Managing the Cost of Solvency II Implementation

rnJust how expensive is Solvency II? Well, if the UK’s Financial Services Authority (FSA) is to be believed, the anticipated cost of new technology and external consultants necessary for compliance is likely to exceed US $3 billion. This is a substantial expense for many European insurance firms especially when you consider that 1 in 10 do not currently satisfy the envisaged capital requirements. Whereas the deadline has been pushed back a couple of times, there is no dodging Solvency II compliance for insurers in Europe. But insurers can take advantage of the delays to identify ways through which they can cut back on costs without necessarily compromising compliance. For instance, it may not be necessary to completely overhaul business systems - strategic data warehouse purchases coupled with updates of existing applications may achieve the same goal at a much lower cost. Here are a few tips on keeping costs low: Connecting Legacy Systems and Eliminating Silos Many large insurance firms and especially those that have been in existence for decades are often bedeviled with disparate systems. While there is likely to be one or two central systems that touch on most aspects of the business, the size of large established insurance firms means that different departments over time identify their technology needs independently and go ahead to procure their own systems. The result is important data lying in several disparate systems and databases. This not only presents a challenge for insurers in consolidating the data required to generate Solvency II reports - it also slows down internal decision making. Replacing such legacy systems at one go just for Solvency II compliance would be an expensive undertaking. Instead, insurers can develop a custom interfacing tool that allows for extraction of relevant data from each system. This should go hand in hand with efforts at improving compatibility between legacy systems. Eliminate Non-electronic Data Repositories The nature of the insurance business means that insurers collect and store data in various ways including microfiche, paper, text/flat files and relational databases. It is on all counts a data heavy industry, probably only eclipsed by the banking sector. Extracting information from non-electronic sources for quarterly Solvency II reporting can be a tedious, time consuming affair. Solvency II compliance teams must work with line managers to identify any data in the organization that is solely retained on hard copy that does not have a corresponding readable electronic record. Such data can then be converted to an electronic format that is easily compatible with other systems in the organization. Once physical data becomes electronic, it is much easier to analyze and assimilate with data from other sources. Transferring Decision-making from IT to Business Units Whereas much of the Solvency II framework seems to have stabilized, we cannot rule out the possibility of significant changes taking place between now and 2013. In addition, Solvency II is likely to be replaced by a better framework in future just as it is replacing Solvency I. Effecting such changes on a business’ existing technology infrastructure and data warehouse may involve complex and extensive reprogramming and re-configuration. In certain instances, reverse engineering, a costly process, may be necessary. The bulk of responsibility for effecting such changes often falls on the IT department. But since the IT staff are already tasked with day to day IT duties and are also not subject matter experts on insurance or Solvency II, this can delay implementation and push up overall costs. To avoid this, the workflows, processes and data warehouse setup for Solvency II must separate the ability to change business rules from the ability to change the programming logic. That way, business units can make changes to data extraction, analysis and reporting rules without the need for the IT department’s intervention. Some studies have indicated that by reducing the need for IT staff’s involvement in effecting changes, a business can lower the overall cost of making such changes by up to 50 per cent. This is not only useful for Solvency II but also gives the insurer agility to rapidly respond to changing market conditions. Reducing the Cost of Transparency If there is one major objective of the Solvency II framework other than shoring up capital requirements, it is to make certain that insurers disclose all relevant information. Pillar 2 of Solvency II requires that internal models be regularly evaluated for accuracy. By basing the report generation process on a business rules management system mentioned in the previous section, insurers are in a better position to demonstrate the rationale and audit trail of every key business decision. Such transparency is bound to win the confidence of industry supervisors and avoid the costly repercussions of an unfavorable audit.