Solvency II fatigue is a real danger for the industry

"Solvency II fatigue is a real danger for the industry." 

Phil Smart, Head of Solvency II at KPMG made this comment here. When I read his short article, his words kept on resonating. Of late, the industry has been battered with regulations. No sooner than one regulation is complied with, the industry is presented with another. It is very easy to lay the blame on the regulator; but the FSA is doing what it is expected to do. And they are doing a fine job of that.

The enormity of compliance is due to the fact that

•  Principle based regulations are new to the geography. Insurers need to get used to them soon.
• The focus of current regulatory regime is around effective governance and management of business. As such, any fresh regulation has a pan-enterprise impact. Remember TCF? What seemed such a innocuous compliance, took a larger than estimated efforts for compliance.
• Regulations are evolving out of active consultation with the industry. While this is a healthy practice to generate feedback through consultation from the industry, it delays the clarity on requirements.
• Insurance companies’ mindset of ‘another tick in the box’ towards regulations

With Solvency II, the industry – battered by the last set of regulations, and the current economic downturn – is in a real danger of fatigue. While there is not sufficient time for the insurers to wait for all the requirements to develop, there is considerable confusion in the industry on the best approach to tackle it.

The four Quantitative Impact Studies were expected to help companies assess their readiness for Solvency II compliance. At best it has helped converge their focus to models and Internal Model Approval Process (IMAP). There is an inherent danger of overindulgence on the model at the cost of other (equally) vital aspects about the regulation.

Solvency II is not just another ‘tick-in-the-box’ regulation. It seeks to bring a cultural change in an insurance organisation by embedding risk management as a vital component of your business. In the new regime, it requires a change in the organisation mindset. Anyone having implemented a change programme can appreciate the enormity of the task.

Solvency II readiness is about a methodical approach to its implementation. Ideally it should begin at securing senior management buy-in. The senior management need to appreciate the regulation and its impact across the organisation. Their buy-in is essential for initiating a cultural change in an organisation.

In most organisations, scattered groups are working across functions understanding the emerging requirements in details and their consequent impact on their function. There is an urgent requirement to bring all the disparate groups under a common programme to generate synergies across the work streams.

A thorough pan-organisation impact analysis need to be conducted to assess the efforts for implementation. QIS 3 results provide an ideal starting point for an impact analysis. Another best practice would be to validate the Solvency II requirements with your strategies. In the past, it has been a common folly to comply to the regulations with a ‘myopic’ view, resulting in misaligned priorities and conflicting strategies.

Access to reliable, cross-referenced data will be a key ingredient for successful compliance. As before, the IT department (or data champions within your organisation), should be included in all discussions to provide them with an early view of the requirements. It will definitely help to take a stock of your documentations and process maps and update them, if necessary.

With the publication of Level 2 Implementation measures, there is sufficient clarity on the subjects, and insurance organisations can plan for their implementation. If you have not already kick-started your Solvency II implementation programme, I strongly recommend doing it now. Before Christmas, if possible.