accelerating solvency ii insurance

8/2/2019 Accelerating Solvency II INSURANCE

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WHITE PAPER

Accelerating Solvency II Compliance with SASBuilding the bridge to competitive advantage


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SAS White Paper

Table of Contents

Executive Summary 1

Solvency II 1From Planning to Implementation 1

Evolving or Future Flexibility 2

SAS: Building a Bridge to Compliance 2

Implementation in the Spotlight 3

Challenge 1: Data Management 3

Challenge 2: Meeting Solvency II Capital Requirements 4

Challenge 3: Risk Management 5

Challenge 4: Compliance Reassurance 5

Challenge 5: Reporting 6

Challenge 6: IFRS Reconciliation 7

SAS: Our Expertise, Your Solvency II Solution 7

The SAS Solvency II Framework 8

An Integrated, End-to-End Solvency II Data Management Solution 9

A Robust Risk and Capital Modeling Solution 9

Integration o Solvency II and ORSA 10

Reporting 10

Alignment o Solvency II with IFRS Accounting 10

Conclusion and Next Steps 11

The Five Steps to Solvency II Compliance 11

About SAS 14


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Accelerating Solvency II Compliance with SAS

Executive Summary

Solvency II, the biggest transormation o European insurance legislation in almost

40 years, is set to come into eect on January 1, 2014 Designed to introduce a

harmonized, EU-wide insurance regulatory regime that will protect policyholders

and minimize market disruption, the legislation sets stronger requirements or capital

adequacy, risk management and disclosure

The recent proposal to extend the deadline or Solvency II compliance by one year

reects the fnding o a report by the Financial Services Authority (FSA) in the UK that

many insurers have much to do beore they reach the Solvency II standards1

While the proposed deadline would give frms more time to prepare, it should not

be cause or complacency The challenges o meeting Solvency II requirements are

incredibly complex, regardless o whether insurers are using their own internal capital

model or the Solvency II standard ormula Embedding new solvency capital models,data management processes and reporting systems into day-to-day business, across

multiple business lines and subsidiaries, is a complicated and sophisticated task The

extension should, thereore, be viewed as an opportunity to take a structured approach

to the Solvency II transormation project; to use the space to make considered

decisions that will not only lead to compliance, but also inorm strategy and drive

competitive advantage in the long term

SAS has worked closely with customers in the insurance industry or more than 30

years Our extensive experience with regulatory change means that we are able to

understand the needs o insurers and the solutions to those needs Through this

experience and knowledge, we have developed a complete Solvency II ramework to

help our customers accelerate the compliance process, reduce the cost o the project

and reduce the risk in their Solvency II transormation process

In this paper, we share our insight into the challenges customers are acing in the

countdown to Solvency II, and we outline the SAS solutions that are helping insurers

to prepare

Solvency II

From Planning to Implementation

Once implemented, Solvency II will provide a solid risk- and capital-based oundation

or the insurance industry or many decades to come The EU-wide legislation will

improve capital adequacy, risk management and accountability, thereby increasing

protection or policyholders, giving clarity on insurers creditworthiness and reducing

the risk o market disruption and business ailure It will replace the current 14 EU

insurance directives with a single regulatory standard that will harmonize the rules or

the insurance industry across Europe

1 FSA Solvency II: Internal Model Approval Process Thematic review fndings, February 2011, p. 4.

www.sa.gov.uk/pubs/international/imap_fnal.pd

The extension is an opportunity

to take a structured approach to

the Solvency II transormation

project; to use the space to

make considered decisions that

will not only lead to compliance,

but also inorm strategy and

drive competitive advantage in

the long term.
http://www.fsa.gov.uk/pubs/international/imap_final.pdfhttp://www.fsa.gov.uk/pubs/international/imap_final.pdf


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SAS White Paper

But the short-term challenges o meeting Solvency II requirements are numerous and

complex Beyond compliance, Solvency II solutions must be woven into an insurers

daily operations The deadline or compliance may potentially be delayed by a year, but

insurers should not be lulled into a alse sense o security Failure to act now will only

result in increased pressure in a years time

Since the inception o Solvency II, many insurers have seen it as an opportunity to

make important strategic decisions or the uture Much time and energy has been put

into planning how the transormation to Solvency II can improve operational efciency,

or how new internal capital models can help insurers understand their business better,

develop new product lines and gain competitive advantage

However, the reality is that despite the time spent in planning the transormation to

Solvency II, many insurers have ound that the toughest challenge is implementation

Embedding new models, rules and processes into their multiaceted businesses is

proving to be complicated and expensive How can they build a platorm that works orall stakeholders rom actuarial to fnance to risk and IT? And how can they build it cost-

eectively and on time?

Evolving for Future Flexibility

There are many changes required to meet the Solvency II standards, including fnancial,

actuarial, capital, risk management, audit management and management o the overall

insurance group Unortunately, clarity and guidance rom the EU and the European

Insurance and Occupational Pensions Authority (EIPOA) will not be available or

some time yet,2 and insurers may also need to incorporate changes imposed by the

revised International Financial Reporting Standards (IFRS) This means that platorms,

systems and processes built now must be exible enough to absorb changes to the

requirements in the uture

In the short term, this transormation has become a necessary compliance exercise But,

by building a platorm that can be quickly and cost-eectively adapted later, insurers

can still invest in their long-term competitive advantage Insurers are, thereore, seeking

to build exible IT platorms and data management rameworks that both enable them to

be compliant now and provide a solid oundation or uture innovation and development

SAS: Building a Bridge to Compliance

SAS understands the complexities o the data and IT inrastructure transormationneeded or insurers to be Solvency II compliant In more than 30 years o business,

we have worked with more than 1,000 insurers in more than 50 countries, and have

supported numerous fnancial institutions through regulatory change programs

We also understand that Solvency II is not just about capital management Strong

corporate governance and risk management are at the very heart o Solvency II, and or many

companies, these present a greater compliance challenge than the Pillar 1 requirements

2The EUs Level 2 Implementing Measures and Binding Technical Standards are not due or publicationuntil summer 2012, and EIOPAs Level 3 Guidance documents cannot be published until ater the Level 2is published.

Embedding new models,

rules and processes into their

multiaceted businesses is

proving to be complicated and

expensive.


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Based on our extensive experience, our solutions will help you meet the minimum

Solvency II requirements within the time rame and help to transorm your companys

culture Using SAS, you can connect the actuarial, risk, fnancial and IT unctions o

your business to build a single ramework that meets all o the regulatory standardsThis ramework can provide a solid oundation or improved capital and cost-efciency,

and continuous product innovation, into the uture

Implementation in the Spotlight

At SAS, we regularly engage with our insurance customers to understand the

challenges that Solvency II presents What is increasingly clear is that the more

progress insurers make, the more they realize they have to do

This anecdotal evidence is supported by the fndings o the FSAs Solvency II: Internal

Model Approval Process Thematic review, which ound that some frms judgedthemselves to be already close to Solvency II standards but, on closer questioning,

were not able to provide evidence to justiy this

By combining the experience o our customers with the FSAs fndings, we have

identifed six key challenges that insurers must address immediately to meet Solvency

II standards in time

Challenge 1: Data Management

Data management or more precisely, managing the quality and consistency o data

is undamental to Solvency II compliance The directive requires data to be accurate,

timely and appropriate or all stakeholders, across actuarial, risk and fnancial unctionsBut, in many frms, siloed use has led to disjointed data This is an issue that must be

addressed or frms to be Solvency II compliant

Many insurers have made plans or improved data management, but have stumbled at

the implementation phase The FSA commented that most frms have overstated their

current level o preparedness against Solvency II criteria

The regulator noted that insurers had started to create data dictionaries to help with

companywide classifcation o data These data dictionaries will help to convert data

into the inormation each stakeholder needs whether that be risk profling or reporting

inormation and ensure that everyone is compliant

However, the FSA also commented that there is little evidence o timely maintenance

and consistent use o the data dictionaries across the business It thereore

recommends that one or more data experts should be the custodians o data quality

and management or the entire frm

In addition, the regulator views multiple spreadsheets as an area o risk, leading to an

uncoordinated approach and a lack o cross-unctional alignment and not the best

route to compliance A centralized sotware solution is thereore essential to ensuring

consistent use and easy maintenance o data, as well as reliable monitoring and

reporting

Insurers are, thereore, seeking

to build exible IT platorms

and data management

rameworks that both enablethem to be compliant now

and provide a solid oundation

or uture innovation and

development.

Data dictionaries will help

to convert data into the

inormation each stakeholder

needs whether that be

risk profling or reporting

inormation and ensure that

everyone is compliant.


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SAS White Paper

But with multiple stakeholders, and limited resources, how can companies ensure

policywide compliance in the remaining time?

SAS Recommendation

Solvency II compliance is a massive and multiaceted exercise, but it does not require

frms to tackle data management at a policy-by-policy level Insurers using the

regulators standard ormula will fnd that homogenous risk groups are acceptable

We advise that others should prioritize the data that has a material impact on their

compliance issues, and ensure that these are clearly defned in the data dictionary

Our Solvency II solution eatures products that enable data experts to quickly, easily and

cost-eectively improve data quality, harmonize the data dictionary and meet the basic

requirements or compliance Firms can use these tools or all uture data management,

maintenance and reporting as they develop their data dictionary

Read about SAS end-to-end Solvency II data management solution on page 8

Challenge 2: Meeting Solvency II Capital Requirements

In the past, insurers have used numerous, separate actuarial models to calculate capital

requirements and project cash ow or individual products or subsidiaries This siloed

approach has meant that balance sheets and thereore regulatory capital have not

always truly reected all o the risk undertaken by the business (eg, market, credit,

underwriting, liquidity and operational risk)

Solvency II requires all insurers to integrate the models used to calculate their solvency

capital requirement (SCR) to produce an accurate balance sheet that is reectiveo all risk taken at product, subsidiary and corporate levels This applies to all frms,

regardless o which approach insurers base their capital requirement calculations on:

internal model, standard ormula or a combination o the two

However, there are very ew sotware solutions on the market that can apply these

complex calculations in a compliant and harmonized way And with the delays to

the publication o the directive, there is still uncertainty as to the exact calculation

requirements o the uture

SAS Recommendation

Insurers must develop a central risk calculation engine that will analyze risk and

calculate capital requirements in line with both Solvency II and company strategy This

engine should be quick and easy to use whenever frms need to measure actuarial risk

at a subsidiary or corporate level Furthermore, it should not only be used or capital and

risk calculations, but also or aggregation and stress testing, as well as or validation and

reporting purposes

SAS oers an out-o-the-box solution, SAS Risk Management or Insurance, which both

integrates and accelerates the risk and capital modeling process We use a standard,

predefned ormula, but oer the exibility to adapt the calculations to accommodate


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SAS White Paper

But, as we have already noted, the regulators (in this case, the FSA) ound that frms

oten judged themselves to be ready or Solvency II, but were unable to provide

sufcient evidence to justiy this In the midst o a massively complex actuarial and IT

transormation program, how can insurers quickly and easily document and record

their journey to Solvency II compliance?

SAS Recommendation

Because the SAS Solvency II ramework helps insurers to establish the business

processes required or ull Solvency II compliance, we also ully support compliance

sel-assessment and progress monitoring An intuitive project management interace

enables frms to quickly access evidence o Solvency II compliance processes and

ormula development Results can be used or both external and internal audit, saving

time and giving valuable insight into Solvency II implementation

For more inormation, on SAS Enterprise GRC see page 9

Challenge 5: Reporting

Greater transparency through public disclosure and reporting requirements is one

o the central oundations o Solvency II Insurers will be expected to produce more

reports than ever beore such as capital calculation and risk management results

on a monthly, quarterly and annual basis both or internal, regulatory and market

scrutiny

Not only will frms need to produce more reports, but turnaround times have now

been cut rom months to a matter o days Also, fnal reporting requirements will not be

defned until Solvency II enters the fnal Guidance phase

Meeting the new reporting standards will require an unprecedented amount o work, in

a time o immense pressure and limited resources For many insurers, reporting is the

fnal hurdle to compliance and they stand to ail i they do not put sufcient reporting

tools in place now

SAS Recommendation

Managing separate reporting systems or regulatory, market and management

reporting will not be practical or cost-efcient once Solvency II legislation comes into

eect Insurers must save time and money by integrating their reporting system to

produce consistent, timely and relevant inormation or all stakeholders

Only SAS oers a predefned Solvency II compliant reporting ormat SAS Risk

Management or Insurance with all the necessary data structures or both internal

and external reporting SAS Risk Management or Insurance oers the opportunity

to develop meaningul management and market inormation to meet the needs o

all stakeholders In addition, it can be easily updated as new regulatory reporting

requirements are defned No other sotware provider can oer a complete reporting

solution out o the box To fnd out more about the reporting capabilities o SAS Risk

Management or Insurance, please see page 9

Insurers should develop one

calculation engine to helpproduce both the SCR and the

economic capital requirements

under the ORSA.

Companies that conduct

sel-assessments o their own

compliance with the rules have

better relationships with the

FSA, are less at risk o fnes

or censure, and ultimately

have a lower overall cost

o compliance.


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Challenge 6: IFRS Reconciliation

The move to Solvency II and the upcoming IFRS accounting changes will both have

huge implications or how insurers measure their perormance and are viewed by the

fnancial markets and regulators Failure to communicate capital management and

value creation eectively will lead to greater market scrutiny and an increased cost o

capital Firms must thereore be able to report both standards clearly, and help the

market and regulators understand any discrepancies the two methodologies create

SAS Recommendation

The crossover o the implementation o Solvency II with the IFRS changes presents

an opportunity to integrate the two reporting rameworks The logistics o this will

present huge challenges However, expense and risk associated with managing them

separately make reconciliation the most prudent long-term strategy

SAS believes that insurers should consider IFRS evolution and Solvency II compliance

as part o the same process Using SAS Financial Management, insurers can manage

and plan operational budgets and regulatory capital under one reconciled view For

more inormation, see page 10

SAS: Our Expertise, Your Solvency II Solution

SAS is the leader in business analytics and sotware services, and the largest

independent vendor in the business intelligence market For more than 30 years,

we have worked closely with our 1,000 insurance industry customers to understand

their needs and develop solutions that help them to do more with increasingly limitedresources We also have extensive experience with regulatory change, having enabled

more than 100 Basel II implementations worldwide

Thats why no other vendor can oer the comprehensive, end-to-end risk management

capabilities you get with SAS Unlike other solutions, SAS provides a single, integrated

risk platorm that supports the entire Solvency II process rom data management

through to advanced risk analytics and reporting

With the SAS Solvency II ramework, you can:

Accelerate Solvency II compliance projects with a robust risk analytics ramework

Improve data quality or an accurate risk profle and better-inormed decision

making

Reduce the impact o risks and mitigate losses using advanced analytics

Lower your cost o ownership with a single integrated solution

Ensure transparency and traceability across the entire process

You can also save money and gain competitive advantage by using the same solution

or advanced, non-regulatory measures and ully integrating the system into your

business decision making Plus, our solution is uture-prooed; it is exible enough to

quickly and easily meet any regulatory changes as they occur

Greater transparency

through public disclosure and

reporting requirements is one

o the central oundations o

Solvency II.


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SAS White Paper

The SAS Solvency II Framework

The SAS Solvency II approach starts with a exible, modular ramework that can be

integrated into insurers existing actuarial tools where required We use a phased

implementation approach to bridge any compliance gaps in legacy systems, data

stores and data models

Because the solution is modular, you can implement only those components that

address your specifc business needs, and then expand the solution over time as your

needs change With SAS, you can adopt a single platorm or compliance across all

three pillars o Solvency II, plus achieve real business benefts now and in the uture

The crossover o the

implementation o Solvency II

with the IFRS changes presents

an opportunity to integrate the

two reporting rameworks. The

logistics will be challenging, but

the expense and risk associated

with managing them separately

make reconciliation the most

prudent long-term strategy.

StressTesting

RiskA

ggregation

TechnicalProvisions

Standard Formula

Internal Model

Pillar 1Risk-BasedMeasures

Risk

Appetite

SupervisoryReview

Model Change

Asset and LiabilityManagement

Pillar 2

Portal

Run Models Risk Dashboard Distribute Reports

Risk Management

Do

cumentManagement

Workow

Risk-BasedMeasures

Pillar 3

Regulatory Reporting

Internal MI

Financial Reporting

Monitoring / AuditReconciliation

Business Glossary

Conguration

Data Quality Data Deciencies Data Warehouse

DATA

Data Dictionary Data Proling Data Lineage

Metadata Management

Liabilities Third Party Finance Other SourceAssets

DATA

DATA

DATA

DATA

DATA


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An Integrated, End-to-End Solvency II Data Management Solution

Only SAS oers an integrated, end-to-end data management solution or Solvency II

compliance We can provide:

A single process or data management and data quality throughout the ramework

Deployment o a Solvency II data warehouse or a complete insurance data model

A preconfgured Solvency II analytical data model or the capital management

process

Integration o a risk management ramework into the internal model process

A result-reporting data model

Repository o quantitative regulatory reporting (by company or group)

Metadata management or improved controls and governance, data lineage rom

source to report, with a data dictionary o business and technical metadata

Data profling capability with built-in data quality management routines to ensure

data integrity and drive maximum value or the business Full audit control unctionality via a simple user interace

Workow management, including escalation o tasks and automation o processes

to and rom actuarial models

A Robust Risk and Capital Modeling Solution

SAS Risk Management or Insurance is designed to perorm risk analysis and

risk-based capital calculations or lie, property and casualty, and health insurance

companies

As a modular approach, it can be exible in line with a frms changing needs It can

also provide open data interaces to import liability cash ows rom third-party actuarialapplications

The application supports the standard ormula and the internal model approaches,

enabling insurers to perorm complex risk calculations, defne control measures and

maintain compliant capital ratios It can provide the platorm or the calculation o:

Technical provisions

Market risk

Counterparty deault risk

Underwriting risk

Risk margin

Operational risk

Firmwide risk (SCR/minimum capital requirement)

Group risk capital

Concentration risk

Stress-testing analysis

Regulatory and internal risk model reporting


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SAS White Paper

Integration of Solvency II and ORSA

SAS Enterprise GRC provides a Web-based application that enables insurers to

identiy, collect, measure, manage, monitor, analyze and report on all exposure to risk

That inormation can be applied across your Solvency II implementation and as part o

an ongoing internal risk management process

Business strategy is an integral part o the application, so SAS Enterprise GRC will

enable better-inormed decision making based on a coherent, accurate risk profle

and expected changes to this and SCR

The solution also oers:

Integration o business planning into the risk profle or use in the capital modeling

process

Risk identifcation and assessment at group or subsidiary level

Control testing and assurance reporting in line with both regulatory and businessrequirements

Mitigation action alerts or policy management purposes

Risk monitoring using key risk indicators

Stress testing and scenario planning using advanced analytics

Remediation and action plan management to report and mitigate identifed issues

Reporting

SAS Risk Management or Insurance includes standard and ad hoc reporting

capabilities that are critical or disseminating risk inormation to regulators or Solvency

II compliance and to senior management or improved risk decision making The

application provides unctional, data and reporting components o the SAS Solvency II

ramework to deliver:

Aggregation o results rom solo to group level

Solvency and fnancial condition reporting and reports to supervisors

Internal reporting and management inormation

Risk reporting

Alignment of Solvency II with IFRS Accounting

SAS Financial Management is designed to meet Solvency II fnance unction

requirements, including statutory consolidation, fnancial reporting, budgeting andplanning

By implementing this solution, insurers can greatly reduce the workload involved in

complying with multiple reporting standards ie, IFRS, local GAAP and Solvency

II SAS Financial Management can accommodate any specifed structure, and the

solution enables separate hierarchies to be defned, or example, or local and/or group

reporting


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The application enables fnancial managers to:

Easily handle currency conversions, intercompany eliminations, reconciliations,

minority interests, new acquisitions, etc

Use either a top-down or bottom-up approach (or a combination o the two) orthe budgeting process

Customize budget orms to allow users exibility on how they submit budgets

eg, via Excel or a Web page

Automatically calculate results based on the latest approved data or a more

dynamic operational environment

Conclusion and Next Steps

As we have seen, time is o the essence i insurers are to meet minimum requirements

to be Solvency II compliant by January 2014 And there is still much to do

While considered an exceptionally ambitious project, Solvency II was designed to

generate benefts or policyholders, the market and insurance companies themselves

Its implementation should make the European insurance industry more competitive

while opening the door to many new opportunities

The SAS Solvency II ramework builds a bridge to compliance and provides a solid

oundation or frms to reap the benefts o a truly EU-wide insurance industry We are

the only sotware company that can oer a exible ramework to meet the needs o all

insurers, large and small, regardless o which ormula they have chosen or where they

are along the path to implementation

The Five Steps to Solvency II Compliance

1 Review your Solvency II program with SAS

2 Incorporate the SAS Solvency II ramework into your existing architecture

3 Deploy a exible Solvency II platorm to meet solo and group compliance

4 Take a phased approach to ensuring completeness and cultural change

5 Deliver regulatory reports, and improve business management inormation


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About SAS

SAS is the leader in business analytics sotware and services, and the largest independent vendor in the business intelligence market

Through innovative solutions delivered within an integrated ramework, SAS helps customers at more than 50,000 sites improve

perormance and deliver value by making better decisions aster Since 1976 SAS has been giving customers around

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accelerating solvency ii insurance

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