ARCLogics Sword Blog

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