Strategies and solutions for Pillar 3 of Solvency II
May 2015 | 10QUESTIONS | SECTOR ANALYSIS
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FW speaks with Anne Leslie-Bini, Director, International Development Leader at Invoke, about strategies and solutions for Pillar 3 of Solvency II.
FW: In your opinion, what are the biggest challenges posed by the introduction of Pillar 3 of the Solvency II Directive?
Leslie-Bini: One of the principle challenges of Pillar 3 is that the complexity of the reporting and disclosure aspects of Solvency II was massively underestimated, which has impacted the critical path preparations and resources that firms have devoted to this aspect of their Solvency II programs. Now that Pillar 3 has finally become a priority, we are seeing that there are huge organisational and process implications with regard to how insurers produce, collate and manage their data. Up until now, undertakings had been managing to meet their reporting obligations satisfactorily in spite of being organised by ‘silo’, but this approach simply no longer works in a Solvency II context. In order to manage the task of producing the massive volumes of data required by the regulator, there is necessarily transversal collaboration between business functions – such as risk, finance, actuarial, and so on – and firms are realising this quite late in the day. When the increase in data volume and complexity is coupled with the marked increase in reporting frequency, it is clear that firms really are facing a sea-change.
FW: Scheduled to come into effect on 1 January 2016, how prepared are insurers to deal with the implementation of the Solvency II Directive? In your experience, is there plenty of work to be done?
Leslie-Bini: Our experience in working with insurers across Europe has shown us that there are huge disparities in the level of preparedness, by country and by size and type of insurer. In France, for example, the decision by the French Regulator (ACPR) to impose a dry-run of Pillar 3 reporting in September 2014 ‘forced’ insurers in France into being early movers, and this decision has proved to be largely beneficial in terms of industry readiness. Even when national supervisors have preferred to ‘explain’ rather than ‘comply’ with Interim Phase reporting in 2015, we have the example of one of our Danish customers who opted to prepare for the rigours of Pillar 3 from as early as 2012, in spite of them having arguably more time available to them compared with peers elsewhere. When talking about the amount of work firms are facing to be ready, the time horizon under consideration is an important parameter. Does ‘ready’ mean being tactically prepared for the short-term objective of 2016, or does ‘ready’ mean that firms are armed with sustainable strategies for the future? Solvency II is forcing firms into a new operational paradigm that has information technology at its core, with a view to automating processes and systems that have traditionally been manual and spreadsheet-based. The banking industry has already made this seismic shift towards rationalised front-to-back systems; it is now time for insurers to follow suit.
“Now that Pillar 3 has finally become a priority, we are seeing that there are huge organisational and process implications with regard to how insurers produce, collate and manage their data.”
FW: What impact did the financial crisis have on the way insurers previously viewed and managed risk? What are the benefits for insurance companies of adopting a look-through approach to managing their capital?
Leslie-Bini: Once the initial shock of the financial crisis wore off, a significant number of insurers assumed a proactive and forward-looking stance, which involved taking a hard look at their businesses. The financial crisis undoubtedly acted as a catalyst for firms to identify areas for improved risk management strategies and operational practices that would serve to make them more resilient and capable of creating value for policyholders and investors. Beyond the regulatory constraints imposed by Solvency II, there is definitely a growing view within the industry that the efficient management of risk and capital is the key to future business success. As regards look-through, the jury is still out on whether or not any tangible benefits will actually materialise from this approach. As things stand, simply meeting the data requirements for look-through is a significant challenge for both insurers and their asset managers. It will be interesting to see if – and how – the industry decides to embed the look-through requirements into business-as-usual so as to leverage them for competitive advantage.
FW: In your opinion, how much will the implementation of Pillar 3 of Solvency II cost the insurance industry – in financial terms or otherwise?
Leslie-Bini: Given that the focus of Pillar 3 is on reporting and disclosure, it is not surprising that the industry is considering it to be a pure compliance burden that delivers little or no business value. As such, the approach taken by most firms is one of cost minimisation. However, such a standpoint is arguably myopic and we would contend that firms taking this route may be exposing themselves to a significant risk regarding unforeseen consequences. While there are certainly difference approaches to managing Pillar 3, all sustainable strategies necessarily involve an investment in robust processes, skilled people and agile technology. When insurers ask themselves “Can we afford to invest in Pillar 3?”, our view is that the real question should be “Can we afford not to?”. Have insurers really measured the potential costs and reputational damage that non-compliance could cause, because corners were cut or because the different elements needed to successfully manage all aspects of Pillar 3 were either not aligned or sufficiently fit for purpose?
FW: What steps do insurers need to take to ensure that their asset data is of a sufficient quality to comply with this heightened regulatory environment?
Leslie-Bini: The asset data challenge of Solvency II is one that is rattling the relationship between insurers and their asset managers to its very core. One of the more unexpected side effects of Solvency II is the sizeable number of insurers we are seeing who are actively engaged in rationalising the number of asset managers with whom they interact, in an attempt to simplify how they access, control and aggregate large volumes of high quality granular asset data on their investment portfolios. The asset managers coming out on top are those that are managing to deliver the full asset data set which insurers need to report, on time and in an easily consumable format. The importance of proactive and open dialogue between insurers and their asset managers has never been more important. It really is in firms’ best interests to collaborate closely with their asset managers, guiding them and, to an extent, educating them regarding the detailed asset data requirements. Insurers need to be explicit in their requests and realistic in their expectations, engaging with their asset managers as valued business partners. If the relationship between insurer and asset manager is one that is regarded as purely transactional in nature, the weight of the Solvency II reporting burden is likely to cause it to collapse.
“The asset data challenge of Solvency II is one that is rattling the relationship between insurers and their asset managers to its very core.”
FW: Given that the Solvency II Directive means that insurers will be dealing with a vast increase in the volume of data they process, what strategies can they implement to ensure their operational effectiveness is not compromised?
Leslie-Bini: Solvency II has given rise to an unprecedented data challenge. Our experience has shown us that a technology strategy based on forward-looking moderation and industrialised data management is the key to enhanced operational efficiency. While volumes of data have increased massively across the board, arguably the biggest impact of Solvency II is on the asset data side. The changes brought about by Pillar 3 and look-through are driving new levels of collaboration and cooperation between insurers, asset managers, industry representative bodies and data intermediaries, simply in an effort to source the requisite data in a timely and cost efficient manner. A good example of where pragmatic discussion and industry-wide collaboration can generate benefits for all stakeholders is the Tripartite Template, which aims at standardising the multiple and recurrent data requests that insurers are levelling at their asset managers and data intermediaries. Where data requirements are applicable across the industry, it really makes no sense for each insurer to ‘go it alone’ in devising a unilateral strategy when a mutualised, concerted and standardised approach has the potential to reduce costs, improve operational efficiency and optimise the overall value created across the industry.
FW: Has the European Insurance and Occupational Pensions Authority’s adoption of the eXtensible Business Reporting Language (XBRL) standard led to any significant difficulties for the insurance industry in terms of Pillar 3 implementation reporting strategies?
Leslie-Bini: The provocative answer to this question is ‘not yet’. XBRL is a technical format for standardising the communication of data and as such, is perceived as a very small detail in the wider context of firms’ Solvency II programmes. The key to any successful Pillar 3 reporting strategy is the availability of the right data, at the right level of granularity, at the right time. Many firms are still grappling with this challenge; the result is that XBRL has largely been consigned to the backburner. As there has been no obligation on firms to make an XBRL submission to the regulator – test or otherwise – no major issues or difficulties have been flagged. However, that doesn’t mean there aren’t any. It simply means that firms, and supervisors, may not yet be fully aware of them. The good news, however, is that there is mature technology available on the market that is perfectly aligned with the Pillar 3 use-case. Firms do need to be mindful of asking the right questions when evaluating vendors, so that they are certain that their reporting software will bridge the ‘XBRL gap’ between their data and the technical submission requirements imposed by their national supervisor.
FW: What criticisms, if any would you make of the rollout of the Solvency II Directive? Did the Pillar 3 reporting requirements take insurers by surprise?
Leslie-Bini: Solvency II is no stranger to criticism, but we are where we are and it is in everybody’s best interests to make sure that the Interim Phase and full implementation are ultimately a success. Our experience engaging with both insurers and supervisors has shown us that both constituencies have been dealing with significant challenges in terms of preparing for the roll-out of Solvency II. A recurring gripe concerns the timely availability of answers to queries, and the operational discomfort caused by lack of clarity. EIOPA has communicated to the best of its ability regarding macro changes to Solvency II requirements. However, Pillar 3 is a very particular beast and the devil is definitely in the detail. Once firms actually started performing a deep analysis of the data requirements, it is true that many were aghast at the magnitude of what they are being asked to accomplish in such a tight timeframe. And that is without even mentioning how the publication of successive XBRL taxonomy iterations can further complicate matters.
“The good news, however, is that there is mature technology available on the market that is perfectly aligned with the Pillar 3 use-case.”
FW: To what extent are criticisms of European legislators justified as far as their timetable for the Solvency II Directive is concerned?
Leslie-Bini: Realistically, there is no ‘perfect’ timetable for implementing regulatory packages of this scale, as change is always synonymous with some level of difficulty and discomfort. While the Interim Phase certainly has helped ease the passage of Solvency II, in hindsight it would arguably have been beneficial for firms had the difference in scope between the data requirements for the preparatory phase and full roll-out been narrower. While the intention was undoubtedly to ease the passage of Pillar 3 for insurers, the actual result is that over 50 percent of the full scope of required QRTs will be put into production in 2016 without having benefitted from the road-testing of the 2015 deadlines. Fundamental and complex issues linked to look-through and run-off triangles, for example, are currently causing insurers significant concern, as their business teams are not yet fully confident of their ability to produce the requisite data in a production environment that is aligned with the Solvency II roll-out schedule.
FW: Going forward, will Pillar 3 of the Solvency II Directive prove to be a key component in encouraging greater discipline in the insurance industry across Europe? What factors are likely to influence its success or failure?
Leslie-Bini: Pillar 3 imposes unprecedented supervisory and public disclosure requirements on Europe’s insurance industry. In the face of heightened external control and scrutiny, firms will undoubtedly be mindful of ensuring that their operations are above reproach. Furthermore, forward-looking firms will be keen to leverage this constraint and turn it to their advantage. On the supervisory side, regulators are soon to find themselves inundated with frequent onslaughts of complex and voluminous submissions, under pressure to demonstrate their ability to analyse and reuse the Pillar 3 data. The quality of the engagement that EIOPA and national supervisors have with the industry and technology providers during the run-up and initial implementation phase is certainly a key success factor for Pillar 3. What will further condition its alleged success or failure will be the relative ease – or difficulty – experienced by firms in meeting their obligations, and the perceived benefits derived from their efforts. One resoundingly positive development is the transversal cohesion that Solvency II is generating across functional business teams that had in the past operated largely independently from one another. The reporting requirements of Pillar 3 are vast in scope, which is forcing entirely new levels of internal collaboration towards a common goal. Pillar 3 involves harnessing the collective talent of a diverse range of operational teams as part of a concerted, firm-wide effort that is supported by reinforced multi-level governance mechanisms designed to instil discipline by default. Pillar 3 is all about people and data, both of which are value-rich resources when leveraged effectively. It might be wishful thinking to imagine that the discipline inherent in Pillar 3 alone will drive better business performance for insurers. However, it is entirely conceivable that the people, process and technology-oriented mindset required for successfully managing Pillar 3 will be one of the catalysts driving the modernisation and digital transformation of the insurance industry... and that certainly is positive.
Anne Leslie-Bini is Director, International Development Leader at Invoke. She can be contacted on +33 (0) 1 4268 8560 or by email: abini@invoke.fr.
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