No time for self-congratulation
While many insurers have taken great strides in preparing for Solvency II, there is no room for complacency. Rick Lester explains that with deadlines looming fast, strategic decisions must be made and capital management holes highlighted and plugged
When it comes to implementing Solvency II, the UK is in a considerably better position than much of continental Europe, having had its Individual Capital Adequacy Standards in place since 2004. But, while this is a benefit, it also means that there is a real risk of complacency.
While some insurers have recognised the opportunities presented by Solvency II and made progress in their preparations, others have failed to engage with it at all. In some cases, this has been because they were reluctant to invest until there was more clarity in the new regime; in other cases because they felt they were already close to meeting the requirements.
However, when the Financial Services Authority published its discussion paper Insurance Risk Management: The Path to Solvency II in September 2008, it became glaringly obvious that doing nothing was no longer an option. As well as being more explicit about the requirements and what the new regime would mean in practice, this paper also highlighted significant deadlines.
The first of these is quarter one 2009. During this period, the FSA expects all firms to clarify their implementation planning for Solvency II, including determining who is accountable for overseeing the process. Then, in quarter two, firms must give an indication of whether or not they want to apply for internal model approval. Both of these conversations with the FSA will require firms to have undertaken significant analysis of their business models to understand the impacts and begun a change programme in preparation for the new requirements. Complacency is simply no longer an option.
While those firms that started working on their Solvency II requirements a year ago are likely to be well advanced with their preparations, for those that have only just started there is much to be done.
The first step an insurer must take when considering Solvency II is setting its vision: a thorough understanding of what the insurer wishes to achieve is essential here. For instance, while compliance will be sufficient for some, others will want to go beyond the requirements to obtain additional business benefits. By way of an example, a new requirement for insurers under Solvency II is the disclosure of capital and risk information to the public. Firms need to weigh up the challenges and opportunities relating to this but some may feel they could gain a competitive edge by implementing this requirement before October 2012.
Once a firm has determined its vision, the next stage is a Gap Analysis. This will highlight any holes in its risk and capital management practices and give a good indication of the work required to implement Solvency II.
For example, one area in which many firms may find they need to take further action is in data availability. The new regime requires firms to collect certain types of data but, with many insurers lumbering under the weight of legacy systems, it may be necessary to invest in this area. To ensure their change programmes are successful, firms must also formulate business cases to support their activities and bridge any gaps that they identify. Additionally, they will need to put suitable timetables in place - with the necessary governance surrounding it - to enable them to achieve their goals.
This may also necessitate cultural change within the firm. Although Solvency II may appear to lie firmly in the domain of the actuarial and risk management departments, it is far-reaching and affects all areas of the business. Therefore it is essential that everyone within the company understands the implications and the opportunities it presents.
Insurers must also be aware that the changes they are required to make will vary greatly. As well as depending on whether or not companies want to meet or go beyond the minimum requirements, change will also be influenced by factors such as product ranges, the portfolio written, distribution channels and geographical spread. Clearly, there isn't one simple solution to implementing Solvency II that will fit all insurers.
But it is important not to consider Solvency II in isolation. Other change programmes such as cost reduction, finance transformation, enterprise risk management and the International Financial Reporting Standards, may also be on the agenda. Taking an holistic approach and integrating different programmes can reduce the work required and ensure there are no conflicts, either during implementation or once the new processes are in place.
October 2012 may seem a long way off but, with the FSA looking to insurers for evidence of their preparations for Solvency II, it is time to get serious about preparing for the new regime.
- Rick Lester is a partner at Deloitte and leads the Solvency II team.
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