Why group supervision?
Solvency II introduces a holistic approach to group supervision. Group activity will be monitored at the highest level at which decisions about the group are being taken.
EEA insurance groups will now have a single regulator for the entire group and will have the option of reporting at group level. This change is increasing the complexity and importance of data management and the need to set up an effective reporting infrastructure.
The importance of groups
The CEA estimates that in 2007 there were 125 large insurance groups and approximately 500 medium-sized groups in the European insurance market (see chart for the breakdown of market share by size and number of companies).
“The European insurance industry,” according to the CEA, “consists of a wide mix of companies and groups ranging from large multinationals to smaller regional or local operators.”
By taking a holistic view of group supervision, regulators should gain more transparency of group operations and be able to identify risks arising in individual entities of the group. The encompassing approach is needed because certain risks such as double gearing and leveraging may only be spotted at group level.
Solvency II group supervision
Group supervision under Solvency II will be conducted through the supervision of the group head office or its holding company (regardless of whether that entity is an insurance company or not). But, as the FSA points out in an early document, group supervision pits the treatment of individual entities against that of the entire group.
“The challenge in putting forward a proposal for the structure of group supervision under Solvency II is to balance two competing views of an insurance group: one view sees an insurance group as a single economic entity within which risks are pooled and diversified, the second recognises the group as a collection of separate legal entities with segregated risks.”
Solo entities will still be supervised by their local regulator but the regulators will have to work with the group supervisor and this will increase the complexity of reporting.
Solvency II allows groups to report as a single entity. Firms can apply to the group supervisor to submit both an ORSA (Own Risk Solvency Assessment) and a SFCR (Solvency and Financial Condition Report) for the whole group. ORSA outlines the firm’s risk profile and its ability to match future liabilities while the SFCR is the firm’s public disclosure under Pillar 3.
However reporting will remain just as rigorous. Both reports must have sufficient detail of each individual solo entity in the group and they will be shared with all relevant supervisors.
Data challenges for group supervision
It’s not surprising that data and an infrastructure to collect and report data is high on the agenda of most firms. In the annual Deloitte Solvency II Survey, which focused primarily on the UK industry, data infrastructure and data handling processes were ranked 3rd as an area organisations will be focusing on most in the next six months.
Richard Hurley, Insurance partner at Deloitte, told Solvency II Wire, “The difficulties many insurers face is both in matching the quality and handling the volume of data from across the group. What many have found out is that often the data is not uniform and requires a lot of processing in order to create a group report that is compliant with Solvency II Pillar 3.”
Firms have been applying different solutions to data management which are now being implemented, however, Mr Hurley notes, “There is a certain amount of tension between solo entities and the group head around the calculation of the ORSA and SFCR. While the group is keen to obtain the raw data for the calculation, many solo entities prefer to do the calculation themselves rather than pass on the data.”
John Smith, Insurance Business Solutions partner, IBM Global Business Services, UK & Ireland, told Solvency II Wire that reporting at group level could increase complexity and errors if data governance systems are not sufficiently robust.
“As an example, data governance may be delivered via a template for centralised population or increasingly via a centralised actuarial solution shared by the enterprise. In the latter case, the overall performance will be limited by the weakest links in the process, systems and data chain resulting in a slower end to end process or failures in calculation and reporting that demand extensive reworking,” Mr Smith said.
Recently, IBM announced it will be supporting HSBC Insurance UK in its preparation for Solvency II. IBM will create a, “data management and analytics model to ensure compliance with Solvency II requirements and deliver advanced risk management capabilities.”
The solution will provide a store for HSBC’s risk and solvency modelling data allowing it to deliver all the key regulatory data and associated reporting. There are other European legal entities within the HSBC Group to which Solvency II applies, but each is being dealt with independently, whilst sharing best practice and oversight at a European level.
Mr Smith explains how Solvency II will affect groups with a world-wide presence, “For global insurance organisations it is clear that Solvency II along with IFRS 4 phase II etc, is establishing a regulatory benchmark that will drive firms to adopt comparable or equivalent standards for external analysis and comparison and for internal management of performance.”
Delivery to shifting deadlines
As ever with Solvency II, the challenges are compounded by the lack of clarity and delays in drafting of the final regulation. IBM is adopting a pragmatic solution.
“For all Solvency II projects, there is a real challenge to delivering a project with incomplete requirements and an assessment approach by regulators that is not fully embedded into their ways of working”, Mr Smith says. “As such our advise to our clients across Europe has been to adopt an iterative or multiple release based approach.”
“The alternative,” according to Mr Smith, “is unworkable. Awaiting final guidance for requirements would foreshorten implementation and adoption timelines whilst increasing risk and costs beyond acceptable levels.”