Demystifying Solvency II
The global financial crisis has emphasized the critical role of effective risk management and comprehensive governance in the finance industry.
Stricter and more intricate regulations ensure that the financial sector remains strong.
Solvency II is a European Union (EU) directive that aims at updating and modernizing the regulatory framework by codifying and harmonizing
the European insurance regulation. The directive extends to over 30 countries and is considered the largest ever effort to create a single set of
rules governing insurer creditworthiness and risk management.
US insurers with parent companies in the EU need to follow Solvency II requirements. Similarly, American parent companies with European
subsidiaries must meet Solvency II requirements for these subsidiaries.
Solvency II is based on three major areas or pillars:
• Pillar 1 stipulates the quantitative requirements.
• Pillar 2 specifies requirements for the governance, risk management and effective supervision of insurers.
• Pillar 3 focuses on disclosure and transparency requirements.
Enabling total compliance with Solvency II
Thinksoft’s offering for insurers
- Rama Warrier and Phani Tangirala
Among other requirements, absolute compliance with
Solvency II also implies a detailed overhaul and testing of
financial applications and making sure the technology front
is updated and synchronized with the new risk management
approach. Insurance providers must work with a testing
specialist to ensure that any new applications integrate
seamlessly with the legacy systems and that any enhancements
to current applications are performed correctly.
Adopting the right approach to manage the Solvency II
compliance is also a critical decision for all insurance providers.
How Thinksoft can help
The insurance practice at Thinksoft has been gearing itself to assist
you in your efforts to comply with the Solvency II norms. We feel
that following a comprehensive issue-based approach to compliance
management is the way forward.
An issue-based approach is more logical and is aimed at identifying
the objectives behind the regulation. Designing such an approach
will help you resolve the issues in a holistic manner, rather than
preparing for Solvency II compliance alone.
Thinksoft can help you comply with Solvency II in multiple ways.
With Thinksoft’s expertise, you can:
• Understand Solvency II requirements in detail
• Adopt the right information technology model
• Prepare to comply with Solvency II
• Get expert guidance on Solvency II
Understanding Solvency II requirements
The three-pillar approach of Solvency II is aimed at setting standards for measuring and managing capital adequacy of insurance companies
operating in the EU region. A risk-based capital (RBC) approach is the concept upon which Solvency II is built.
The Three-pillar Approach of Solvency II
Pillar 1 Pillar 2 Pillar 3
Quantitative Requirements Supervisory Review Disclosures
Valuation of assets and liabilities Internal controls Regulatory reporting
Best estimates Enterprise-level risk managemnet Public disclosures
SCR / MCR calculation Governance Transparency
Standard model ORSA
Implementing Solvency II
Finalization of valuation and models ORSA Designing reporting process
Designing and testing of internal model Risk management infrastructure Detailing disclosure requirements
Data management Internal audit and controls
Calculation of MCR / SCR
Investment RI planning
Solvency council formation
Gap analysis and implementation plan
Preparing project plan and control
Implementing process and system updation
Generic Framework Requirement
Adopting the right information technology model
A three-layered approach as shown in the diagram below is an appropriate one for Solvency II. The model has been structured around the flow
The stack is built with a data layer as the base. The middle tier is the calculation engine with the intelligence to perform the required
calculations. The top layer is the reporting tool, which renders the output for internal and external stakeholders.
The three-layered stack can receive data collated from different source systems, which in turn receive data from operations. In some cases,
you may need to include an intermediate stage of collation and cleansing of data to ensure accuracy and quality of inputs for the Solvency II
Information Technology Model for Solvency II
Insurance Operations / Investment /
Others / Corporate Actuaries
Reporting Tool Top Management
Data Cleansing and Pooling
Source System 2 Source System 3Source System 1
Preparing to comply with Solvency II
Preparing for Solvency II compliance is a major IT initiative for any insurer. The typical challenges of a large IT implementation can be
anticipated during the initiative. The IT priorities may be split into two focus areas – data and application – for the convenience of considering
them in the implementation plan.
Ability to cope with complexity is important as the RBC calculations and reporting is expected to evolve over a period of time, with increasing
complexity. The IT set-up needs to have the capacity to handle a large volume of complex calculations. Technology needs to be scalable and
flexible to ensure that the Solvency II infrastructure blends well with the overall application landscape.
The table below outlines a bird’s eye view of activities indicating the areas where Thinksoft can collaborate with you in achieving total
Road map for Total Compliance
• Gap analysis
• Project planning
• Overall project management
• Periodic review of progress
• Reporting to board / steering
• Communication campaigns
within the organisation
• Gap analysis
• Project planning and
• Data management
» Understanding current data
» Plan for required
• Documentation of goals,
» Risk management
» Internal audits
• IT products / package
evaluation and vendor
• Testing solutions for accuracy
Overall data management approach
Availability of data
Quality check of data
Identifying gap in data capture / design methods
to capture data
Actuarial modelling tools
Valuation and other calculation tools
Governance of models
Risk management system
Internal audit and control systems
Supporting infrastructure of governance
Design of reporting system infrastructure
System support for disclosure requirements
Insurer’s Contribution Thinksoft’s Contribution
Getting expert guidance on Solvency II
Anticipating your needs, Thinksoft has identified a team of experts with excellent working knowledge of various lines of the insurance business
including life insurance, non-life insurance, health insurance and pension. The team has attended many workshops on Solvency II requirements
and is specially trained to assist you in your journey to absolute compliance. The key expertise of the team is:
• Excellent understanding of insurance business
• Detailed knowledge of Solvency II requirements
• In-depth understanding of global best practices in business analysis and testing services
• Good written and verbal communication skills
Partner with us to make your journey to compliance a smooth and successful endeavor.
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