The Solvency II regulatory regime expected to govern the capital adequacy of EU insurers is fast approaching Insurers need to consider the systems implications carefully, says Madhu Senthil Thanikasalam
We aim to throw light on the options insurers could explore in their Solvency II journey. The primary focus of this article is on developing a foundational platform that can be leveraged to address the insurer's requirements, which may not be limited to Solvency II.
Requirements to keep in mind
While Insurers need to be able to generate the Quantitative Reporting Templates (QRTs) and the Regular Supervisory Report (RSR) as part of their compliance, they also have to consider how evolving requirements can be met without affecting their existing needs, keeping the following in mind:
Current financial reporting standards - Insurers are expected to be able to meet their current reporting standards
Solvency I and Solvency II - handling the requirements during the regime transition i.e. can it handle the insurer's needs to provide both Solvency I reports as well as Solvency II reporting
Group and Solo reporting requirements - the level of data granularity that is required to report at the solo and group level - especially for global insurers operating in the EU as well as in Asia-Pacific (where the needs are still evolving)
Report layouts, information to be provided, format (languages) - be able to generate multi-lingual reports in each of the region / countries in which it operates
Differences between the Solvency II disclosures and those of other current statutory reports - likely to be challenged by analysts and investors
The new IFRS reporting standards - ability to do segment reporting; identify appropriate business or geographic segments. Proper and complete audit trails to ensure confidence of business users in the reported data
Investment data reporting - absence of consistent source of transactional data / multiple data sources; data not being in consumable format for use by the source system
Insurers should not fall into the mistake of using multiple platforms for each of the different business objectives, which would eventually result in inefficiencies creeping into the insurer's operational systems. Investment data reporting - absence of consistent source of transactional data/multiple data sources; data not being in consumable format for use by the source system.
What options are available to insurers?
While insurers are always looking for quick solutions to address their needs, the current Solvency II regulations have provided them with an option to introspect, invest and transform their risk and reporting platforms.
The Solvency II regime has provided the much needed impetus to change not only the way insurers view their business, but also transform the way they operate. A sound platform would give insurers the edge in managing their operational risks.
A few of the options that are available to insurers are:
a) Build up the information platform at an enterprise level - this option is primarily for the long haul, allowing the insurer to transform the entire operational systems landscape. This allows insurers to be able to build in the requirements with respect to managing operational risks, reporting needs of Solvency II, IFRS, investment reporting, etc.
This approach allow insurers to address
Global and Local needs/instances
Capability to integrate various formats
Optimal and consistent performance of the operational system across locations
Round the clock reliability and availability for collaboration and critical reporting needs
Traceability and audit trail
Allow for multi-level and complex reporting
Allow for 'slice and dice' of data for insights
While this option would allow insurers to address many of their needs, the downside is the time involved in building the platform in a constantly changing economic and regulatory environment.
b) Smaller platforms and a wrapper - this option aims at developing / optimising existing platforms focused on individual business drivers, while having a wrapper at the required aggregate level.
The wrapper allows integration of information at multiple levels, but also brings the additional overhead of requiring constant monitoring of the wrapper and changing it to evolving needs. This options allows insurers to focus quickly on the need at hand, but at the same time reducing the need for an integrated global information system.
c) Optimise the existing platform - this option is purely focused on leveraging the existing platforms in place, but the absence of an aggregate platform increases operational risk and may not be the best long-term solution for its reporting needs. Often this option is the initial step in the insurer's journey to transforming its operating landscape.
Which option should be chosen?
The selection of the best option for an insurer depends on the combination of their priorities, time and resource availability. Most insurers look at implementing smaller platforms to ensure their day-to-day operational needs are addressed.
It is best advised that insurers follow a two-way approach to building their regulatory platform, as illustrated in the diagram below:
As the pieces of the regulatory platform firm up (policies, governance, technology, data, and regional needs) and the blocks are in place, the smaller platforms are assimilated into the enterprise regulatory platform, providing the insurer with the capability to not only manage their operational landscape but also transform their risk management and regulatory reporting.
Risk management and regulatory reporting have been a challenge to insurers operating in the current global environment. There is no one-stop solution that addresses this complex information minefield, but a defined approach that combines the insurer's short-term need while not losing sight of the enterprise regulatory platform allows it to manage its risks while simultaneously transforming its operational landscape.
Madhu Senthil Thanikasalam is a senior manager working in the insurance practice of Cognizant Technology solutions. He has 11 years of experience in consulting and developing technology platform solutions focusing on underwriting and risk management services for insurers in the UK, Continental Europe and North America.