21 May 2012

Risk.net: Smoothing the flow - Integrating workflow in Solvency II

Insurers need to overhaul their approach to dealing with the flow of data within their organisations, if they are to comply with all of the requirements of Solvency II, not just Pillar I.

The capital requirements imposed by Solvency II – Pillar I – have tended to hog the limelight when it comes to the new regime. This is understandable given the potential for these new requirements to impact business and profitability. Also, the calculations require extensive new data as well as sophisticated computational abilities.

But Solvency II’s other two pillars, II and III, are just as important and, in many ways, equally challenging for insurers to implement. Furthermore, their inter-relationship suggests that the three pillars are best approached in an integrated way, rather than treating Pillars II and III as afterthoughts to the risk modelling and capital calculation processes.

Pillar II focuses on the governance and risk management of an insurance business. Specifically, it covers the Own Risk and Solvency Assessment (ORSA) and the policies, systems, processes and functions around that; while Pillar III focuses on disclosure and transparency through mandatory public and regulatory reporting.

For many insurers, it is the period-end reporting requirements that encapsulate the challenges of Pillars II and III. “Under Solvency II, firms will face dramatically increased reporting requirements with tighter deadlines and a much higher level of required controls”, says Tom Wilson, chief risk officer at Allianz in Munich. The Solvency II reporting requirements imply a sequence that starts with the collection of data, which feeds into risk modelling and capital calculation, the results of which are presented and, finally, distributed for internal and external reporting.

But the ultimate goal of Solvency II is not just about imposing a reporting schedule – it is about genuinely embedding rigour in corporate governance, Noblet says. And the tool for creating this rigour is workflow, he says.

Workflow is the formalisation of processes, including scheduling and control, often supported by software. A good workflow management process is the key to meeting the auditability and traceability requirements of Solvency II, says Laszlo Hrabovszki, group chief life and health actuary, for Cologne-based Generali Germany.

Comprehensive, well-designed and automated workflow for Pillars II and III of Solvency II clearly provides control and efficiency while reducing errors and unauthorised actions. However, there are a number of challenges to achieving such a system. These include the continued uncertainty over the final form of the Solvency II rules, the lack of standardised systems, and the need to build flexibility into workflow processes.

In the end, the workflow process is about providing management with the information it can use to make decisions about the business in the interest of all its stakeholders, as well as providing regulators with the information they need to protect consumers and the wider economy.

As insurers progress with their Solvency II projects, many realise that the task of managing the workflow, governance and reporting for Solvency II is one of the biggest challenges they face, according to Burmeister of Algorithmics. “In effect, you need to model how an organisation works and how the people interact with one another. It is a massive undertaking”, he says.

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