1st January 2017 marked a year since the implementation of Solvency II, a Europe-wide insurance solvency scheme aimed at improving consumer protection and increasing the international competitiveness between insurers in the European Union (EU), while also establishing a revised set of capital requirements and risk management standards.
Despite a decade-long build up to its introduction, the industry scrambled to prepare for this new regulation with considerable investment in new computation models and requirements to disclose capital strength on a quarterly and annual basis.
As an EU regulation, Solvency II’s future has come into question as a result of the UK’s vote last June to leave the EU. The House of Commons-appointed Treasury Select Committee is currently conducting an enquiry into the necessity of Solvency II in the UK, to see what improvements can be made in the interest of the insurance industry once the Brexit process has come to an end.
With its future uncertain, what can firms do to prepare for a potential regulatory overhaul?
Looking into the crystal ball
When considering the next steps for Solvency II, it is important to look back at how the regulation came into effect and its influence on firms across the EU. While many firms used Solvency II as an opportunity to modernise their systems and internal processes, this investment in both monetary and staff resource could prove unnecessary, depending on the findings of the Treasury’s enquiry.
The initial response to Solvency II was positive, with firms increasingly realising the benefits of IT and learning to become more tech-literate, working closely with technical teams to get a clearer understanding of their capital strength data ahead of their submission. Support has waned in recent months however, with accounting group Grant Thornton reporting in its latest survey last October that only 17% of insurance firms in the UK are now in favour of the regulation. That represented only a third of the corresponding result from the firm’s 2014 survey.
One option facing the insurance sector is for the government to create its own capital requirements regulation. This is not a popular choice either, as the 400 UK firms that have invested significant amounts of time and money in Solvency II will face investing further resource into disassembling processes necessary to cope with solvency returns, and implement new regimes to deal with a new alternative.
A ‘middle man’ option is for the UK to adopt its own version of Solvency II, keeping the same basic processes, but tweaking the regulation to best suit the needs of the country’s insurance industry over the rest of the EU. As it is looking increasingly likely that the UK will eventually leave the single market once the formal Brexit process is over, Solvency II could continue to affect writing business abroad, even if no longer adopted by firms in the UK.
Coping with change
The uncertainties surrounding the UK following last June’s referendum, not only those related to Solvency II, showcases the need to for insurance firms to adopt agile technology capable of reacting to change in the moment, giving organisations the opportunity to plan and model scenarios as new information relating to Brexit becomes available.
Automating existing processes is the key to Solvency II success now, and in the future. This regulation results in ever-increasing data sets being produced by firms, which combined with the frequency of reporting timescales, puts a great deal of pressure not only on finance departments, but also on actuaries and risk professionals.
Sophisticated technology not only assists in ensuring correct computations, but also gives firms a strategy to be able to deal with any unforeseen data issues that arise when explaining the results of the data to chief financial officers (CFOs) and other senior finance professionals. Regulation technology, or ‘regtech’, is a new area being created to specifically help organisations cope with regulatory requirements such as Solvency II. If not already considered, firms should look into implementing a form of regtech such as a comprehensive planning tool, in order to deal with Solvency II more effectively over the next two years.
With Article 50 set to be triggered this March, and a full Brexit scheduled following two years of negotiation with the EU, it is a fact that change is on the horizon for the insurance industry. Although some businesses are adapting and becoming more tech-savvy, many large corporations still rely heavily on outdated legacy systems. These organisations could struggle to introduce changes to regulation in an acceptable timeframe, and without errors or significant investment. Now is the time for insurance firms to ensure their computation is developed enough to cope with changes to Solvency II, or the introduction of new regulation altogether.
While many still think the banking sector is characterised by legacy systems and lack of innovation, this could not be further from the truth. 2018 marks the year when a multitude of external factors will shake up the industry once and for all and reinvent the way people bank. Inevitably, this presents a threat, but also an opportunity.
The Indo-US trade corridor is expected to grow to $500 billion by 2025. Currently, the two-way merchandise trade between these two countries is at $66.7 billion.
Cryptocurrencies have developed and matured in to an entirely new class of asset. Completely digital and constructed using blockchain technology, they are a genuine, game-changing means of raising capital for the funding of new and existing businesses alike.
There has been an uptick of treasurers inquiring about interest rate risk management in recent months as interest rates in the US and UK have started to show a rise in momentum, said Chatham Financial at the annual Bellin treasury conference.