The management of the insurance companies will have the choice between the standard formula and an (semi-)internal model to calculate its SCR (“Solvency Capital Required”). The level 2 implementation measures published by the EIOPA updated the technical specifications defined for the QIS5, which is now therefore obsolete. The choice of one of the approaches (standard or internal) will depend of the level of flexibility desired and the type of business of the company.
However, the implementation measures are not final, some litigious points remain open and new updates of the level 2 measures are expected. Among all the risks that the company has to consider for its Solvency II model, the operational risk for instance in the standard formula is considered as directly dependant of the Basic Solvency Capital Required, which cannot cover the whole panel of operational risks a company is facing. A hybrid model could therefore be more appropriate to overcome this shortcoming.
Another big challenge: the implementation of the Own Risk and Solvency Assessment (“ORSA”). The ORSA can be defined as the entirety of the procedures and processes used to assess, identify, manage, monitor the risks faced by the company. The target of this tool is to ensure that the risks will not prevent the company from meeting its solvency requirements at anytime.
Also, an efficient risk management requires a strong underlying governance, that will structure the company’s response to external and internal threats. Only by taking ownership of their risks, and embedding their management in the conduct of their business, will insurance companies reach the heart of the Solvency II directive.
In terms of reporting, companies will be facing a large increase of the requirements:
- Quarterly reporting of the results of the quantitative model
- Yearly reporting to the regulator of the Regular Supervision Report (RSR)
- Yearly issuance toward the public of a Solvency and Financial Condition Report (SFCR).
In those reports, qualitative and quantitative information will have to be given by the insurance undertakings. The extent of this information will be finally defined by the Level 2 implementing measures.
The complexity and details of the directive cannot all be covered in this brief summary, but needless to say, the challenges that Solvency II brought to the insurance sector will still require a lot of efforts and investments from the companies.
- Gap analysis and preparation of a Solvency II roadmap;
- Ad-hoc advices on Solvency II approach, interpretation and implementation;
- Organization and steering of your Solvency II project;
- Actuarial services (model preparation, challenge or validation; CAA reporting preparation; complex calculations…)
- ORSA model development
- Governance, Risk management and Compliance (GRC) framework setup
- Data quality and traceability assessment
- Reporting organization and definition
- Preparation to forthcoming Solvency II audit requirements