By Vivek Syal, Director, Insurance, PwC
I don’t know about you, but at this time of year I tend to reflect about the year that was and start thinking through the year(s) ahead.
Looking back, there has been tangible progress made in the UK and Europe in preparation of the new regulatory regime. Insurers are coming to terms with effective risk and capital management as an enabler of business strategy & sustainable growth and not a hindrance to it; organisations have embarked on a journey of integrated underwriting,
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utilising the opportunities the Own Risk and Solvency Assessment (ORSA) provides to assess performance and planning in the short and medium term; and firms are engaging more with their supervisors in a proactive way.
However, the EIOPA 2014 Insurance Stress Test Report (released on 28/11) served as an important reminder of the need to keep the foot on the accelerator. The analysis has furthermore raised questions that many organisations had previously put to bed.
For example, whether the standard model really fits their business/risk profile and why they aren’t going down the USP, PIM, IM route. Or indeed how long low interest rates will continue to affect portfolio returns and whether a change in investment strategy is required to manage the cycle.
These and many other questions signal that the sophistication of discussions held is shifting the paradigms of good and effective governance and in the end, Solvency II will be seen as a significant step forward for the industry.
Before then however, and looking forward over the next 24 months, I anticipate sharper focus on several areas. Namely:
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Pillar 1: Continuing focus on internal capital model stability and robustness. IM’s and model run time is still an issue for many organisations who continue to struggle to produce large simulations and complex risk analyses in an agile and robust way.
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In doing so, insurers will increase the resolution of the risk profile by creating stable, well structured models that also supports Pillar 2 and Pillar 3 activities.
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Pillar 2: Whilst insurers have developed a set of risk appetite statements, several have acknowledged that it doesn’t mean much to them nor does it tie-in with their strategic goals. Continuing focus on this in 2015 is expected. Recovery and resolution planning is also expected to be an agenda item next year.
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Pillar 3: Implementation and the necessary impact this will have on processes, data collections and systems. The industry is now looking at Pillar 3 and rolling up its sleeves for the challenges ahead.
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Standard Formula: The PRA stated that 90% of the insurance market is taking the SF route and I suspect this will change over time. Post day-1 IMAP (and USP) applications are expected and organisations should take account for this in their strategy and ORSA.
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Transactions: As I write this, the UK is in the midst of one of the largest deals I’ve seen with Aviva’s takeover of Friends Life. The M&A and capital optimisation market will continue to be busy as insurers seek to deploy and structure their capital more efficiently.
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Reserving and Technical Provisions: Including the nature of the risk margin and how uncertainty in parameters is captured and harmonised. The probability of sufficiency of the SII risk margin, and how this level of prudence is linked to risk appetite (mentioned above), is increasingly important for Boards to consider and evaluate.
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Transformation: Driven in part by Pillar 3 and transactions, change and transformation programmes will continue over the coming years as organisations seek to streamline business processes and optimise their operating models.
With all this and a UK general election to look forward to, 2015 promises much as we all gear up for Solvency II Go-Live.
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