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Addressing the Solvency II implementation challenge

Introduction

“Solvency II is not just about capital. It is a change of behaviour”

Thomas Steffen, Chairman, CEIOPS

Solvency II is a fundamental review of the capital adequacy regime for the European insurance industry. It aims to establish a revised set of EU-wide capital requirements and risk management standards that will replace the current Solvency. As the finer details of the regulations continue to evolve, organisation's Solvency II programmes face a high degree of uncertainty. Consequently the focus to date has largely been on addressing the wider guidance around risk, governance and capital management. Most firms have made the strategic decisions such as whether to use an internal model, standard formula or partial internal model. Subsequently, those taking the internal model approach should be well underway with design if they wish to achieve FSA approval in advance of the compliance deadline. However, in our experience, few firms have started to consider the delivery of the organisational, operational and behavioural changes that will be required to implement Solvency II. We believe it is this “implementation” phase that presents the biggest challenge.

There is a temptation to dismiss Solvency II as a superficial regulatory “tick-box” exercise. We strongly believe this is not the right approach. Implementing the new regime will require a significant amount of time, effort, resources and investment. A programme of change is necessary to ensure behaviours are adapted to align with the requirements of Solvency II and that new processes and ways of working are implemented. Such an undertaking brings with it a number of challenges.

Four areas of implementation challenge and key recommendations for success

The four focus points that we believe make implementation the most challenging phase of Solvency II programmes, as well as some key recommendations to help construct and run a successful implementation are below:

Moorhouse 4 areas of Solvency II implementation challenge

1. Complex planning and programme delivery

Preparing for Solvency II implementation can be intimidating. It requires intricate planning of requirements, organisation design, process change and technology across the whole business. The level of process change necessary will cross existing functions and thus require careful management of internal and external dependencies.

All this demands a structured and well considered approach to programme delivery using resources with the right capability and capacity to ensure successful delivery. Key recommendations

• A clearly defined, business led programme, which can provide leadership on the organisational changes necessary and has ultimate accountability for delivery is imperative to avoid political conflicts between business units and different functions – e.g. finance, risk and IT.

• Intricate and robust planning supported by a structured planning hierarchy of aligned plans through corporate, programme, project and team levels, each with a single owner ultimately responsible for managing risks and delivering the outcome of the plan will help deliver Solvency II programmes on time and within budget.

• Appointing key individuals to the implementation programme early is crucial as there is a limited pool of suitable resources in the market and sourcing costs are increasing.

2. Management of change and communications

Solvency II is as much about a change in attitudes as it is about new capital calculation requirements. It requires a high degree of cultural and process change to ensure that effective risk management, governance, and reporting is embedded throughout the organisation and to establish new ways of working. In particular, the Board must demonstrate that it makes risk based decisions, and to do this, it must show that all employees follow a risk based approach from the front line to the back office.

Creating this culture will face resistance as it requires a more disciplined approach to risk, which may have negative connotations for some. Success in this area will depend on whether the Programme has been convincing in championing the Solvency II message to the wider firm.

Key Recommendations

• Solvency II programmes should have a dedicated communications and change function.

• This function should work to truly embed the new attitudes to risk into operations by communicating the risk strategy at all levels throughout the business.

• General Solvency II training is a requirement for all employees, with more specific training for those whose roles require it.

3. Continuous revisions and updates to the Solvency II design

The regulators are still ironing out the finer details of the Solvency II regime and this will continue for some time. Consequently, during implementation, the programme will need to manage revisions to the design on a continuous basis. There is a need to 'build the plane mid-air' which will require ongoing involvement from subject matter experts across the business. If not carefully managed, particularly during busy periods, such as year end, this could lead to excess disruption and seriously impact business as usual operations.

Key recommendations

• The most successful programmes will have a function that will determine the impact and communicate revisions to the regulation as they happen.

• Strong programme governance is imperative. Firms should set up a Design Authority with power over changes to Solvency II design at a group level and with appropriate representation from each impacted stakeholder area to maintain the integrity of the end to end solution.

• Absolute clarity on a structured set of programme definition documents enables robust management of all the implications of changes to Solvency II design.

4. Coordination with pre-existing change initiatives

Solvency II will necessitate change and restructuring across the whole organisation. This change will need to be carefully managed alongside existing change initiatives. It is imperative that existing initiatives are assessed and integrated with Solvency II implementation to avoid conflicts and ensure the business is following a consistent strategy.

Key recommendations

• Develop a register of all projects and programmes underway or planned, and then assess these against benefit, strategic importance and degree of conflict / interdependencies with Solvency II.

• Subsequently, reconfigure projects and programmes, revising scope to get a mutually exclusive set of initiatives, which minimises interdependencies whilst maintaining the delivery of business strategy.

• Assess the revised portfolio against capacity requirements, in priority order and refine to ensure a balanced portfolio aligned to Solvency II.

Conclusion

If you haven't already, now is the time to start thinking about how you are going to implement your Solvency II solution. The right programme delivery expertise can really help to avoid the pitfalls with structuring your programme, planning the delivery of your solution, achieving cultural change, managing revisions to your existing design, and integrating Solvency II with your existing change activities and business as usual operations. All this will go a long way to ensure that your firm delivers Solvency II to regulatory approval, on time and to budget.