ARCLogics Sword Blog

They aren’t ready yet but there’s still some time to go. Having said that, many of the insurers we are working with are well advanced in their Solvency II preparations. Insurers appear (sensibly) to be taking a stepwise approach to Solvency II

• Step 1: Appoint a programme manager and plan the project.
• Step 2: Focus on Pillar 1 and the data and processes for calculating capital requirement.
• Step 3: Focus on Pillar 2 and the ERM and ORSA requirements
• Step 4: Focus on the reporting requirements of Pillar 3.

Each step requires different skill sets, and we can track the progress insurers are making by looking at who they are recruiting. Step 1 needs program managers, Step 2 actuaries and steps 3 and 4 require risk management skills. What we are seeing right now is that, as insurers complete step 2 (or at least have it under control) they are starting to look at Step 3 and are looking for risk management expertise. In particular, this expertise is needed to decide how to approach the ERM requirements of Solvency II.

In our experience, the larger insurers see Step 3 as an opportunity to embed risk management throughout the organisation and are using products like Sword as a foundation for this. Smaller insurers don’t necessarily have the resources in house for this but vendors such as ourselves are starting to make it easier by introducing solutions that include a pre-configured ERM framework for Solvency II, and pre-populated risk and control libraries.

Mike MacDonagh

Nobody doubts the importance of Solvency II to the insurance industry in Europe but will it achieve what it is setting out to with regard to good governance? The question is a bit broad so, more specifically, will Solvency II really result in insurers linking their capital calculations to their risk appetite and, through the ORSA, to their risk management frameworks? Also, will they really consolidate the different risk silos into an enterprise risk management framework that will increase the risk awareness of executive management and enable risk-based decision making?

It would seem like a no-brainer, but the problem lies in the ROI, or rather, the lack of it. The returns from investing in good risk management tend to manifest themselves in the form of bad stuff not happening but, set against investments that generate positive revenue streams, the comparison can be invidious and the argument for investment a tough one to win.

So what happens next? Faced with the choice between treating Solvency II as an opportunity to invest in an enterprise-wide ERM framework to underpin its capital calculations and help ensure good decision making or treating it as a a series of isolated compliance problems, how many insurers will opt for the latter? After all, this is more or less what happened with the response to Sarbanes-Oxley. If it costs less in terms of cash and organisational investment, will executives simply pass it to compliance and ask them to “keep the regulators happy”?

I guess time will tell, we are already working to implement ERM frameworks for some large insurers who are definitely taking the ‘high road’ in response to Solvency II, let’s hope they aren’t alone.

Mike MacDonagh