qualityIT and risk management systems. Establish n a comprehensive data policy for theInsurers may need to seek assistance with collection, storage and processing of data,implementing the information systems and including the data provided by third partiestechnology requirements across the three pillars (intermediaries, for instance) or throughof the Solvency II framework. electronic sources (Internet for instance) Agree n with the role of internal and externalEffective Data Management auditors in validating data qualityData is at the very core of meeting Solvency II Assess n data deficiencies and analyze optionsrequirements, and it is clear that any Internal to increase the quality and quantity ofModel Approval Process (IMAP) will focus internal data, including the review ofheavily on the quality of data inputs to the internal processesmodels. It is widely recognised that the increase Document n the adjustments made to thefrequency of Solvency II reporting will require historical data, in particular the correction offirms to collect and prepare data faster and any data errors and omissions, and use ofaccurately than they do today. Moreover, they external data / market benchmarksneed to aggregate or segment data in new waysand source additional data which they have not External n data and market information used todone previously. complement internal data needs to be assessed on data quality – appropriateness, completeness and accuracy An Integrated Approach For most insurers, a detailed assessment of current systems capability brings forth two important observations: 1. Most insurance companies maintain multiple databases by source and function (risk, finance, actuarial and so on). This makes data integration and getting a single view of customers, a challenging task.04 |
  7. 7. Solvency II Implementation Solvency IIs Impact will Affect Process Efficiency in Insurance Will Your Operational Viability and Reputation Survive in a Solvency II World?2. Considering the requirements that the will now be required to work together, directive spells out, it will be a challenging changing the existing systems as necessary proposition to have a single end-to-end and adding new tools where existing technology solution to meet all Solvency II technology cannot be used to meet Solvency requirements. An integrated approach is what II requirements. will be the most appropriate. A schematic view of IT architecture in a Insurers will need to deploy teams of post-Solvency II environment can be depicted actuaries, business stakeholders and IT as follows: specialists to integrate existing systems that Compensation Details Real-time Access to Data Flexing Reporting Formats New Data Elements Historic Information Product Systems PMS GL MIS Integrated Layer Integrated Layer Integrated Layer Channel Management Claims Statutory Risk Management Reporting New Business DW Customers Customer Data Group Aggregation Board Actuarial Ratings Historic Client Data Reconciliation Automated Risk Calculation4. Reporting Compliance and follow a prescribed structure developed by The Committee of European Insurance andDisclosures Occupational Pensions Supervisors (CEIOPS)Under the Solvency II regime Pillar III deals with covering the following areas: Businessthe requirements for supervisory reporting and and Performance, System of Governance,public disclosure. The objectives are to Risk Management, Regulatory Balance Sheetharmonize reporting, promote comparability of and Capital Managementvaluation and reporting rules with InternationalAccounting Standards and ensure efficient Reports to Supervisor (RTS)supervision of insurance groups. The RTS is not public and is communicated only to the firms supervisor. In broad terms, theThe key reporting requirements are as follows: private RTS requires information on the followingSolvency and Financial Condition Report (SFCR) example areas which are not included in thePublic disclosure is expected to be made public SFCR such as business strategy, legalavailable via electronic publication. The SFCR and regulatory issues, variance against plan,will be required within three months of an projections of future solvency needs, and futureinsurers financial year end. The SFCR must risk exposure | 05
  8. 8. Insurers must implement a robust Pillar III Disclosure Designprogramme covering the following main themes: Design the structure and principles of the Solvency II reporting regimeDisclosure Impact AssessmentIdentify the impact of the proposed requirements Disclosure Reporting Buildingon existing reporting procedures (systems, data, and Implementationpeople, processes and controls) Implement changes to the reporting framework to deliver the Solvency II requirementsIn ConclusionInsurers are spending millions in order to comply Insurers who are agile enough to respond swiftlywith the impending Solvency II regulatory to the changing scenario will clearly be at aregime. Solvency II should be seen as competitive advantage to outperform.opportunity to refine internal processes ratherthan merely a tick-box exercise, and those who Insurers able to meet this challenge will findembrace the regime will be able to demonstrate themselves in a position to achieve significantsound operational control and efficiency. competitive advantage and improved stakeholder confidence. The solution in place to addressMany European insurers will not only benefit operational efficiency needs to have thefrom reduced operational risk and capital flexibility to take your organization to Solvency IIadequacy requirements, but also lower operating and beyond, providing a platform for continuouscosts, improved customer service and greater process improvement and operational viability.operational insight and to look at outsourcing asa business strategy.04 |
  9. 9. Copyright © 2012 WNS Global Services About WNS WNS (Holdings) Limited, is a leading global business process solutions company. We offer industry-specific solutions to nine, including Banking and Financial Services; Healthcare; Insurance; Manufacturing; Retail and Consumer Products; Shipping and Logistics; Telecommunications; Travel and Leisure; and Utilities. We also offer horizontal solutions, including Finance and Accounting; Research and Analytics; and Contact Center. We have professionals working across delivery centers in Costa Rica, India, the Philippines, Romania, South Africa, Sri Lanka, UK and USA. Analytics is a core differentiator for WNS. Leveraging our deep research and analytics expertise, industry intimacy, focus on operational excellence and a robust global delivery model, WNS helps leading companies make insight-based business decisions. The WNS Analytics Decision Engine (WADETM) is an award-winning solution for driving strategic insights to the C-level suite. Write to us at to know more.