Key Challenges of Solvency II

Solvency II is a review of capital adequacy regime for insurers in European Union, which aim to establish a revised set of risk based capital requirements, valuation techniques and risk management standards.

Solvency II directives focus on the capital requirement of (re)insurer which will be impacting the risk model and decision making strategies of insurance firms. There is a causal loop impact on the insurance business model; the report generated by internal model would change the way insurance do business.

One of the biggest impacts from Solvency II on insurance companies is the expectation for senior management to express in-depth understanding of the framework, improved management of their capital and better decision-making as a result of their identification of key organisational risks.

The aftermath of solvency II regime will be the change in the behaviour of business processes of (re)insurer. There will be a requirement to establish key risk indictors (KRIs) on the critical business processes i.e. underwriter, claims, product development, new business, agency management etc to monitor the risk.

The key challenges of solvency II for (re)insurance firms will be the following:

• Revamp or new Risk & Actuarial Models: Realistic valuation of assets and liabilities in the balance sheet. Calculation of Technical provision, Best estimation and Risk margin. 
• Data Management: Data management would be the first priority for every (re)insurer which includes data availability, data accuracy and data consistency.
• Data availability: Extreme events data
• Data Accuracy
• Data Consistency
• Data Formats & granularity
• Data Integration: Integration of different functional data as well as integration of data with the external environment like current inflation rate, interest rate, extreme events. etc.
• Regulatory reporting: Solvency II also insisted on building up transparency between insurer, reinsurer, policy holders and stake holders. CEIOPS proposed following reports:
• SFCR: It is a public disclosure reports 
• RTS: The RTS is not public and is communicated only to the firm's supervisor. The RTS expands on the SFCR's disclosures using a similar, prescribed structure but this time presenting the information differently as part of the ongoing supervisory dialogue with the firm.
• New controls within processes: Supervisor authorities or senior management would set key risk indicators to manage business processes.
• Business Process Re-engineering: Good control management would open a new opportunities to rectify or revamp the sick business process areas.