With the frantic preparations underway for the arrival of Solvency II, the potential business benefits can be forgotten. Gurpreet Johal explains the new regime has plenty to offer insurers
From integrated risk and capital management, more profitable product lines and streamlined administration systems to enhanced reputation with customers and other stakeholders, a significant business edge awaits those insurers prepared to fully embrace Solvency II.
Strategic, financial and operational benefits are available for those insurers that take a long-term and holistic approach to implementing change. While there will inevitably be costs involved in moving to a Solvency II compliant position, the improvements to business will easily outweigh this.
From a financial perspective there are significant advantages to be gained from the new regime. Although Solvency II looks to use similar risk and capital management practices as the UK's current Individual Capital Adequacy Standards, there are some significant differences. For a start, minimum capital requirements under the new regime are more sophisticated and dependent on a number of risk and product factors. This will give insurers greater flexibility over how they structure their individual business models, allowing them to adjust the capital they require by focusing on different product lines.
An additional advantage of this will be the ability to understand the real cost of writing different lines of business. Armed with this information, insurers will be able to take a much more strategic view of the product lines they write. Likewise, this sharper focus on capital efficiency could prompt an insurer to scrutinise its corporate structure more closely, potentially rationalising it further to gain a competitive edge.
Another important benefit will come from the fact that, because Solvency II will be mandatory, changes to business processes will be highlighted for improvement, which might otherwise be overlooked. To implement the new framework effectively, insurers will need to take a look at every area of their business to ensure it is at a minimum compliant. This could mean that business areas that are not as efficient as they could be will become able to secure the financial commitment needed to make improvements.
A prime example will be the work required to upgrade IT systems. Many insurers operate under a patchwork structure, whether for different parts of their business, products or simply due to inheriting legacy systems. The quantity and, more importantly, the quality of data insurers will be required to collect to comply with Solvency II will probably necessitate an extensive overhaul of existing systems. Despite the fact that this may attract considerable cost, upgrading systems also brings advantages. It will enable companies to introduce more sophisticated pricing and underwriting tools and methodologies to gain competitive advantage and also to minimise surprises that the business may face.
For many insurers, Solvency II will bring better quality and quantity of data that will result in more sophisticated product pricing, with greater emphasis on risk-based pricing as the requirements of the regime become embedded within the business. In turn, this will make it easier for insurers to target their chosen markets and reduce the risk of unexpected levels of claims.
In addition, Solvency II offers reputational benefits, with insurers able to demonstrate better business practices to customers, employees and stakeholders in the way they implement and communicate the new regime. As an example, with the requirement for full disclosure there will be much more information in the public domain. Although there are some risks associated with this, it can also be seen as an opportunity to demonstrate a business' strengths and to distinguish it from its peers.
Similarly, by enabling insurers to integrate capital modelling with broader business processes, such as pricing, planning and reserving, there will be an increased focus on better enterprise risk management. This will hold advantages for various stakeholders including regulators and rating agencies who will look more favourably upon those who embrace ERM.
By achieving more than minimum compliance standards, a company can demonstrate strong leadership and create a positive culture within its workplace.
As the new regime is far-reaching and will affect every area of the business, fully embracing it will require buy-in throughout the organisation. This will be particularly important if reward strategy is more closely linked to business performance. Insurers prepared to invest in employee training to ensure a smooth transition to the new regime could achieve advantages in terms or recruitment and retention.
But, clearly, not every insurer will find it easy to reap all of these benefits and much will depend on the extent to which they embrace Solvency II and integrate it within their business and with other initiatives. Those prepared to look at the bigger picture now and view the changes as an opportunity to better manage their business and framework will be the biggest winners.
- Gurpreet Johal is a partner at Deloitte.
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