Blog: What a difference a year makes

Many will breathe a sigh of relief if the Solvency II 2013 deadline is pushed back to 2014. But what impact is this likely to have on regulatory compliance. 

Solvency II will bring in a raft of changes, and there has already been a great deal of debate between the European Commission and the industry it seeks to bring into line on the subject. The commission’s policy on how it will work with the industry in the run up to the scheme’s implementation is still being shaped.   

Conceived more than 10 years ago, Solvency II will demand that insurers hold reserves in proportion to the risks they underwrite. With the insurance and banking industries adversely affected by the recent financial crisis and coming under increased public scrutiny as a result, the bar has been set high.

Breathing room

The thought of an extra year to deliver will sound like a welcome lifeline to many. The new system will require companies to run exceedingly complex forecasts based on a number of criteria. While for some this capability exists, turning it around on a monthly or ad-hoc basis is likely to prove a momentous challenge, unless the current process becomes a lot more streamlined.

A lot of companies have been trying to de-scope on information, data and technology where possible. De-scoping often leads to reduced quality, with well thought through solutions being shelved in favour of shortcuts. This impact on quality is at odds with the spirit of what Solvency II is trying to achieve around faster, more effective identification and management of risks. For example, reducing the Pillar 1 reporting cycle from three months to 20 days is not going to get the right result if it is done with sticky tape and string.

At the same time, deferring the deadline could mean that insurers take their foot off the gas. With another year to deliver, work could be pushed back to save on budgets this year. Delivery may lose its current momentum. Scaling down and then scaling up with the same teams may be unworkable, as individuals could leave for other opportunities and it can be costly to retain resources or re-hire people.

It could also affect budgets. Many insurers have recently reforecast their projected costs for Solvency II with increases of up to 60% (more than £50m) in some cases. With more time to deliver, this cost could rise further, as the time resources are needed increases and more strategic solutions come back in favour.

Stepping stones

To avoid losing momentum and further increases in costs, the regulator could allow insurers to complete their efforts on Pillars 1 and 2, while deferring the Pillar 3 deadlines. This would potentially give insurers more bandwidth to focus on addressing the current challenges before bringing on new requirements. It could also help them stay within the current cost estimates. while keeping their foot on the gas with more time to comply.

By introducing a number of subsequent milestones for insurers to hit over an extended period of time, the introduction of Solvency II could yet prove seamless and will allow companies to shift their focus from expediency and take more of a qualitative approach to reporting. At the same time, this needs to be done carefully to make sure it does not simply defer the current problems and increase costs for insurers.

Sanjay Kaul is Logica’s risk and regulation lead.