Solvency II Now Business As Usual Time To Reap The Benefits

Solvency II Now Business As Usual, Time To Reap The Benefits!


For European insurers Solvency II has been effective since 1 January 2016 and is now business as usual! Or is it?

Background To Solvency II Implementation

Insurance companies in Europe invested millions of Euros in ensuring readiness and compliance with the European wide regulation Solvency II. The process started several years ago with the purpose of harmonisation across the EU to improve consumer protection, modernise supervision, deepen the market integration and increase the international competitiveness of European insurers and reinsurers. Under Solvency II, insurers are required to take account of all types of risk to which they are exposed and to manage those risks effectively.

The reality of how Solvency II would affect the whole organisation started to dawn on directors in 2011, when the target start date for the new regime was set to 2014. There was pressure to complete gap analyses for Pillar II, involving formalisation of the corporate governance framework, reporting lines, processes and procedures throughout the organisation. The mandatory key functions of Actuarial, Risk Management, Compliance and Internal Audit had to be in place, together with any other functions deemed critical by the company, and policies and procedures had to be documented.

A start date of 2014 appeared to be too optimistic and to allow companies to be in a ready state EIOPA introduced an implementation phase of two years during 2014 and 2015 with a “go live” date of 1 Jan 2016. During these two years EIOPA had provided preparatory guidelines on ORSA and the corporate governance framework. Various technical specifications for capital requirement calculations were also provided.

Time To Reap The Benefits of Enterprise Risk Management

European member states have now incorporated the Solvency II regulation into their respective national regulatory framework, and form part of insurance law. For many smaller insurers and captives with lean structures and some outsourced functions, the implementation has been costly with a drain on resources. However, there are some great positives which have come from the successful implementation of Enterprise Risk Management in particular.

Formal risk registers at first appeared to be a disproportionate burden on many small insurers. However, by initiating the process of identifying, classifying and evaluating risks and emerging risks facing the company, efforts were focused in order to ensure that sufficient controls are in place to protect the company from major risks.

At the start of the process of Pillar II the business strategy, which quite often was visionary and may not have been challenged for a number of years, had to be formalised and documented. The risk appetite was another matter that had to be considered in detail. Discussions and workshops proved to have provided great opportunities for executive and non-executive directors, risk owners and operational staff to gain a common understanding of the risks facing the organisation and how to manage those risks.

ORSA Connecting Risk Management With Strategy

Without doubt ORSA brings an increased awareness of risk oversight to the board of directors and senior management. The ORSA process pulls together the risk management components from the entire organisation and analyses the capital availability. Because the ORSA needs to be forward looking, the organisation will proactively look at the future evolution of their risks. Hence, the insurance company can then better prepare for what lies ahead. Controls can be put in place or be improved and by tracking changes in the operational environment organisations can ensure that profitable opportunities are not being lost.

For example a capital rich insurer with capital levels well above the solvency capital requirement (SCR), the results of the ORSA may have shown that their risk appetite was very conservative and that more risk could be taken in order to optimise the use of capital. In such instances this may lead to increased retention levels or expanded business, perhaps into other classes of business or into new geographic territories. Business plans and strategies would then be redefined, approved and implemented.

Need Additional Resource?

At times when succession planning does not quite work out, or at times when the demands on resources for Quarterly regulatory reporting, ORSA, Policy Reviews, and normal business operations outstrips the availability of available man-hours in the organisation there is help at hand at Risk Management London.

Contact us to see how we can help:

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