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Insurance Risk Smoothing the Flow


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The Solvency II focus is moving from Pillar 1 to Pillar 2 and Pillar 3. Insurance firms now need to ensure the smooth flow of Solvency II data throughout their organizations for efficient regulatory reporting and trusted business analytics. Read the article, ‘Smoothing the flow’, for the experiences and best practices among leading insurance practitioners in Solvency II data management, governance, workflow and regulatory reporting

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Insurance Risk Smoothing the Flow

  1. 1. Solvency II ■ capItal ■ RISk ManageMent June 2012 Smoothing the flow Insurers need to overhaul their approach to dealing with the flow of data within their organisations, if they are to comply with all of the requirements of Solvency II, not just Pillar I. Clive Davidson reports The capiTal requiremenTS imposed by Solvency II – Pillar I – have Tom Wilson, chief risk officer at Allianz in Munich. The Solvency II tended to hog the limelight when it comes to the new regime. This is reporting requirements imply a sequence that starts with the collec- understandable given the potential for these new requirements to tion of data, which feeds into risk modelling and capital calculation, impact business and profitability. Also, the calculations require exten- the results of which are presented and, finally, distributed for internal sive new data as well as sophisticated computational abilities. But and external reporting. Solvency II’s other two pillars, II and III, are just as important and, But however logical this process might sound, this is not the sequence in many ways, equally challenging for insurers to implement. in which the task of implementing Solvency II, and in particular Furthermore, their inter-relationship suggests that the three pillars Pillars II and III, should be approached, says Emmanuel Noblet, who are best approached in an integrated way, rather than treating Pillars was deputy chief risk officer at ING Insurance until March when he II and III as afterthoughts to the risk modelling and capital calcula- moved to Amsterdam-based financial IT services company tion processes. SecondFloor as chief operating officer. Pillar II focuses on the governance and risk management of an insur- “Step one of implementing Pillars II and III should focus on the ance business. Specifically, it covers the Own Risk and Solvency time-driven reporting window, because this is where the pain is Assessment (Orsa) and the policies, systems, processes and functions hidden,” says Noblet. The challenge for insurers in this area, he says, around that; while Pillar III focuses on disclosure and transparency is identifying the different pieces of information scattered throughout through mandatory public and regulatory reporting. “At the heart of Solvency II is protection for policyholders and set- “Step one of implementing Pillars II ting the correct level of technical provisions and the solvency capital requirement [SCR],” says Martin Sarjeant, head of development for and III should focus on the time-driven Pennsylvania-based SunGard’s iWorks Prophet actuarial and risk man- reporting window, because this is where agement system. Most European insurers are familiar with these types the pain is hidden” of calculation and have made significant progress in meeting Solvency emmanuel noblet, SecondFloor II’s requirements in this regard. Areas where insurers are perhaps not as strong are in Pillars II and III, he says. “We see a shift in the emphasis to these pillars as insurers the organisation that must be assembled, taking into account their build out their frameworks, integrate their systems and move towards timing issues and constraints. This includes market and asset data embedding the models within their decision-making processes. This delivery, potential valuations or cashflow projections, accounting means having better controls over their period-end reporting, audita- reporting obligations and risk-reporting timelines. bility and processes. It also means better communication and The next step is an examination of the processes, controls and audit- presentation of results in a timely manner and transforming the results ability around the assembly of the information – in other words, who into actionable information,” says Sarjeant. does what, when and how this is tracked and monitored. For many insurers, it is the period-end reporting requirements that Only once these two steps, which provide the framework or context for encapsulate the challenges of Pillars II and III. “Under Solvency II, the reporting process, are completed should the more technical aspects firms will face dramatically increased reporting requirements with of the data collection and data distribution be tackled, argues Noblet. tighter deadlines and a much higher level of required controls,” says The technical aspects include deciding how the results should be1 Reprinted from Insurance Risk
  2. 2. woRkflow pRoceSSeSpresented – for example, whether the results including scheduling and control, often sup- any model changes will be well understoodof standard model calculations are presented ported by software. A good workflow and approved beforehand and not come as aseparately from or together with the results of management process is the key to meeting surprise during the closing process,” he says.internal model calculations. Then there are the auditability and traceability requirements The process should be efficient in the senseissues of how the required calculations and of Solvency II, says Laszlo Hrabovszki, group that it provides “a stable, routinised process,aggregation will be structured – for example, chief life and health actuary, for Cologne- heavily supported by information technologyshould the asset management system perform based Generali Germany. “It should provide and with only minimal manual intervention”,credit spread calculations, or should they be [a single] framework for the most important Wilson adds. In other words, the workflowpart of the standard model calculation proc- part of the calculations. It should log and should be automated as much as possible.ess. Once all this is done, the actual data to check the necessary steps and guide actuaries One of the issues with input data is the factbe collected at the beginning of the process through the process,” he says. that internal models generally analyse riskand distributed through internal and external So what constitutes good workflow man- from a business unit perspective, while thereports at the end can be defined. agement? According to Wilson of Allianz, the Solvency II standard model takes a legal But the ultimate goal of Solvency II is not management process should be both control- entity perspective. “Some companies have ajust about imposing a reporting schedule – it led and efficient, while anticipating the perfect match between legal entity and busi-is about genuinely embedding rigour in cor- possibility of change to processes or tasks. ness entity, but most companies have materialporate governance, Noblet says. And the tool “It will be controlled in the sense that all of difference between these hierarchies,” saysfor creating this rigour is workflow, he says. the input data as well as end numbers can be Noblet of SecondFloor. This means that Workflow is the formalisation of processes, relied upon to tie together, and the impact of while the same data is required for both June 2012 2
  3. 3. woRkflow pRoceSSeS “An automated workflow process, tying together the myriad data flows and analysis systems, is absolutely required by large, complex financial services institutions” Tom Wilson, allianz model, the actuary will have to ensure that the data is fit for purpose. i nter- “Regulators will want to see proof that data was approved – that nal and someone signed off on it,” says Curt Burmeister, vice-president of standard risk solutions at Toronto-based Algorithmics. In the same way models, it must be modern databases log and track all actions on data, so the workflow organised in different should provide a similar audit trail, including a record of with whom ways. “Context does the responsibility for the data lies. matter,” he says. Another danger that workflow should guard against is undocu- Automation has a number of bene- mented, ‘on-the-fl y’ changes to models outside the approval process, fits, including ensuring a consistent says Noblet. This is especially important for large groups that oper- methodology is applied across the whole proc- ate decentralised systems where part of the modelling process, for ess and reducing errors that might be introduced example liability cashflow calculations, might be done on local actu- through manual processes. “By breaking down the arial systems. whole process of risk modelling and capital calculation into Comprehensive, well-designed and automated workflow for Pillars II their basic components and [automating these in] software, one and III of Solvency II clearly provides control and efficiency while can make sure that every calculation follows the same methodology,” reducing errors and unauthorised actions. However, there are a says Hrabovszki of Generali Germany. number of challenges to achieving such a system. These include the Automation also improves efficiency by avoiding breaks in processes continued uncertainty over the fi nal form of the Solvency II rules, the and reducing human error, he adds. “An automated workflow process lack of standardised systems and the need to build flexibility into reduces manual steps and also provides the opportunity to inform workflow processes. users that further actions are required. Moreover, reducing manual “Methodology and, therefore, processes are still subject to many steps reduces possible error sources,” says Hrabovszki. changes, which makes the instalment of standardised processes com- In fact, the demands of Pillars II and III in terms of governance and plicated,” says Generali’s Hrabovszki. “Moreover, no standard reporting are such that automated workflow is no longer an optional solutions for calculations within the Solvency II framework have been luxury for insurers of any size. “An automated workflow process, tying established in the market due to the short history of Solvency II. Thus, together the myriad data flows and analysis systems, is absolutely companies are obliged to set up individual solutions, incurring higher required by large, complex fi nancial services institutions if they are to costs than [if they were able to use] standardised solutions,” he adds. develop efficient, controlled and robust reporting processes across the The need for flexibility can require insurers to review fundamental internal and standard models and market-value balance sheets under a organisational structures and traditional ways of operating. Although management and legal entity view, within the time horizons dictated workflow tries to pin down and mechanise the processes leading up to by public and supervisory disclosures. The days when the internal period-ends and the output of reports, at the same time it has to allow model and valuation could be done through a manual and artisanal for post-closing updates, corrections and re-runs – and these must process are over,” says Wilson. have their own workflow. The criteria and thresholds for such events Part of the workflow process will be to ensure the quality of the must be clearly defi ned, the correction procedures must be well docu- data used in the risk modelling and capital calculations. Not only are mented and the actions must be as equally formalised and auditable as the validation standards for data onerous under Solvency II, but on the main workflow. top of that the technical actuarial standards require that data is not “To accomplish this, many organisations will have to fundamen- just used blindly. For example, where data feeds into an actuarial tally improve the coordination between the risk, fi nance and3 Reprinted from Insurance Risk
  4. 4. woRkflow pRoceSSeSactuarial functions, often breaking down silos and building an extensions to the system. For insurers with highly bespoke busi-integrated closing process, both at the operating entity level and nesses, SecondFloor will customise a group level, as well as providing robust systems support,” says Meanwhile, Prudential Corporation Asia, part of the UK’sWilson of Allianz. Prudential, is upgrading to the enterprise version of SunGard’s iWorks In the end, the workflow process is about providing management Prophet to help it optimise risk management, actuarial processing andwith the information it can use to make decisions about the business compliance reporting to meet Solvency II standards, including datain the interest of all its stakeholders, as well as providing regulators management and automation of reporting processes. And leadingwith the information they need to protect consumers and the wider Finnish insurer Tapiola recently chose New York-based Moody’seconomy. “Top managers generally feel comfortable about making Analytics’ Solvency II software to help it meet regulatory require-decisions – that is what they are paid for – but their issue is they have ments across all of its Finnish operations. “We saw a distinct advantageto make decisions based on information from processes they don’t in the solution’s combination of robust data quality manage-control and which appear cumbersome and complex,” says Noblet. ment with built-in SCR calculation and reportingGood workflow management systems should give them greater confi- capabilities,” said Markku Miettinen, chief riskdence in the information on which they are basing their decisions, officer at Tapiola.because of the way it contextualises, formalises, automates and tracks As insurers progress with theirthe production of that information, thereby ensuring its accuracy, Solvency II projects, many realisecompleteness, timeliness, auditability and repeatability. that the task of managing the workflow, govern- ance and “No standard solutions for calculations reporting within the Solvency II framework have for been established in the market… thus, companies are obliged to set up individual solutions, incurring higher costs” laszlo hrabovszki, Generali Germany Sarjeant of SunGard agrees. “Process management tools help orches-trate and automate processes while maintaining an audit trail, givingexecutives the confidence they need to ensure their decisions are accu-rate, timely and contextual,” he says. With the growing recognition of the challenges of Pillars II and IIIand the importance of implementing efficient, rigorous and robustprocesses and procedures, insurers are increasingly looking forstrong workflow and reporting capabilities in addition to risk model-ling and capital calculation functions when choosing Solvency IIsoftware. ING Insurance and Allianz both selected Algorithmics to S o l ve n c yprovide the analytical technology framework for their internal II is one ofmodels and hired SecondFloor to develop the workflow to support the biggest chal-their capital calculations. lenges they face, Realising that many insurers were going to face similar challenges according to Burmeisterin terms of the workflow, governance and reporting around their of Algorithmics. “In effect,internal models for Solvency II, Algorithmics and SecondFloor col- you need to model how anlaborated to develop a product called Capital Workflow Manager organisation works and how the(CWM). Among insurers that have implemented the CWM product people interact with one another. It is ais the UK’s Legal & General, which added some internally developed massive undertaking,” he says. IR June 2012 4