Solvency II regulatory initiative aims to normalize the way Insurance companies will measure risks, will manage their portfolio in accordance and will report on their record to control authority.
Such a big change may lead companies to reorganize their steering processes : some driven by internal momentum willing to get market differentiators, some others driven mainly by regulatory constraint. Whatever the vision, this will end up with major business transformations and, for some companies, with industry recombination due to portfolios optimization.
Hopefully, most of companies have launched transformation programs and, as Deloitte reports in its 2011 survey, more than 52% of UK companies had reached implementation phase by 2011 with 75% among big companies. Moreover the same report shows that budgets are expected to be contained between 1,2m and 12m euros, larger amounts being intended only for biggest organizations.
But, if boards seem to be aware of Solvency II new responsibilities and opportunities, projects and programs still undergo uncertainties and questions :
- on capital calculation methods which still have to be tuned and for some of them fullly specified
- on data which have to be collected, processed, checked and validated for each calculation method
- on organization which have to get responsibilities of subprocesses and define how they intend to performe them
- on management which have to prepare people and to request investment for resources
Finally, companies undergo 2 opposing forces : strong dependancies between Solvency II aspects and fragmentation forces coming from solving approach which have been selected to deal with complexities : technical (actuary, computing, business,…) and social (actors, governance, influence,…). Technical fragmentation comes from necessity to adopt partial analytical approach. Social fragmentation comes from business mindset, culture, influence competition.
All that draws a web of multifaceted questions with some among them being knitted with the others. Indeed, as soon as programs start to contemplate data, they quickly have to deal with risks models and with business process question. Should they refine risks models that they have soon to deal with strategy, risks management issues and data quality. Result of uncertainty for one aspect is uncertainty for all others.
It comes that Solvency II transformational programs are not able to define any specific target, but just a vision of compounded scenarios associated to rules and guidance. They draw roadmaps with stages tending to one or more of the vision scenarios. More the stages are shared by roadmaps, more programs will have options in front of them and will be flexible. Obviously, these plans include IT activities, platform developments and roll-outs otherwise programs may face to even more social fragmentation and more complexities which could severely hamper their success.
Starting and launching a program dynamic appears to be uneasy.
Solvency II transformations hit :
- financial departments which have to reduce drastically balance sheet timetable production and, for that, to reengineer their processes,
- actuaries departements which have to radically change the way they are doing their business,
- business managers which have to overhaul their decision processes for taking in account risks costs
- top managers who have to review all performance and management system, better rewarding better risks management.
How to not involve all these stakeholders in transformation definition and management if they have to agree on quick wins at program roadmaps starting point and on objectives to be reached.. To cope with uncertainty, programs have to settle a strong management structure which could take decisions all along roadmaps. Then, best implementation approaches are agile steered by risks.
Programs have to consider 2 types of risks :
- Requirements instabilty due to late publication of regulatory guidelines and to difficulty to find an effective solution to do Solvency II Reporting in the required timetable.
- Integration difficulty due to existing processes and practices based on user tools, not too much specified nor standardized, and very loosely integrated thanks to manual procedures
If Information technology criticity hasn’t appeared at the beginning, it won’t stay long time before it becomes an issue, because most of risks come from data processing and calculation which are done often within excel spreadsheets or other user data management solution like SAS Windows or other Windows DBMS. These solutions which allow to quick correct input data and change calculation rules as well seem extremely flexible,
But they rise risks of data errors, data integrity and confidentiality. they have slowed down integration as all information exchange are manual, specific to each actors. Changing is not so easy as flexibility is an unvaluable advantage for some business aspects.
Yet, all activities of preparing, collecting, verifying data, calculating provisions, matching with accounting data, writing analyzes memorandum would be totally overhauled by Solvency II since prospect discounted cash flows method requires finest grain of data, since Solvency II rules require high data quality level and a comprehensive data auditability. From data point of view, Solvency II would be a waterfall which will contains not only detailed operational data, but organizational, costs, financial and economic prospect data.
In this context, any datawarehouse approach would bear a huge number of specifications for stable data objects or would have to rely on interfaces technology able to support vert often changes.
At this point, it appears that some Solvency II programs which rushed into modelization for being able to quickly provide feedback on captal costs tendancies, made a mistake since it appears better to manage all aspects at the same time and to have a balanced progress.
- CIMCON Software (XLAudit and XLRisk)
- Prodiance (Spreadsheet IQ)
- ClusterSeven (Enterprise Spreadsheet Manager)
- Finsbury Solutions (EUC Enterprise)
- ComplyXL from Lyquidity.com
Then Solvency II programs have choices of settle 3 types of organization:
- centralized organisation which prepares plans for all actors and manage execution. They may soon face to plans designing issues since everybody does not exactly know at the beginning the method for calculating future discounted cash flows, for instance. And if programs go on, they soon may be disaligned with stakeholders expectations and rise serious risks on success.
- decentralized organisation which supports actors for preparing plans and managing execution. They may soon face to integration issues, fragmentation of points of view and diverging objectives. In this context, decision to implement a shared platforms may happen late, hamper reporing efficiency, rise risks on delay and quality.
- Mixed organisation which draws a common design framework in which each stakeholder has to develop its own stages of roadmap. This framework allows to keep tight all points of view and creates actors empowerment for them being able to find local optimizations and to curb change resistance.
Finding right boundary for what should be included in programs or remain outside is not easy when purpose is process and data standardization as it comes soon to share processing platforms. This decision may turn tricky since taken too much in advance, it may lead to misalignement, especially when editors and companies do not have all regulatory requirements. If taken too late, it may cause process inefficiencies. Regarding these kind of solutions some companies decided to start with prototypes.
For Solvency II changes, this paper shows that business issues and Information Technology issues are tightly intricated. They have to be managed together for avoiding any harmful fragmentation. In such a transformation business are involved at steering level and in the same time, should be supported to define their new role.
It is necessary to create or increase empathy between business departments and Information Technology as they have to work hand by hand in roadmaps design and to take right and timely decisions. All that pledges for mixed program approach adoption.
Programs will find favourable and unvaluable support from Enterprise architecture approach as it builds the design shared framework for program actors, IT and non IT, and all other condition which will allow all of them to be effective.