How insurers are facing the reporting challenge of Solvency II

INVOKE SPECIAL REPORT

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Solvency II’s Pillar III reporting requirements impose a far greater reporting burden on firms than currently exists. Insurance companies have typically been required to create and publish around 30 reports annually, but Solvency II will require them to supply as many as 100 reports a year to supervisors, many of which will be produced quarterly.

Of particular concern to insurers are the tight timescales within which companies must report. Insurers will have to produce reports within 14 weeks for annual reports and five weeks for quarterly reporting.

Meanwhile, this substantial compliance exercise presents an opportunity for firms to re-examine their data and reporting systems and consider how those might be improved. Technology sits at the heart of Pillar III projects. And choices about the technology deployed now could make the difference between projects that run to budget and on time, and those that fall short. Failure could leave firms unable to report to regulators on time and in the required format.

Solvency II will change the European insurance industry more than any prior initiative, creating a harmonised rule book across the 31 countries where it applies. Pillar III also requires all firms to report in the same format – XBRL (see box), a reporting language with great potential but one that few firms know well. Thus, firms are finding gaps both in their data and expertise relating to Pillar III.

Preparation for Pillar III has been complicated by the repeated delays in Solvency II’s legislative process. However, the delay of implementation of the directive until 2016 should be seen as an opportunity for firms to prepare fully rather than a chance to slow their plans.

To encourage the process of preparation, the European Insurance and Occupational Pensions Authority (Eiopa) published Interim Guidelines which

Pillar III will impose an unprecedented reporting burden on insurance firms

Technology will be crucial to the implementation of Pillar III

Solvency II delays are an opportunity, not a hindrance

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Solvency II imposes extensive reporting demands on insurance companies both in the speed and frequency with which they are required to generate reports and the information they must provide. Insurers have faced difficult choices about what to do in the face of uncertainty surrounding the directive and how far to automate the reporting process, as well as practical challenges such as how to collate the data required for reporting and how to staff and organise themselves for the new regime. The positive news, however, is that – in the long run – the new environment will make regulatory maintenance easier and provide managers with better information to assist them in decision-making for the business.

“Waiting is not a solution. Now that the industry has realised how much there is to do, it is clear we are fortunate that the delay in implementation makes compliance possible” Stéphane Belon, Director, KPMG

national supervisors will implement from 2015. Under the draft proposals insurers will report in line with much of the Pillar III requirements from July 2015 and for the end-of-year reports. Eiopa’s guidelines are intended to encourage firms to identify difficulties in full compliance when the directive comes into force.

Some local regulators are also pushing companies to prepare for reporting in good time. In France, for example, the regulator instructed companies to prepare reports for September 2014 based on the Pillar III requirements. Considering the deadline for the full directive only, companies will need programmes in place during 2015 to gather the required information to report. Those will need to be built and tested and the longer firms wait, the fewer options they will have regarding how they approach this challenge.

Thus, insurers should consider now how far they are able to automate the reporting processes. They must also develop strategies for how they manage data across the enterprise, and how they best prepare their risk, actuarial and accounting teams for the new requirements. In doing so, they should keep in mind the benefit of flexibility. Firms must plan so that changes to systems in future remain possible without abandoning infrastructure already put in place.

Automation

The central question facing firms is to what extent they automate their reporting processes or whether they continue with manual Excel-based processes for the immediate future, translating those into XBRL for reporting to the regulator.

Flexibility is desirable in planning automation

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The use of the computer language Extensible Business Reporting Language (XBRL) for Pillar III reporting has the potential to save firms time and money.

XBRL is a computer language created for the electronic communication of standardised financial and business data. It is a royalty-free open data standard developed by the XBRL International consortium, a not-for-profit collective of companies and agencies.

Eiopa decided in 2011 to use XBRL for reporting between national supervisors, a decision that will encourage supervisors also to adopt XBRL for reporting from regulated firms. This is expected to lead to widespread XBRL adoption across the European insurance sector.

In XBRL, individual items of data are tagged using a hierarchy of labels defined in a taxonomy. Rules

governing the treatment of data as well as coherency checks are embedded within the taxonomy. In addition, XBRL includes multi-lingual labels (making it easy to use in different countries) and can be used to create reporting tables of varying size and complexity.

Using a common data standard across the European insurance sector should allow Eiopa and national supervisors to save money. XBRL will also simplify and cut the cost of regulatory maintenance for insurers. This is because the regulator can change rules in the taxonomy rather than require firms to change proprietary reporting software. Multinational groups can save money by using a single reporting system for all their entities across Europe. An additional benefit is that insurers can use taxonomies as a template for the harmonisation of data across the organisation and across borders.

The power of language

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Given the volume of reports that will be required and the speed with which companies must produce them, there is wide agreement that a fully automated or ‘industrialised’ approach is desirable, where practicable. The judgment, therefore, is more about how much initial investment an insurer is able and willing to make, and whether an overhaul of existing systems is realistic or possible within the period between now and implementation. Here, also, firms must be mindful of the damage of building systems now that later must be discarded or replaced rather than built on.

The potential benefits of an industrialised process go beyond just the savings of time and labour. For example, an industrialised process provides the opportunity to focus highly trained (and often costly) staff on analysing the company numbers rather than collecting and managing data. This in turn gives the firm more time and a greater capacity to manage its reporting strategy, including how much information to provide to the market and regulators, and how to communicate and explain the various reported metrics, such as those required for Solvency II and the financial accounts.

An automated process also provides a greater level of comfort in the quality of the numbers that management can discuss with supervisors and the market. This can be crucial in circumstances where the reported output differs from expectations. In contrast, companies relying on manual systems must eliminate first the possibility of data errors before they can take action on the numbers being produced. Similarly, supervisors might request information about changes in specific numbers. If the company’s systems make those comparisons difficult, senior management will be less well-placed to understand and explain those differences.

To automate reporting systems requires an upfront investment of time and money. But once up and running such a system will save manpower in filling out reporting templates and the time taken to check the numbers. Some specific templates under Pillar III, such as the D4 quarterly reporting template (QRT) that requires detailed asset information, have thousands or tens of thousands of lines of specification.

For international groups, using a single reporting system across a number of jurisdictions can also provide significant cost savings, spreading the cost of software between those parts of the business.

A fully industrialised approach will not suit everyone, however. In practice, insurers are taking a wide variety of approaches depending on their specific circumstances, ranging from full automation, through partial automation to so-called ‘workaround’ solutions.

Insurers will gain maximum benefit from an automated approach

Automation produces dependable data

Automation provides cost benefits

There is no one-size-fits-all solution

“All our accounting systems are set up to deliver automatically. We don’t want to report manually and we need to incorporate Solvency II into our existing systems” Jesper Kandrup, Senior vice president, Danica Pension

Reasoning

Several considerations are influencing insurers’ thinking, including the complexity of the business, the state of existing data systems and the scale of improvement in reporting times that must be achieved. For some of the largest insurers, for example, their many legacy systems may render any attempt to centralise data unthinkable in the time frame available. Others have automated reporting systems in place already for their financial reporting, making the natural option to extend those systems to meet Solvency II requirements.

For some companies the risks inherent in an overhaul of existing systems are too high. This is particularly the case for companies that expect to change their business in the near future. A major overhaul will run over several months or years. In some cases a company’s business might change too much before the project completes, rendering useless some of the work. Waiting is the sensible option, for example, if a company is expecting to divest parts of the business or merge with another organisation.

At the same time, those companies that choose to take a piecemeal approach to developing their reporting system could be forced to discard interim solutions in future, wasting the cost sunk in putting those in place. Thus, for firms choosing partial industrialisation, a step-by-step approach is key: industrializing parts of the process in a way that allows for additional automation in future without dismantling what is in place already.

Data challenge

Alongside the reporting challenge facing insurers is the matter of data governance. Insurers will need to identify gaps in their data and gather data for the quarterly reporting template that is appropriate, complete, and accurate.

This is a substantial exercise given that insurance companies typically operate with between five and 10 data systems that are relevant to their reporting needs. These might include, for example, policy management systems, accounting systems and actuarial models.

Often the data formats will be different, which makes carrying the data from one to another difficult. Related information, such as asset data, may be spread across several systems. Data will also be subject to transformation where, for example, product lines in the business are mapped to a single line for reporting purposes, which raises aggregation issues for companies.

Collecting the data in time for reporting is a key challenge especially as data must be controlled along the way otherwise a company will spend too much time checking reports at the end of the process.

The process of identifying data gaps and discrepancies is one where, often, the more progress the company makes the more it becomes aware of the difficulties. Many of these will be particular to the organisation in question.

A full overhaul of systems is not always appropriate

Insurers must identify gaps in data

Different data formats make aggregation a challenge

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For example, companies might find that the closing date for accounts in one part of the group is different from that in another, or the understanding of a term in one area of the business differs from another. There are examples of firms that have collated data to a central point only to discover that customer data is classified in a number of different ways or policy dates exist that fall outside the period to which the policy applies.

One solution is to collect all data in a single central data warehouse, which can be interrogated in different ways depending on the information required. This will simplify the process of data governance, meaning companies can apply controls or rules quickly and consistently to all data rather than seeking to replicate rules across separate databases.

A single data warehouse harmonises the governance of the data, addressing issues such as ownership and labelling. This makes the data more robust, easier to manage, easier to control and easier to interrogate.

But building such a central repository typically takes as long as two years and is expensive and complex. Creating a central data warehouse also raises questions about the depth of information that the firm will centralise. Insurers will need to consider whether to hold data that is merely sufficient to meet the requirements of creating the QRTs or whether to include more detailed business unit information.

The cost of design shortcomings in such a central source of information could prove substantial. Some insurers remain cautious about going beyond the requirements of Solvency II to incorporate other reporting requirements such as those under accounting standard IFRS 4 Phase II. The risk for insurers is that they build a central warehouse but leave out features that later would be beneficial. Insurers would want to ensure that a single data centre could seed reports for IFRS 4 Phase II accounting purposes as well Solvency II.

Changing roles

Meanwhile, because Pillar III adds to the reporting burden, insurers will need to think about additional staffing and how they find synergies and share resources between departments. Thus the directive is driving a change in the approach and behaviour of risk, actuarial and accounting personnel, to match the overhaul already taking place of data and IT systems.

A central data warehouse will simplify the process of data governance

A central data warehouse should be adaptable for future needs

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“Data volume and the entire data management process remains a major challenge for insurance firms. The strategy of dealing with data will differentiate the benefits that firms will achieve from a regulatory change programme” Gezim Llanaj, Senior manager, PwC

Whereas Pillar I and Pillar II tend largely to fall under the scope of the actuarial and risk functions, Pillar III reporting is a tripartite effort that requires the additional involvement of the finance function, whose role grows in importance as Pillar III reporting becomes standard practice. This reflects the transition from companies treating Solvency II as a special project towards a point where those who will be responsible for reporting day-to-day assume that responsibility ahead of implementation.

Because Pillar III requires input from the risk, accounting and actuarial functions within insurance companies in generating reports and has placed more emphasis on risk and actuarial elements of those reports, all three are beginning to work more closely. As a consequence, the accounting function will increasingly require an understanding of elements of the work done by risk teams. Accounting teams will need to develop additional skills in future.

Decision-making

The speed with which risk data must be available reflects the ambition at the heart of the Solvency II directive that companies become fully risk-aware in their approach to management. By assisting in pursuit of that objective, Pillar III projects have the capability to generate value for insurers. In this respect, Pillar III should not be seen only as a compliance exercise.

It is important that management use the data gathered for reporting in their decision-making, and Solvency II is already leading to the evolution of corporate ‘dashboards’. For advanced firms, Pillar III projects sit within a wider review of the firm’s data governance and a drive towards the harmonisation of data across the enterprise. At all levels, the directive will require a level of granularity in information that some insurers may not have experienced before, such as the breakdown of premiums by Solvency II line of business.

As a result, risk is becoming a more significant driver of decision-making and this is reflected in the metrics included in internal reports. Traditional performance indicators included in the internal reports to senior management and boards at insurance companies have focused on profit and loss metrics, asset-liability management and metrics such as the combined ratio (which shows the ratio of claims and operating expenses to earned premiums, giving an indication of whether the insurer is making an underwriting profit). This last metric is often used to measure the relative success of different business units or products.

As companies move towards greater use of risk-based indicators such as economic capital and return on economic capital, they are able to enhance the value of these existing indicators. Firms can begin to look at capital as a finite resource and manage accordingly, considering the impact on capital

Pillar III is a tripartite effort involving actuarial, risk and finance functions

Pillar III projects should be part of a drive to harmonise data within the firm

Risk is becoming a significant driver of decision-making

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“If you have more of a patchwork infrastructure, and your finance, actuarial and risk teams are less used to working together, then you will have a longer journey” Tom Brown, Partner, PwC

allocation of specific actions. A firm might set parameters for the combined ratio of a certain business line, for example, knowing that outside those limits the business in question will require more capital than is allocated.

Looking ahead

Firms that combine an industrialised approach to reporting with a comprehensive data governance programme will benefit most. They will be able to automate much of their reporting, leverage that technology to generate additional reports such as quarterly financial accounts, gain access to more granular information more quickly than has been the case in the past, and deal with regulatory change more efficiently.

Others will have lower ambitions, choosing partial industrialisation. Some will be content to continue with manual processes and Excel-based workarounds. All three, however, must consider at this point the concerns of resourcing, and training and preparing staff for the new requirements. Above all, they must consider how to deploy systems now that they can build on in future as their own needs or regulatory demands develop. If not, they risk shutting the door to benefits they can unlock later, as the industry continues its journey towards improved data governance and reporting.

Automation will help firms deal with regulatory change more efficiently

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“We are seeing Solvency II acting as a catalyst for a number of investments that in previous years have been postponed or put at the bottom of the pile” Michel de la Bellière, Partner, EMEA Solvency II leader, Deloitte

Michel de la Bellière • DeloitteMichel de La Belliere has been Deloitte’s EMEA Solvency II Lead since 2009. He is based in Paris, and belongs to the Insurance Consulting Practice. He has more than 18 years of experience in Europe and in the US. He has focused on Solvency II over the past six years, and has advised some of the leading European insurers on the implementation and impacts of Pillar 2 and Pillar 3 of the reform. Beyond Solvency II, he has assisted market players in other transformational projects, in the fields of organisation, mergers, business planning and information systems definition. His clients span life, non-life and health insurance, as well as brokerage. In addition, he is Deloitte France’s Insurance Leader.

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Gezim Llanaj • PwCGez has extensive regulatory change and risk management experience from his previous roles at Fitch Ratings and at SAS, where he was Solution Lead responsible for technology architecture in Basel II and Solvency II implementations. Gez is deeply involved with Solvency II IT transformation programmes, defining and implementing common data models and storage infrastructures to meet compliance and strategic business requirements. He has worked with many technology vendors, enabling clients to benefit from a holistic view of data and IT infrastructure transformations based on single platforms consolidating Finance, Actuarial and Risk reporting environments. At PwC, Gez has conducted a series of system and data gap analyses for clients, advising firms on Solvency II business, application and data architectures with the underlying aim of providing high data quality for Solvency II disclosure.

Stéphane Belon • KPMGStéphane Belon is a Partner in the Finance & Risk Consulting Practice. Stéphane joined KPMG in 1995 and has managed audit engagements within the insurance industry for more than 10 years in France and in New York, where he was seconded for four years. Since his return in 2007, Stéphane has advised insurers in their accounting, risk and regulatory projects.

Contributors

About Invoke

Invoke develops specialised software for managing financial, tax and regulatory information. Well-established as a key player in the international regulatory reporting sphere, Invoke delivers cutting-edge solutions for international supervisory bodies, for the banking sector, and for insurance companies concerned with Pillar III reporting within the framework of the Solvency II Directive.

Invoke is a founding member of the professional association XBRL France, and is a direct member of the XBRL International consortium.

For more information visit www.invoke-software.com

Invoke would like to thank the individuals who contributed to the article. The contributors’ views are independent and should not be interpreted as an endorsement of Invoke services or products.