The Intelligent Quarterly from the publishers of The Insurance Insider

Winter 2011 / 2012

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The Financial Services Authority (FSA) has now revised its Solvency II implementation assumptions in light of EU discussions about the splitting - or "bifurcation" - of the implementation dates.

Legal transposition of the Solvency II directive is now assumed to be 1 January 2013, while the requirements will be switched on for firms with effect from 1 January 2014. In the intervening year, firms will continue to be regulated under the existing regime, while supervisors and firms will monitor progress toward Solvency II. These supervisors will be able to complete the necessary approval processes, including that of internal models.

This implies that progress on the journey to Solvency II has slowed and that insurance firms can relax. However, the FSA has stressed that these changes do not mean a delay of a year, stating that: "We must maintain the momentum and stay focused on implementation." As such, regulated firms should not be taking their foot off the accelerator, as they will find that much work is still required and there remain issues to be dealt with.

Indeed, we have recently seen a flurry of regulatory activity, with consultations being announced by the European Insurance and Occupational Pensions Authority (Eiopa) on the guidance of the Own Risk and Solvency Assessment (Orsa) and on the Solvency II reporting requirements. The FSA has added to this by announcing its own consultation on how the Solvency II directive is to be brought into the FSA handbook. We can expect to see more of this type of activity in the coming months.

So what does all of this mean for insurance firms, and how can the extra year before the regime goes fully live be used wisely? Much time (and expense) has been spent on the requirements of the risk management and corporate governance aspects of the new regime and also on the calculation of the capital requirements. Some areas have, however, been neglected either through a lack of finalised guidance or through their inherent difficulty.

Business as usual

The underlying importance of effective data management under the new regime is an area that many have yet to fully grasp. A core principle of the regime is the requirement to present data users with the ability to assess the quality of the data being used in terms of its accuracy, completeness and appropriateness. The end user of the data might be the internal model, the Orsa, a regulatory report or any user that is making a business decision. Confidence in a firm's data, and the resultant business decisions being made, is central to the transparency and quality principles prescribed by the regime. However, effective data governance means challenging how data is seen within the organisation - this requires cultural change and the implementation of new procedures.

Simply writing a data policy is not enough. Proper data management is essential if the data is to be accurate, complete and appropriate. Operational boards and appropriate internal structures that facilitate the proper management of information and data are the key enablers of a successful data governance programme. Achieving a robust data governance regime takes time both to implement and embed.

Through data governance, firms seek to exercise positive control over the processes and methods used to manage data, including its collection, storage, processing and delivery. In order to ensure a consistent level of control, relevant constraints need to be defined and applied. The cultural change cannot begin until these are identified and data owners are reporting on the information and controls that they are responsible for. The remediation plans for the control and process weaknesses identified have now been given the time to be both implemented and embedded into a firm's "business as usual" procedures. The delay in Solvency II implementation allows for much more of this activity to take place in time for 2014.

Weather eye

The Orsa remains one of the key challenges of the Solvency II requirements. Many are still questioning exactly what it is and how they are going to achieve it. While the new guidelines published for consultation by Eiopa might not answer all these questions in full, they should give many firms the required impetus to develop and finalise how they will produce their own Orsas.

An effective Orsa is the key to embedding the effective risk management and capital management envisaged by Solvency II. The new guidelines emphasise that the board must not only engage with the development of their firm's Orsa, but must be intimately involved in the process to ensure it becomes embedded in the company's culture. It is important to realise that the Orsa will be unique to each individual firm - indeed, the Eiopa guidelines deliberately do not contain a template - but are principle-based to allow boards to define the Orsa for their own particular business. The emphasis remains firmly on the "own".

Companies should not underestimate the extent of the challenge. This is not a short exercise, but is one that requires engagement in the process widely across the business. It also needs much supporting documentation and therefore requires some considerable activity.

As with much of the Solvency II regime, the Orsa requires its own policy and procedure to be defined. However, it is important that the Orsa process is not seen just as regulatory box-ticking. Orsas that demonstrate that all is sunny will not be useful to the business, whereas Orsas that contain dark clouds in some areas with relevant action plans will be meaningful and useful - and might also tick that regulatory box.

The extra year means that, having put a policy and procedure in place, firms can now produce dry run Orsas, enabling the policy, the procedures and the format and underlying documentation to be challenged and revised so that by 2014 a robust and appropriately formatted Orsa is in place.

Focus the mind

Reporting and disclosure under the Solvency II project has been on the back burner at many firms because of the uncertainty of the new regime's definitive requirements.
However, the recently published Eiopa consultation has now removed some of this uncertainty and insurers can now start to put into place more concrete implementation plans.

The new consultation is far more detailed and reading it focuses the mind on the potential size of the task that firms are facing to meet the extensive disclosure requirements.

The published requirements are still not final, but have been the subject of both public and private consultation with industry stakeholders and so are unlikely to change materially from those now published.

They will, however, possibly be supplemented by extra reporting for financial stability purposes and country specific requirements.

So what challenges do firms need to deal with? The biggest challenge remains the revised frequency, speed and increased detail of the reporting.

It means finance departments will have to challenge their current processes and procedures in order to enable the faster and more detailed reporting required. This may need a re-think of how and why the department does its work and how it integrates with the actuarial, risk and other departments in the firm.

Such change does not come about quickly and firms need to start identifying their preferred operational model and implementing and testing the necessary changes to both process and procedure to ensure that the new operating frameworks are robust and tested prior to having to deliver the reporting in anger in 2014.

Charles Portsmouth is director of Moore Stephens' Insurance Industry Group