By Asesh Sarkar and David Biggin, Financial Services experts
After considerable uncertainty around the final policy and timetable for Solvency II, there have been two important recent developments. Firstly, the European Commission put forward a draft Directive making 1 January 2016 the implementation date for Solvency II. Secondly, EIOPA published its final version of the preparatory guidelines, which come into effect from 1 January 2014. This means that insurers must complete their Solvency II implementation activity earlier than many had anticipated.
With EIOPA’s preparatory guidelines coming into force in the New Year, insurers have only a few months to prepare their response. They also need to consider what they need to do to get ready for the overall implementation in 2016, taking into account the lessons of the past. With significant question marks hanging over the billions of pounds already spent on Solvency II, many insurers are wary of more investment.
To prepare for Solvency II in a cost efficient way, insurers should focus on the following steps: they should understand the real requirements of the preparatory guidelines; focus on the sequence of implementation; and approach implementation in a way that minimises complexity and cost.
Understand the real requirements of the preparatory guidelines
The Prudential Regulatory Authority (PRA) looks set to apply EIOPA’s preparatory guidelines to all insurers (although some smaller insurers may be exempt from reporting due to falling below the quantitative thresholds). It is important to note, however, the context of the preparatory guidelines. They do not require firms to be fully compliant by January 2014, but to be suitably prepared. Where firms are not yet compliant, they should create credible and sensible plans to achieve compliance rather than rushing a costly implementation.
Notwithstanding the context of the preparatory guidelines, there are areas where insurers must act now. These areas include: being ready to submit a robust Solvency II Own Risk and Solvency Assessment (ORSA) in 2014, and being ready to submit year-end 2014 returns to the regulator by Q2 2015. Although there are no expected changes to the process through which firms apply to use internal models, insurers will need to understand the detailed guidelines and incorporate these into their ICAS+ and IMAP submissions.
Focus on the sequence of implementation to avoid costly rework
Insurers can achieve cost efficiencies through an informed prioritisation of implementation activities. While the preparatory guidelines represent a subset of final or near-final policy, important parts of the policy are still to be finalised and will be agreed over the next 12 months. We recommend that insurers do not embark on implementation activity linked to policy that is likely to change and that they sequence their work in line with the stability of policy.
In practice, the PRA is likely to review larger firms’ ORSA regardless of the preparatory guidelines requirements and so prioritising ORSA would be advantageous. For the disclosure of information requirements, reporting development should be sequenced to focus initially only on delivering a subset of the requirements as specified in the guidelines. The remainder of the reporting package, such as the national specific templates, can then be delivered as the Level 2 policy stabilises in 2014. This will present less risk of policy change causing costly systems rework.
Approach implementation in a way that minimises complexity and cost
The PRA will inevitably focus its attention on perceived high-risk firms as determined by the impact on the financial system in the event of failure. Risk levels will also be calculated by the quality and complexity of the firm’s Solvency II submissions. Gaining the early confidence of the PRA will help firms avoid the additional time and costs of increased scrutiny. This can be achieved by understanding the PRA’s perspective, priorities and approach and then managing the relationship with the firm’s supervisor accordingly. This will necessitate exceptionally high quality responses to the preparatory guidelines and ICAS+ / IMAP submissions. Reducing the complexity of Solvency II submissions will also reduce cost of compliance by, for example, reducing model scope to the minimum practicable.
Responding to the preparatory guidelines is an opportunity to reinvigorate Solvency II programmes and develop ways of working that serve as a template for the remainder of the implementation. Many insurers have transitioned their programmes into business-as-usual to save costs. We recommend that firms adopt a light-touch methodology that will provide necessary rigour to deliver a policy-led programme to a set of fixed deadlines. We recently helped a major organisation move to a light-touch programme methodology with delivery responsibility embedded into business-as-usual. This resulted in a 60% reduction in the cost of the Solvency II programme without comprising outcomes.
We have worked with many leading firms to ensure the vision at the heart of their Solvency II programme is clear. To find out more, contact us now.
To take part in PA’s 3rd Solvency II 'State of the Nation' survey, click here.