One of the most common complaints about risk and capital reporting is that by the time it is delivered it is too out-of-date to be of much use. Solvency II will not only require quarterly reporting, but also cut the turnaround from many weeks to a matter of days. While this is clearly challenging, it is also an opportunity to develop near real-time risk and capital evaluation and hence make model outputs a much more useful feature of day-to-day management information.
Timelier risk and capital reporting will also help to lay a solid foundation for the planned move to a market-consistent IFRS for insurance contracts (‘Getting to grips with the shake-up’ outlines the differences and potential synergies between the two frameworks).
The draft implementation measures for Solvency II call for two sets of regulatory submissions – the quarterly and annual quantitative reporting template (QRT) and the annual Report to Supervisors (RTS). As Figure 1 highlights, the already exacting timelines will be significantly reduced between 2013 and 2015. In addition to this periodic reporting, insurers will also need to be able to assess their capital position as soon as possible after a major decision or event that could affect their solvency position. The triggers might include a planned acquisition, new product launch or significant fall in share values.
While many companies will be focusing on getting over the line when Solvency II goes live at the end of 2012, it would make sense to build into current plans the process, systems and governance requirements which will enable delivery of the post-2012 reporting demands. Boards will want clear sight of all costs through to the end of 2015, and are unlikely to give programme teams a second bite of the cherry. Starting now will also allow sufficient time to identify staff and systems requirements and develop a sustainable framework for delivery, while spreading the implementation costs.
1 These timelines are based on the latest proposals set out in ‘Consultation Paper 58: Advice on supervisory reporting and disclosure’, which was published by the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) in July 2009. While there may be further review of the details and timescales, the direction towards much more extensive regulatory reporting and shorter turnaround is clear.
Although the demands of submitting a full RTS in 14 weeks should not be underestimated, it is likely that delivering the QRT on time will present the toughest challenges. Figure 2 lists the main content areas of the QRT. Meeting the detailed disclosure stipulations in each of these areas will effectively require a full analysis of balance sheet, profit and loss, capital, assets and liabilities.
The demands on larger organisations will be especially onerous as they will be required to produce separate reports at both group and solo entity level. Figure 3 outlines an indicative timescale for a business unit which is part of a larger group.
As Figure 3 highlights, signed-off results for group submission are likely to be required as early as working day (WD) 10. As firms will need to allow time for aggregation, analysis, commentary and review, the bulk of inputs to the capital assessment process will be required as early as possible in the process. In practice, this is likely to include assets, liabilities and the stresses required for the Solvency Capital Requirement (SCR) calculation.
There is no ‘magic bullet’ to meeting these deadlines. Even the most advanced systems solutions only go so far and what is successful in some companies may not work elsewhere. Even if there were sufficient resources, bringing in truckloads of new people will not work either, especially as the key personnel needed are in increasingly short supply.
It is therefore important to look closely at the current framework of reporting processes, IT and governance and consider what changes and upgrades will be needed to bring it up to speed. Technology is not the only enabler – operational models and the division of roles and responsibilities between finance and actuarial teams are likely to require considerable modification.
Figure 4 outlines the main issues and possible solutions. Greater automation of areas such as data retrieval and manipulation will be essential, enabling firms to speed up delivery and reduce the potential for error and need for costly extra control associated with spreadsheets. An increasing number of firms are also introducing acceleration tools such as replicating portfolios or curve-fitting, which often incorporate an aggregation system.
The benefits include the ability to produce near real-time and materially accurate management information, assess stress-testing requirements quickly and generate what-if scenarios to better understand the impact of business decisions or possible market developments. However, such tools are only one part of the overall process and systems which will be required to complete the QRT. It is important to ensure that investment in such tools is aligned to clearly defined business requirements or firms may end up with an expensive solution that is unfit for purpose. With or without new software, all companies will have to adapt and improve their existing reporting capabilities.
The key is being able to identify and prioritise the ‘critical path’ to delivery as part of a more coherent and streamlined reporting framework. Areas that may need to be targeted for improvement include assets, policyholder data and external assumptions.
It will also be important to consider the governance and organisation design implications. This includes both sign-off by the relevant committees and the controls needed to provide senior management with sufficient comfort about the material accuracy of the numbers. For example, completing a full analysis of the change on the actuarial liabilities and SCR will be challenging in this timescale. However, many firms would not be prepared to submit the QRT without having prepared such an analysis as a key internal control.
Similarly, while there is a considerable amount of debate and uncertainty around whether the numbers in the QRT and RTS can be different, boards will need to be consulted about whether such differences are acceptable from their perspective and, if not, what processes would be required to reconcile any variations.
"…the requirements for the quantitative reporting templates will have a significant impact for undertakings."
Source: CEIOPS’ Advice for Level 2 Implementing Measures on Solvency II: Supervisory Reporting and Public Disclosure Requirements, October 2009
Figure 5 sets out a possible approach to developing the necessary evaluation and reporting framework. The starting point is a clear understanding of what senior management expects to achieve through Solvency II, including their goals for improving management information and the desired level of reconciliation between the RTS and QRT.
Companies can then begin to design a framework for delivery and decide what automation, acceleration and other systems and process improvements will be required. To be effective, the implementation plan should include clear milestones and success criteria. Given the regulatory pressures surrounding Solvency II, completing these as soon as possible, preferably before the end of the first quarter in 2011, will be critical to ensure plans are credible.
It may not be possible to implement all of the solutions needed in a strategic way for 2015 compliance by 2012, and firms may have to address specific issues tactically.
The development of a 3-5 year systems architecture and implementation plan should address this point and demonstrate how improvements will be delivered over time in a phased, managed transition. In developing the business case, it will be necessary to set out these options and implications as there will be more than one possible roadmap to compliance.
"All quantitative reporting templates should be approved by the administrative, management or supervisory body of the undertaking."
Source: CEIOPS’ Advice for Level 2 Implementing Measures on Solvency II: Supervisory Reporting and Public Disclosure Requirements, October 2009
Many insurers may be reluctant to look beyond 2012 given all the other seemingly more pressing demands. Yet the QRT and RTS could prove as taxing as current priorities such as internal model development, both in the impact on systems and processes and in the need to create a robust framework of control and senior management oversight.
Assessing the implications now and building them into broader implementation plans will allow time to develop a sustainable approach to delivery that meets regulatory demands and enhances the basis for decision making.
www.pwc.com
© 2010 PwC. All rights reserved. "PwC" refers to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.