Solvency II – It’s Only Disclosure Management, so Why All the Fuss?

The EU Solvency II Directive (the insurance industry equivalent of Basel II for banks) seeks to harmonise EU insurance regulation and protect the public by reducing the risk of insolvency. Affected EU direct life and non-life insurance and reinsurance companies will, effective as of 1st January 2016, be governed as to the amount of capital that the company must hold.

But the new regulation looks beyond mere accounting ratios to calculate the amount of capital that the company must hold to reduce the risk of insolvency (Pillar 1), the quality and effectiveness of governance/risk management practices and conditions for supervisory oversight (Pillar 2); and, public disclosure of information about capital, solvency, financial and other risk situations (Pillar 3). But how well prepared is the insurance sector for these sweeping changes?

A recent report by EY (European Solvency II Survey 2014), suggests that insurance companies appear “generally well prepared” on all aspects of Pillar 1, whilst there is much more to do around Pillar 2 to become compliant. However, there are widespread concerns around the sector’s readiness for Pillar 3 with 80% of respondents saying they have yet to meet most or all Solvency II reporting requirements. EY points out that there are major shortcomings in terms of information technology and people, compliance planning, data sourcing and the creation of a viable production operating model. So why the difficulty?

The requirements are far-reaching

At first sight, Solvency 2 Pillar 3 has many similarities with other reporting regimes, yet closer inspection reveals that the ‘devil is in the detail’, because Pillar 3 demands more granular and more frequent capital, risk and financial information about the organization. In a ‘nutshell’, it is more complicated and data-intensive than was initially estimated (similar to bank’s earlier comparable Basel II experience).
Furthermore the information requirements are quite broadly cast, requiring disclosure about business performance, governance and risk management, valuation methodology, plus (large amounts) of prescribed data about capital, solvency, risk profile and other financial matters. The Directive introduces two capital related reports, the Solvency and Financial Condition Report (SFCR) and the Regular Supervision Report (RSR), with both quantitative and qualitative components. It introduces some 60 Quantitative Reporting Templates (QRTs) which some estimates say will involve in excess of 20,000 data points.

No cause for panic – solutions are at hand

Faced with such profound changes there is a temptation to cast around for new systems and approaches, yet closer inspection reveals how well Pillar 3 fits into established solutions for disclosure management that have been popularised for statutory reporting.
For example, Pillar 3 Disclosure is prepared on a legal entity (i.e. group and individual entity) basis, as opposed to business lines, and is owned by the Board of Directors. Furthermore, disclosures must be made publically available, in parallel to (and consistent with) the Annual Report. And in some cases, disclosures may run to over 100 pages of data, analysis and commentary – well within the operational experience of businesses already using disclosure management for statutory reports.

Time for action

Pillar 3 will of course require significant effort if organizations are to become compliant but leveraging well established and proven disclosure management solutions such as Tagetik Collaborative Disclosure Management will greatly ease the burden, giving them the time to focus on the organisational, process and data issues rather than the technology solution. The ability to rely on existing disclosure management that provides a highly automated framework for data capture, document production, collaboration, version management, auditability, workflow, control and complex disclosure (SFCR, RSR, QRTs) will give preparers more time for analysis, commentary and governance oversight. It will also allow organisations to respond flexibly to the inevitable changes as regulators and the industry continue to debate and adjust the requirements. But if preparers are to give themselves the best chance overall of meeting the regulatory deadline of January 2016 for the start of the new regime and the first Pillar 3 reporting thereafter (likely sometime in 2017) then they’d better get started. Eliminating the question now of “what systems should we be using” will smooth the critical path to implementation and provide an enduring solution for the longer term and prebuilt Solvency Ii calculations and reporting makes this a quick win that can then be used to address other reporting requirements.

 

Tagetik for Solvency II

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