The Intelligent Quarterly from the publishers of The Insurance Insider

Spring 2012

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The insurance industry often gets a hard time for being slow to adopt new technology. Some of this criticism is just noise from suppliers looking to shift products, but some of the criticism is justified. In the industry, there have certainly been some high profile, low-return investments over the past 10 years or so. While the London market remains a bastion of trust and personal relationships, technology will be central to retaining our unique position in the global market going forward. There is no room for error.

We don't think the investment being made by the industry into Solvency II (SII) falls into the "low-return" category. The industry is taking SII seriously as an issue - and with good reason. A recent Northdoor survey showed that 58 percent of insurers believe that the incoming European solvency regulation presents more of a risk to the market than the 2011 hurricane season. Of those surveyed, 26 percent believe that industry is behind with its SII compliance and 13 percent said that they had already spent £250,000 to £500,000 on the regulation. An additional 6 percent expected to spend at least £1mn more.

Click to enlarge The fact that the industry views SII as on a par with the hurricane season shows that regulation really is the burning issue in the market right now. Companies have made good progress, but there is still more to do and it's a worry that nearly 75 percent of our respondents didn't know or weren't sure whether the industry was really on track with compliance.

Despite these residual fears, it's good news that market participants are focusing on delivery - and, just as importantly, delivery over the medium-term (2013 and beyond) - not just ticking the boxes to get past the first inspection. It's refreshing to see a good chunk of the industry eschewing manual or spreadsheet and word processor-based options to adopt more sophisticated solutions.

There is a growing recognition that spreadsheets create several "versions of the truth" and consequently, that the integrity of the data that companies are basing management decisions and business strategies on is not sound enough. This has led to the uptake of, for example, a Microsoft SharePoint and data directory combination as a much more robust and flexible compliance solution.

But it's not just about compliance - the insurance business model overall will benefit from a holistic approach to risk management and regulation (see chart). Modern technologies have higher security standards and can help to establish governance and controls with smart mechanisms, such as incorporating audit trail and tracking functionality. You can even employ preventive security tools based on behaviour assessments, and therefore reap benefits that extend far beyond SII compliance.

As well as compliance and security, globalisation is another issue. Even though SII does not affect the United States directly, interest in SII compliance has been steadily building from insurers in both Bermuda and the US. The Bermuda market is now aiming to implement data quality controls equivalent to those defined by SII.

Interdependence
Already, the interdependence between the London market and other geographies has increased considerably and successful global trading requires all participants to adhere to broadly similar standards, wherever they are domiciled. Technology will continue to play a key role in enabling cross-border interactions, business collaboration and transactions, since reliable data will need to flow between these different constituencies. As such, expenditure on SII can also be an investment in your global capabilities, making your business a more attractive international partner for other market participants.

Click to enlarge With all of these different factors to consider, it makes sense to look beyond the regulations themselves and to think about how the implementation of SII requirements can help to improve your organisation's business processes and data governance through technology. With this approach, insurance organisations can use SII compliance projects as an opportunity to create a repeatable solution that will help streamline business processes, reduce operating costs, and improve accuracy of risk calculations through greater visibility and control of critical business information.

But in order to benefit from this kind of approach, insurers will need to consider how investments in "SII systems" can be integrated into the wider IT infrastructure. Only then can you escape the "silos curse" that prevents so many IT-based projects from achieving their goal.

For instance, many insurers have historically tried to calculate and underwrite risk within separate areas of the business, or across different geographies that have little connection to one another. To make matters even more complex, different business teams within the same company are often collating and evaluating comparable sets of data in distinctly different ways, and across numerous legacy systems. This out-dated approach won't work when it comes to SII.

Since SII will fundamentally change the way that all parties in the insurance value chain deal with information in order to accurately assess risks, most insurers have already begun preparing for closer scrutiny of their material data. For this reason, insurers have initiated their SII preparations by focusing on the data management aspects of the regulations, with particular attention being paid to how IT systems will be able to cope with these changes.

Solvency II requires the compilation of a full directory of any data used to operate, validate and develop the internal model. This data directory must show what data is included in the internal model, where it is sourced from, how it is used and how it is dependent on other data (see chart below).

Flexibility
In addition to ensuring that the organisation understands the data definitions in the directory, an insurer will need to document agreed processes for dealing with data and making changes to the model. Critically, an insurer will also need flexibility and a sustainable set of processes to ensure that the data directory remains in line with changing regulatory requirements. A robust data directory can automate the storing and profiling of data - measuring and ensuring its accuracy, appropriateness and completeness.

Moreover, core business processes will need to be carefully defined, developed and documented, with special attention given to the IT systems that will be required to support these areas.

At the same time, deficiencies in data security and privacy will also need to be clearly identified and improved, and a mechanism for producing reports and disclosures will need to be put in place. The technology solutions responsible for data management and documentation will then play a key role in all these areas.

As such, in order to maximise the investment that you're making in meeting SII requirements you will need to understand the IT implications of this type of project in a comprehensive manner, rather than just focusing on actuarial modelling. After all, technology will play a critical role in providing and demonstrating the project management discipline and methodology required for the SII implementation, and - if applied correctly - can also help to bring disconnected business processes and departments together at the same time.

For all of these reasons, insurers should take advantage of their SII projects as a chance to gain a competitive advantage by creating a repeatable IT solution and processes that are underpinned by robust technology solutions. This way, chief information/technology officers can transform their investment in SII projects into something much more valuable: a strategic IT project that can help to support the firm's commitment to SII compliance right now, whilst also creating the technology framework needed to maintain a competitive edge in the future.

Rob Stavrou is director of consultancy for Northdoor