Accountability for Solvency II compliance rolls all the way up to the ‘C’ suite

Contributor: Petra Wildemann

My first two posts on Solvency II compliance addressed the fast-approaching milestones that must be met as well as the necessary time and expense required for a Solvency II implementation. Today, I will delve into the reasons why C-level executives need to become involved with their organization’s compliance processes.

Solvency II imposes a self-regulatory component with ORSA (Own Risk and Solvency Assessment). The ORSA has a two-fold nature: first, it is an internal assessment process that is embedded in the strategic decisions of the undertaking; second, it also is a supervisory tool for the regulatory authorities, who are informed of the results.

While the firm’s Solvency Capital Requirement (SCR) calibration is a good foundation for its ORSA, the final assessment also should pinpoint areas where it may differ from the SCR calculation and include details on the methods used, the internal model and how those formulas help achieve the ORSA results.

ORSA is not a one-time report; insurers will be required to repeat this assessment every year. Therefore, insurers will need to assemble processes and systems for identifying and quantifying risk that can be quickly and easily updated. They’ll also need to prove that the ORSA results are considered by key corporate decision-makers and that they impact the overall strategic direction of the business. For instance, are they taking ORSA into account whenever they assume new risk? In considering new risk, do they take on less or find new ways to lay off the risk via re-insurance or co-insurance strategies? Supervisors will want to see that ORSA is more than an actuarial process and that it is being used to drive overall corporate direction.

In addition to ORSA, insurers that intend to pursue a partial or full internal model route as an alternative to the supervisor’s standard model are required to provide a “use test.” This use test should demonstrate that the internal model is widely used and plays an important part in compliance. In fact, the use test provides the regulators with the confidence they need that management is actually using these models to make its business decisions. It also gives insurers an advantage in that it stimulates them to fully understand and manage risks in their balance sheets.

Each insurer assumes responsibility for its own ORSA process and reporting as well as its use test, should it rely on internal models. Both should be regularly reviewed and approved by the organization’s administrative or management body.

To date, it remains unclear whether or not insurance C-suite executives will be held personally accountable for their Solvency II compliance and the processes around it. While the person in charge of the financial statements and the company itself are held responsible for the shortfalls or non-compliance of the act, there is no directive as yet regarding penalties if some part of the process is not followed.

What is perhaps more troubling is that so few senior executives have a clear understanding of Solvency II in general, much less their own accountability.  According to SunGard’s recent study, only slightly more than a quarter of senior executives were reported to be well informed about Solvency II; the majority had limited or poor understand of the issue at that time.[1]

Are you ready for Solvency II?

SunGard iWorks Solvency II Resources:

White Paper:

Solvency II: Threat or Opportunity

Webinars:

Are you Ready for Solvency II?

Does Solvency II Mean Better ERM?

Podcasts:

Confronting the Challenges of Solvency II

Perspectives on issues raised by Solvency II regulation

Articles:

The New Frontier for Actuarial Risk Systems

Understanding Risk Management

[1] The independent study was conducted by Freeform Dynamics in May 2010 and involved 100 telephone interviews with business and IT professionals from the insurance industry.  The Insurance organizations varied in size from an asset base of £250 million to £25 billion+.

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