context
Solvency II is the new European regulatory framework for the insurance industry and often referred to as the insurance industry echo of the Basel II regulation of the banking sector. Solvency II enables institutions to absorb significant unforeseen losses and give reasonable assurance to policyholders. At the same time, Solvency II pursues the following goals:
- give an incentive to the supervised institutions to measure and properly manage their risks.
- contribute to a better managed and more competitive insurance industry that can better perform its key function of accepting and spreading risk.
- align external regulatory and rating requirements with good risk management.
The Solvency II system is built up on a three-pillar structure, inspired by the Basel II regulations.
key considerations
As for Basel II, Solvency II initiatives will be significant projects implying changes at various levels of the organization. Companies will face numerous challenges in various domains in order to cope with the Solvency II challenge and turn the regulatory framework into a competitive advantage:
- impact assessment: the impact of a regulation like Solvency II varies inside the organization and it is advisable to consider carefully before jumping into the actual implementation of a solution. Domains to be assessed include business processes, governance structure, risk strategies, available skills and resources and IT solutions.
- early articulation of the business case: by articulating the business case early, companies will be able to secure the required executive level sponsorship and establish a clear and effective program management and governance. Articulating the business case should be driven by benefits brought to the company in implementing Solvency II compliance. Failing to articulate the business case early might lead to huge efforts to be reengineered afterwards due to:
- a lack of adequacy of the solution architecture: architectural patchwork.
- a lack of adequacy of the data to allow the evolution of the risk models.
- A lack of functionalities with regards to the business community requirements.
- strong performance management foundations: the information system that supports the risk management processes inside insurance companies is at the centre of numerous challenges, urging companies to take Enterprise Information Management seriously:
- manage the inheritance from the past: multiple technologies, platforms and environments need to be managed; combined with a past of merging and acquisitions, multiplying the number of source systems.
- compliance: keep the data management processes compliant with the regulatory framework, forcing usage of metadata and best practices.
- data volumes: the more advanced models are used, the more data are needed, especially historical data. Huge data volumes will need to be stored to perform the adequate risk calculations.
Keyrus and Solvency II
Solvency II shares many characteristics with Basel II, especially in its structure, and it is a huge opportunity to take advantages of the lessons learnt in Basel II projects to successfully implement Solvency II for insurance companies. Through our expertise gained in the Basel II context, and through our continuous investment in understanding and proactively guiding companies who will need to be compliant, Keyrus positions as a value-adding provider, supporting the insurance companies in preparing themselves, defining and implementing Solvency II compliant solutions.
