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Solvency II in Focus

As we return from summer holidays, it is the same as the many global insurers make their (hopefully) final preparations to comply with a significantly expanded Solvency II regime taking effect January 2016. There are a number of areas included for this deadline, and those of particular importance include the need for expanded risk reporting with greater accuracy and robust modeling in pricing, valuation and risk via multiple currencies, asset classes and discount curves.

Firms may be looking to adopt new analytics processes to address this expanded range of risk related obligations. Many of these requirements represent areas not historically mandated under any regulatory framework for insurers. This marks a big shift as these organizations will need to focus on new areas that have a significant effect on assets, liabilities, off balance sheet items and derivatives.

Insurers have had to address numerous facets of the Solvency II pillars but there are several specific areas that have been particularly challenging, representing a significant effort here to bring policies, processes, systems and analytics in line with regulation.

In particular, Solvency II is driving companies to build more robust capital models, implement higher standards of governance and more scalable risk management. For a lot of firms this is all translating into a great deal of pricing and risk related technology and systems development that needs to be in place to ensure efficiency, timeliness and accuracy.  One key example that has been particularly challenging is related to risk exposure computation and valuations reporting obligations.

One of the toughest challenges will be to look at how firms perform computation and report on the aggregated risks of their business. This will require robust multi-currency, multi-asset systems and technology capabilities for entities across their impacted business. Also challenging are the substantial computational requirements for many of these calculations. The universe of liabilities and asset hedging instruments used by insurers who are hedging and managing longer dated portfolio risks, with inherent potential moves over the long run is sizable to say the least.

When looking at all of these requirements, one important consideration for impacted insurers will be in making their Solvency II implementation scalable for their business. Insurers will need to think about the entire workflow and build out a scalable enterprise valuation and risk platform capable of handling heavy computational demands for risk scenarios and other calculations.

The efforts are compounded for the global insurers that need to consider a global business with multiple currencies, discount curves, global investment opportunities and modeling considerations. As a result, insurers will need to address challenging pricing analytics and modeling issues. Even though the impact will be most felt for UK and other European insurers, it will be an important consideration for North American insurers and other global insurers who will likely see a Solvency II equivalent approach and need to think about this from a global best practice perspective.

With summer now over, insurers will look to finalize their preparations over the coming months and we expect to see improvements in risk reporting, governance, enterprise wide integration and industrial computation capabilities. Summer is over. Everybody out of the pool.

This related video highlights key points and insight regarding Solvency II from Erik Vynckier, Chief Investment Officer – Insurance EMEA, AllianceBernstein at the recent Infoline Valuation for Buy-Side Firms conference in London, UK. This is certainly an important perspective to consider for all global insurers in the midst of working through their Solvency II implementation.

For more on Solvency II, register for our upcoming seminar in London, UK on September 22nd, Addressing Key Valuation and Risk Considerations Under Solvency II.

About the author

Matthew Streeter CFA's picture

Matthew Streeter CFA

Capital Markets Strategist, FINCAD

Matthew Streeter, Capital Markets Strategist at FINCAD, has expertise in derivatives trading, structuring & pricing models as well as a background in operations, pension fund analysis, hedging strategies and PnL / performance reporting. He has held positions at JP Morgan, Société Generale, Wachovia Capital Markets, Bank of America and Deutsche Bank.

Video

Erik Vynckier, Solvency II

Line-item reporting, data drill-down, and spreadsheet risk control.