Beyond Solvency II

COMMENT

The uncertainty surrounding Solvency II is an increasing concern. In this article Graham Olsen, Senior Managing Consultant in IBM’s Global Business Services considers how firms can leverage their investments beyond Solvency  II. For some insurers, Solvency II will have been perceived as a huge waste of time and money: a regulatory hurdle and no more. Insurers may have struggled through treating the regulation as a compliance exercise with little to show for it at the end. Other insurers, however, will turn Solvency II into a success story, and leverage it to deliver significant benefits, both in the short and longer term. While uncertainty about the implementation date continues, insurers need to be especially careful about securing the benefits of their Solvency II programmes. Extended delivery schedules would be likely to increase exposure to risk and defer benefit realisation. Organisations often find it difficult to maintain attention and energy on overlong initiatives. Controlled completion and implementation of these programmes is critical for sponsors if they are to avoid failure and make a difference to their organisation. This article examines the steps successful insurance leaders will take.

Protect

The first step is protection. From the moment projects go live, protection must be in place in Business-As-Usual. New systems and processes must be under robust change control, with end-to-end testing, to defend them against rapid degradation in the face of a dynamic business. If implementation is delayed, then part-built systems and processes must be protected by the project for extended periods. This can significantly increase complexity and risk. Typically, Solvency II projects are delivering more integrated IT and finance environments than before, with more sophisticated controls and interactions. These new systems require stronger IT change processes than many finance divisions are used to. While the processes can be relatively easy to implement, they must be extended throughout the actuarial and accounting areas.

Sweat

Successful insurers will sweat their new assets as soon as they are protected; embedding and realising benefits rapidly. There are two prongs to this: process and decommissioning. Process change takes advantage of the new systems delivered as part of Solvency II to make operational savings in terms of time or cost. For example, improved data quality can allow processes to be changed to take out unnecessary checks or reconciliations. Teams can be resized as volumes of rework are reduced. Increased automation can release people from the process and improved analysis tools can remove spreadsheet work. There are early opportunities to begin extending the benefits of these systems to EEV (European Embedded Value) or IFRS processes, achieving further economies of scale. Decommissioning can be as simple as identifying and removing legacy systems that are no longer required after Solvency II implementation, such as old extracts that have been replaced. More subtly, there is an opportunity to review infrastructure and the way it is used, or to reorganise support teams and roles.

Build

In most cases, the big savings will come from reducing the cost of future IT projects. The most advanced insurers are already thinking about how they are going to build on their Solvency II platform over the coming years. Where insurers have put in place granular policy or results data stores as part of their programmes, they are well placed to support future customer and policy initiatives such as Customer Value Management or enhanced experience analysis. This data can also prove core to government screening and tracking exercises, such as FATCA. Flexible systems can make new product launches or even administration system rationalisation much cheaper and faster. Solvency II systems are likely to act as a good platform for strategic management information systems in the future. The key to securing these future savings is putting in place a clear architectural roadmap and strong governance today, which makes sure the assets are used from now on, within the finance area, and beyond.

Conclusion

There will be winners, strugglers and losers as a result of Solvency II. The losers will fail to put in place adequate protection, and will rapidly find themselves with more complex and expensive processes than before. The strugglers will secure their systems, but not take advantage of the opportunities they face. The winners will take the right steps as they complete their projects to make sure they turn Solvency II into a success, delivering benefits immediately and in the future. — The author is a Senior Managing Consultant in IBM’s Global Business Services. The views expressed are the author’s own.
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