The Intelligent Quarterly from the publishers of The Insurance Insider

Spring 2012

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While data quality is the key to achieving Solvency II compliance, adequate systems and a well-wrought IT strategy are also crucial. None of this comes cheap - and time is running out.

The 1 November 2012 deadline for Solvency II implementation is still two years away, but the Financial Services Authority (FSA) is urging (re)insurers and reinsurers to take advantage of the latest Quantitative Impact Study (QIS5) taking place across Europe from August to October 2010.

The FSA says QIS5 will give firms a better understanding of the impact of Solvency II on their businesses and test how well prepared they are to meet the regime's financial and capital requirements.

QIS5 will help firms decide, assuming they have not already made up their minds, whether to use a standard, off-the-shelf capital adequacy model, to develop an internal one or to use a combination of the two.

The overarching object of the exercise, as the FSA explains, is to "demonstrate adequate financial resources" (under pillar 1); to "demonstrate an adequate system of governance" (pillar 2); and to meet "public disclosure and regulatory reporting requirements" (pillar 3).

PricewaterhouseCoopers (PwC) partner Jim Bichard says that the London market is taking the task seriously, but there are firms that have yet to fully get to grips with Solvency II. And, although late starters may gain advantage by learning from the early movers, technological resources are in short supply.

Bichard also notes that costs are escalating as resources become increasingly scarce. Whereas the European Commission's early estimate put the cost to the European insurance sector at EUR2-EUR3bn over five years to implement Solvency II, Bichard says that the eventual total is likely to be significantly higher.

Many businesses are wrestling with Solvency II requirements, while their legacy systems also need to be upgraded or replaced altogether. At Hardy Group, a firm that is well advanced with its Solvency II project, chief information officer Matthew Simpson puts the cost, including of new applications and data warehousing, at between 5 and 10 percent of annual expenditure across the enterprise.

Where does all the money go? On hardware and software for sure, but ensuring the quality, integrity and consistency of data across the entire business is enormously time consuming and involves every part of the firm.

Simpson explains that establishing accurate and appropriate data policies policies is vital. An agreement on the meaning and definition of elements as fundamental as premium income or claims, for example, has to be consistently accepted across the firm. Each part of the company has to take ownership of the data it produces and the resulting data has to be appropriately "wrapped up" and be "auditable by the FSA". This is by no means as easy as it sounds, especially across large and diverse businesses. The amount of data is huge and the systems for handling it need to be up to the task.

In addition, data received from outside partners, such as brokers or financial information providers, needs to be integrated into the process. "Straight-through-processing" may be the holy grail for many parts of the financial services sector, but achieving it is highly complex and the technology investment is costly.

Only if data is entire, correct and auditable can the IT do its job. In the context of Solvency II, a "garbage in, garbage out" approach won't wash. In essence, the chief information officer/chief technology officer is responsible for ensuring the enterprise stays in business amid increased regulatory rigour. From an IT standpoint, as well as from a regulatory one, the insurance sector has never seen anything like this before.

Colin Whickman is Director and Co-Founder of Scyllogis Consulting