Solvency II Group Supervision Implications on Data Warehouse Management

Solvency II has streamlined regulatory reporting for multi-national and/or multi-subsidiary financial services companies with an insurance arm doing business in the European Economic Area (European Union plus Norway, Iceland and Liechtenstein).

Activities of the different businesses, divisions and branches can now be monitored and appraised centrally at the highest level. Instead of reporting to multiple regulators in different legal jurisdictions of the EEA, insurance companies now have the option of filing all reports at group level with just one regulator.

They can do this by submitting an SFCR (Solvency and Financial Condition Report) which covers the disclosure requirements in Solvency II’s third pillar, and an ORSA (Own Risk Solvency Assessment) which is an outline of the group’s risk profile. The group supervisor would then share the reports with all other pertinent supervisors.

But even as this process appears to reduce redundant reporting, the level of detail in the SFCR and ORSA required for each entity within the group means data collation and management will need to be just as (if not more) complex when preparing the group reports than it is with solo reporting.

What’s more, the fact that the same group-level reports will be distributed to multiple supervisors means the data warehouse of such large insurance companies has to be meticulously configured to ‘get it right the first time’.

Does Group Supervision Expose Otherwise Hidden Risks?

Probably one of the first things that comes to mind when you think about filing group reports is the likelihood of certain risks being ‘swallowed up’ and hidden from regulators because of the data aggregation from a centralized data warehouse. But on the contrary, filing consolidated group-wide reports can in fact bring to light certain risks that would otherwise be difficult to see when reporting is done separately for distinct subsidiaries, divisions and country branches.

A classic case is double or multiple gearing, a controversial practice where two (double gearing) or more (multiple gearing) companies consolidate their risks by investing capital in each other. The quintessential example of double gearing is an insurer buying shares in a bank and the bank extending loans to the same insurer. Unless overtly declared and factored into regulatory reports, it can mask the true capital position of the institutions involved.

Group supervision would help pick out double gearing and other complex multi-entity risks such as leverage. In fact, the group supervision provisions were originally informed by the need to protect insurance policy holders within the EEA from risks that may originate from the insurance company’s other businesses outside the EEA.

But Just how Significant is Group Supervision under Solvency II?

Very. According to the European federation of reinsurance and insurance associations (CEA or Comite Europeen des Assurances), Europe’s insurance industry had 125 insurance groups categorized as large and 500 medium as at 2007. The 125 large insurers controlled 85 per cent market share, medium-sized insurers took 13 per cent while about 5000 small insurance companies had only 2 per cent of the market.

Even though the insurance industry was rattled by the 2008 financial crisis, the proportion of market segmentation between large, medium and small players is unlikely to have changed much since then. So given that large insurers are responsible for 85% of European Economic Area (EEA) insurance business by value, the ability to have a group wide report of such large companies also allows regulators to have a bird’s eye view of the entire industry by looking at a relatively small number of insurers.

So How Important is Data Management for Solvency II Group Supervision?

According to a 2011 survey conducted among UK insurers by the EIU (Economist Intelligence Unit) and published by Big 4 accounting firm Deloitte, firming up data handling and data infrastructure capabilities was going to be a Top 3 Solvency II focus area for most large insurers through 2011.

Large insurers were acknowledging the difficulty in standardising the quality, format and control of data from all entities within the group in preparation for group supervision. This is because subsidiaries and distinct businesses within the same group may have disparate systems, data warehouses and data formats that would need to be harmonised if auto-generated Solvency II group supervision reports are to be realised.

The Politics of Data

But the data challenges large insurers will have to grapple with go beyond just differences in data formats. The potentially crippling intra-organisational conflicts are likely to set in as staff responsible for preparing group reports face off with the heads of subsidiaries and business divisions on just what data should be submitted for SFCR and ORSA calculation.

Some line business heads will be reluctant to release ‘their’ raw data to a group data warehouse and instead prefer to do the SFCR and ORSA calculation for their business unit themselves. The reasons for such reluctance may vary from a power struggle to a fear of losing control over what information percolates to the group’s executive management and board.

Ultimately, if the boards and executive management teams of large insurers are to be confident that the data used to file group supervision reports is accurate, complete and consistent, basing such reports on raw data from a centralized group data warehouse is the way to go.

Looking Forward

As insurers set out implementation plans to comply with Solvency II, one of the biggest challenges remains the shifting implementation deadlines and delays by the EU parliament in voting on the law (vote has been postponed to April 2012).

On the face of it, a deadline extension (such as the recent announcement that the implementation deadline had been extended by another year from January 2013 to January 2014) would sound like good news as it gives companies more time to prepare before the regulation comes into effect.

But the repercussions of shifting deadlines is not that straightforward. Remember that the drop-dead deadline is one of the key factors used in setting out implementation plans including setting up the requisite data warehouse infrastructure as well as allocating financial and personnel resources. While there is nothing wrong in being ready for Solvency II way before the due date, the ‘unnecessary’ allocation of resources is not cost efficient in the long run.

In addition, given that the European parliament is not set to vote on the law until April 2012, there remains an air of uncertainty over what the provisions will eventually be. Insurers that finalize implementation before then run the risk of having to make costly changes in case some of the current regulations are rejected or new ones introduced.