Solvency II

Overview

EXL has been assisting insurance companies across the UK and Europe in implementing Solvency II. EXL has years of experience in the insurance domain and has skilled resources to assist companies across ERM, Finance & Accounting, Actuarial, Data and Systems Analytics, and Program Delivery.

Solvency II is the updated set of regulatory requirements for insurance firms that operate in the European Union and is scheduled to come into effect late 2012. The rationale for this legislation is to facilitate the development of a single market in insurance services in Europe, as well as securing an adequate level of consumer protection. The third-generation Insurance Directives established an "EU passport" (single license) for insurers based on the concept of minimum harmonization and mutual recognition. Solvency II is based on economic principles for the measurement of assets and liabilities. It is a risk-based system and will be measured on consistent principles and capital requirements will depend directly on this.

The Three Pillars

The three pillar structure for Solvency II is the Insurance industry’s equivalent to bank regulations under Basel II. It addresses risk from the perspective of quantitative requirements, supervisory process, market transparency and disclosure.

Pillar I
Pillar I contains two capital requirements – the Minimum Capital Requirement (MCR) and the Solvency Capital Requirement (SCR) – and technical provisions for calculating them. The MCR reflects an absolute minimum level of required capital below which supervisory action will automatically be triggered. The SCR represents additional capital to firms to absorb significant unforeseen losses.
Firms have two options to calculate SCR. They can either adopt a standardized approach or an internal model. The standardized approach is closer to the system of regulation currently in force in most EU states. It is less time consuming, but is based on averages and there is a considerable amount of guesswork involved.
For insurance companies choosing the internal model route, regulatory approval will be required before a firm is able to use its internal model to calculate SCR. Solvency II also permits a hybrid approach involving simplified models with an element of standardization. This may be attractive to smaller and medium-sized insurers unable to justify investment in full-scale models.

Pillar II
Pillar II focuses on supervisory activities of regulators with the aim of identifying firms with a higher risk profile. Those firms may be required to hold capital at a higher level than the amount suggested by the SCR calculation and/or to take steps to reduce identified risks
In addition, it also provides guidelines on implementation of Own Risk and Solvency Assessment (ORSA). If the regulators are not satisfied with the risk-based capital provisions, it could impose higher capital requirements

Pillar III
Pillar III requires disclosure of additional information that supervisors feel they need in order to perform their regulatory functions. The reports must contain the following information:

Overview of the business and its performance: description of the activities, group structure, external environment, objectives, strategy and financial results.
Governance: Description of the governance structures, an evaluation of how adequate they are for the company’s risk profile, and a compliance code including competence and integrity rules.
Valuation Method: Technical provisions, assets held to cover the technical provisions and capital requirements, as well as other assets and liabilities.
Risk Management: A description of the policies and means used to identify, measure, hedge and control each individual risk category

The EXL Advantage

As the industry looks to adapt to the new changes and seek competitive advantage, we see growing challenges for securing the right people, at the right price and availability. EXL has experience working in insurance and has skilled resources to assist across ERM, Finance & Accounting, Actuarial, Data and Systems Analytics, and Programme Delivery.

EXL has a dedicated team of over 800 delivery professionals comprising Chartered Accountants, CPAs, PhDs, Actuaries, and Masters of Econometrics, Economics, Statistics and Risk Management. This diverse profile of professionals brings in the right mix of aptitude and knowledge required for implementing Solvency II.

EXL adopts a global delivery model which allows access to highly trained resources with diverse skills and extends the cost reduction benefits across the programme.

EXL also has hands-on experience of working with all leading decision analytics tools like: Prophet, Igloo, Moses, SAS, SPSS, MATLAB, Neural Networks, SQL, CART, MARS, JMP, R, EDD.

Working with over 60 of the leading global insurance companies globally, EXL possesses the skills and necessary expertise to address your challenges. Our list of satisfied clients bear a testimony to our capabilities and domain expertise gained over the years.

Case Studies

Supporting implementation of an EGRC platform

EXL helped a leading insurance company implement SAS EGRC applications compliance to integrate enterprise risk management under Solvency II Introduction The client, a large insurance company, wanted to implement SAS EGRC applications for integrating risk management across the enterprise to enhanced competencies for Solvency II compliance. The client engaged EXL’s operational and technology risk resources to act as a bridge between the business users and the SAS product team in successfully implementing the application. Challenges Perform Gap Analysis by mapping BRDs to Functional Specifications Implementation assistance and configuration Unit testing, Integration Testing and UAT Development of training modules Conducting end user training Go-Live assistance and embed into BAU Post implementation maintenance & support Project Management & Monitoring Solution Identification of Organization objectives, structure, key stakeholders and scope Business process understanding and walkthrough Review of functional specifications and gap analysis Monitor and assess key business requirements vis-à-vis configuration of application Report implementation progress. Maintain and update Issue logs Coordinate screening and selection of units within each process to be tested Review and document results of unit tests and identify possible anomalies within the parameters Determine test completeness and closure validation Coordinate planning and methodology of UAT and assist in designing UA test cases, Scenario building and managing teams towards conducting UA test cases Document user assessment , coordinate feedback analysis and review updates in system Assist in documenting desktop training modules and conducting user training sessions Assist in review and validation of user roles and SOD provided in user set up Documentation of gaps, monitoring revision and update of the same prior to Go-Live Assist in post-implementation planning and coordinating implementation testing Review results obtained and coordinate closure of gap logs Benefits Enhanced project and delivery management Continuous tracking of milestones Seamless processes for mapping business and regulatory requirements to system configurations Enhanced efficiencies of data work flow Trained business process owners Detailed Risk, Cause and Control Catalogues prepared towards efficient data base restructure
Towards greater risk governance, model validation and data quality

EXL helped a Fortune 500 Global Financial Services Company address challenges in risk governance, model validation and data quality under Solvency II Introduction A Fortune 500 Global Financial Services Company that specializes in life and long term care insurance, wealth management, mortgage insurance, lifestyle protection insurance, annuities, and senior supplement insurance. Challenges The client was in its first year of Solvency II implementation and was facing challenges in the following areas: Risk Governance Model Validation Data Governance and Data Quality Solution Identified key processes addressing major business risks Controls on all processes were mapped across the three Lines of Defense as per client’s ERM Framework Built Risk & Controls Library and aligned the same to client’s Risk Register Worked closely with the client’s Actuarial teams to create process schematics, specially around the ‘Capital Model’ calculation kernel Identified and documented validation points to meet the ‘Use Test’ and ‘Model Validation’ requirements Created Data Flow Diagrams, showing the flow of data items from source systems to Capital Model Produced a Data Scorecard, showing the Key Performance Indicators (KPI) and other Management Information (MI) metrics for the assessment of Data Quality Compiled a comprehensive Data Dictionary to serve as a centralized repository of data items for Solvency II purposes Assisted in drafting the Data Policy, detailing client’s approach towards Data Management including processes and systems that together ensure that data is appropriate, complete and accurate Benefits Seamless change management Cross functional resource pool, boarding right skill set on the programme Standardized view of risks and controls across processes and sub-processes
Enhancing risk management information reporting standards

EXL helped a leading Insurance Company enhance its Risk Management Information reporting standards to embed into Solvency II specific structures Introduction The client, an European Subsidiary of large US based Insurance Company had a mandate to comply with the Solvency II regulations and was seeking to enhance its current Risk Management Information (MI) reporting standards to embed into Solvency II specific structures. Challenges To build an ‘integrated’ reporting framework to embed into Solvency II specific structures overcoming the following key challenges internal challenges: Lack of risk-driven and ‘integrated’ risk reporting Reporting lacked accountability and tracking Reporting very operations focused Multiple business reports & sources of data Data accuracy and timing issues Solution Defined reporting scope with CRO through existing risk framework Restricted focus on Major & Intermediate risks within key risk types Defined, validated and agreed KRI’s for in scope risks with key stakeholders Assessed available data for creating relevant reports Used existing information and reports to facilitate quick turnaround Use of Extensive automated solutions Implemented a BI tool and trained the business Design focused on reporting by risk type – Insurance, Credit, Market, Liquidity & Operational Agreed KRI’s & thresholds implemented to ‘Go Live’ Focused dashboards rolled out per risk within risk type and priority) 'Remediation’ required for all red risks (problem areas) Ownership vested with Risk owners Better accountability Focused MI framework Benefits Flexible solution helping build an ‘Integrated Risk Management Information (MI)’ framework Set out a MI process facilitating accountability and early ‘remediation’ of critical risks through roll out of a structured Key Risk Indicator (KRI) framework Definition of clear roles and responsibilities of stakeholders Enhanced the process of tracking and monitoring issues through Executive Committees such as the Risk Committee Flexible resource pool and delivery model including potential use of a ‘Dual – Shore’ platform
Partnering towards building efficient internal models

EXL helped a leading insurance company build an internal model to calculate its Solvency Capital Requirement (SCR) Introduction A European Subsidiary of a large US based Insurance Company had a mandate to comply with the Solvency II regulations and elected for an Internal Model instead of the Standard Formula to calculate its Solvency Capital Requirement (SCR). As part of the initiative to build an Internal Model, the first and foremost requirement was to build a model and feed it with the relevant data to be able to run it. At this stage EXL partnered with the Economic Capital Model team within the Solvency II program to render support in the areas of Model Build, Business & Data Analysis. Challenges To build an Internal Capital Model that meets the requirements of the Regulators and also supports the corporate ERM program. Solution Documented data & dependency requirements Created business glossary of all the terms including granularity of data and ownerships Worked with the business users to source the required data sets, performed necessary transformation to the data before loading it in the model database Created the data acquisition report for each phase of Model Build and Validation Documented process maps to explain the data lineage for facilitating the automation of data feeds from source systems into the model, thereby supporting the development of ETL’s Created a Intermediary System for Data Cleansing prior to data upload on the Model Database Server Established data management procedures, script building for updating data validation and data tables, control, monitor and manage tables, regularly backing up data, reconciling information through the use of reports, researching anomalies and making adjustments as necessary thereby ensuring data integrity through accurate data entry Applied multiple dependency groups to enable more flexible dependency modeling Created different copulas and visually identify key features of each Benefits Effective management of the overall data sourcing by engaging SME’s to support the initiative, leading to accuracy in the data requirement gathering & sourcing and reduction of cost & effort on change requests Enhanced process by documenting the data sourcing process, issues and data lineage from source systems to model database Reduction in the overall data load process, by creating intermediary systems for data cleansing prior to upload thereby reducing the overall time and effort in fixing errors or fallouts Supported automation of data feeds from source systems and there subsequent transformations to avoid risks to data quality due to manual intervention