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April 19, 2010updated 13 Apr 2017 8:54am

Solvency II impact ahead of its day

With the still hotly debated Solvency II regulatory regimes implementation some 18 months away, insurers in the EU are looking to upgrade risk and capital management technology systems. Waiting in the wings are solution vendors eager to assist insurers with what is a complex challenge

By Jeremy Woolfe

With the still hotly debated Solvency II regulatory regime’s implementation some 18 months away, insurers in the EU are looking to upgrade risk and capital management technology systems. Waiting in the wings are solution vendors eager to assist insurers with what is a complex challenge. Jeremy Woolfe reports



Solvency II rules for insurers may not be due for implementation into European Union (EU) national rule books until October 2012, but preparation is already under-way among insurers. At the same time authorities are active on the next stages of the rules.

Implementation, of a sort, is moving, in that insurance companies sitting on an assortment of management software systems are reconciling them in single, cohesive models. This is to be ready to take on board the basic principles of the Solvency II Directive.

In addition, at present there is parallel activity by management consultancies advising the companies on how to set up compliance software programmes. These inputs could, within months, initiate a cascade of further orders from the business performance management companies to further upgrade their systems. The reorganisation will include steps to make the best use of existing capital reserves.

One of the next results will see financial institutions, such as banks, pension funds, and to a lesser extent, fund managers, realising benefits as the clearer picture of the financial position of insurance companies is revealed. The investors will be able better to assess the value their portfolio investments in insurance companies in light of parameters revealed by application of the level one, ‘framework’ stage of Solvency II. However, the clear view of the implications of Solvency II on the investment market will not be revealed until 2012.


Software upgrades

Some of the present revelations from software upgrades could start before the actual business performance management programmes are even written. The advice to insurance companies from management consultancies, notably Ernst & Young and Deloitte and Touche, could be guidance enough for them.

Whatever, the amount of capital that is coming into focus is large. As recorded in a previous feature (see LII 239), the investment by member companies of the industry federation — the Comité Européen des Assurances (CEA) — totals €6.8trn ($10trn) in the economy (end-2008).

More specifically, how insurance companies themselves are having to organise their own capital reserves is described by Jacqueline Lommen, manager of pan-European funds at the Amsterdam office of Hewitt Associates pension’s consultancy.

Pre-Solvency II control of capital reserves, she explained, involves ‘caps’ (limits) on how much insurance companies may place their reserve capital in specified risk sectors. Depending on national rules, the upper limit might be 20% in equity, 5% derivatives, and so on.

Following the precedent set by the Basel II legislation for banks, under Solvency II’s risk-based system, companies are being excused these caps. However, the rules penalise exposure to risk in different categories of asset (and liability) management.

Jürgen Weiss, principal research analyst at technology consultant Gartner, explained that different investment vehicles give different loadings.

“Everything will be permitted, but will have to be booked to suit the risk,” Weiss told LII. “You can invest in equity stocks, but these will not count so well as AAA bonds from international companies.”

The knock-on effect of these changes is widespread, and would include variable annuity products. An insurance company selling these would normally guarantee a minimum income. Under Solvency II, too much reserve in volatile stock will disallow such offers.

Last year the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS), gave a steer on the pre-application process. It advised “on supervisory reporting and disclosure deals with the requirements for insurance companies to report to both the regulators and the public”. The industry has complained that a level of capital reserves recommended by CEIOPS as onerous.

However, recently, a European Commission official told LII the body does not expect to comply with that “conservative” recommendation. This could be confirmed by the end of 2010, when the Commission expects clearance of its recommendations for Solvency II’s Level II measures. Following from the Level I framework principles, Level II will deal with governance and risk management.

Stepping out of line with much of the EU insurance business, insurer Zurich Financial Service (ZFS) criticised lobby opposition to increases in capital reserves being expressed by the EU industry last year. James Schiro, who stepped down as CEO of ZFS at the end of 2009, has said that the complaining “does not send the right signal”.

ZFS’s position is that Solvency II’s provisions “come at the right time. It is moving in the right direction. We think it is most significant. It will give life insurance policy holders due protection”.

“In fact,” says a company spokesperson, “Solvency II will shed light on the risk associated with certain products.”

ZFS has been operating under a precursor to Solvency II. This is the Swiss national legislation, the Swiss Solvency Test (SST), which has been in place since 2006. SST is similar in many ways to the EU’s forthcoming rules.


Benefits to be realised

Returning to the business performance management software sector, the benefits shortly to be realised are outlined by Ernst & Young’s Steve Bell, financial services advisory partner.

Bell said new IT systems, soon to be purchased by insurance companies, “will not only deliver new or enhanced risk management systems, but should provide accurate data to a lower level of granularity”. (Granularity is the level of detail of “attributes, “fields, and data types that can be provided”, Bell said). Bell added that data will also be provided “more frequently”.

Some main contenders lining up at the table for the eventual mainstream software contracts are: IBM, the SAS Institute, SAP, Oracle, Sungard, Fermat, EMB, Algorithmic and Towers Perrin plus a fragmented array of specialist application providers.

IBM states that the revision of its insurance industry framework, a “blueprint”, to address all three pillars of Solvency II, is now complete. It is already being used in full or part by over 150 insurers.

The company recommends the IT departments of insurance companies should be thinking about adopting enterprise-wide information architecture.

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