Articles - Solvency II - Getting through the last mile

Barring a last minute stay of execution from The EIOPA – which appears unlikely given that the Delegated Acts were published last week– there are less than 12 months until Solvency II goes live on January 1, 2016. With much still to do, particularly around Pillar III (reporting and disclosure), the long and painstaking work over the past five years will certainly be put to the test. So, what are businesses affected by this rapidly approaching deadline facing now?

 By Robert Gothan, CEO and founder of Accountagility
 First and foremost, completing the gap analysis on Pillar II in terms of policies and procedures, systems and data, and governance is likely to take up some time in early 2015, obviously dependent on the number of outstanding issues.
 Next, and to meet the requirements around Pillar III, we expect firms’ focus to move quickly to the Own Risk and Solvency Assessment (ORSA) reporting requirements. These are probably among the more tangible pieces of work for 2015.
 Pillar III
 Getting to grips with Pillar III on the other hand, is an entirely different matter. Although this relies heavily on prior work completing Pillar I and II, we expect the requirement for businesses to present a lower level of information, with greater frequency and shorter timescales, to put considerable stress on systems, processes and staff. The anticipated scrutiny that we can expect the Pillar III output to attract will make these tasks even more challenging.
 With all the moving parts that make up the Solvency II landscape, it can be easy to overlook the impact that frequency and timeliness have. Hopefully, the up-front larger-scale data, economic scenario generation and base actuarial computations are fairly well nailed down by now. This leaves the challenges presented by a complex set of reporting requirements to be dealt with.
 Getting to the numbers
 As with any financial reporting processes, numbers rarely just fall out into a report and get submitted. They can be subject to a great deal of internal review and analysis. As such, we would often expect a degree of manual adjustment. These are all activities that can take a considerable amount of time. Whenever processes contain an implicit agile requirement, we also find that any challenges around “time-to-market” can be adversely affected, sometimes disproportionately. In Pillar III, we expect process issues around agility to come from two angles.
 Firstly, businesses are likely to need to run many different scenarios through the Pillar III reporting model before they will be comfortable with their end result. This creates a requirement for “iterative processing” and “what-if” analysis – tasks that, without the right level of automation and suitable end user tools, can be extraordinarily painful. Secondly, this is not a mature regulatory process, and the internal “agility” requirements are compounded by possible shifts in regulator positioning and guidance (this has been a feature of the Solvency II journey to date).
 Can Pillar III be automated?
 Our guidance here is yes, but success will depend on several factors. Firstly, despite the tendency of organisations to rely heavily on a spreadsheet-driven approach to many similar reporting tasks, in the case of Solvency II, and given the above challenges, the risk that this approach might not deliver is too great to ignore.
 Pillar III, being the “end product” on which your whole process will ultimately be judged, requires careful thought and consideration. A rules-based approach to these reporting processes might, for example, enable agility to be delivered in a controlled way.
 Review your reporting framework
 This is an ideal time to take a careful look at how reporting is conducted throughout your business. Pillar III is, on one level, no different from any other reporting process, but the scale and complexity make it somewhat special. In this regard, re-using your standard business reporting methodology might expose control issues that are easily hidden in other, less extensive processes. Start with the end result and ensure that there is, in all cases, a direct and clear path from every end result back to your various sources.
 Separate fact from fiction
 Manage your manual adjustments tightly, and even subject them to a review workflow. These adjustments represent a layer on top of your original (“vanilla”) results, not a restatement. Review these adjustments and integrate logic back into your core processes to continually reduce the need for these interventions. Once again, rule-based logic provides an ideal framework to support this.
 Blending control and agility
 Finally, all the usual controls like version control, security, review and sign-off will play a serious part in helping to maintain the right level of control needed by all regulatory processes. In the end, never forget that your Pillar III reporting processes must be manageable by your regulatory teams, which are made up of normal human beings. How agile, automated and user-friendly your reporting processes are will determine how successful your delivery will be in 2016.

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