Solvency II: Threat or Opportunity?

An executive perspective


Published/updated: July 2010

By Dale Vile and Jon Collins

INTRODUCTION

The emergence of new regulation always presents a dilemma, particularly when considered against the background of other, often-conflicting priorities for resources and investment. On the one hand you can respond to the immediate need, absorb the cost of compliance, and have done with it. This often translates to finance and operations staff simply implementing tactical changes to the way business activities are recorded and reported, minimising the impact on core systems and processes.

The alternative approach is to take a more strategic view, and address new compliance requirements in a more fundamental manner that leads to incremental refinement of core policies, systems and processes. While this may initially cost more, responding in this way is more likely to have a cumulative positive effect on efficiency and effectiveness, while avoiding the need to continually reinvent the wheel when it comes to new regulation.

Whichever way you have leaned in the past when faced with such choices, there is an event on the horizon that is likely to force your hand. In 2012, insurance firms in the European Union (EU) will be expected to demonstrate compliance with Solvency II. This new set of regulations changes the game by demanding a more fundamental approach. Transparency of how the company is directed and managed at the highest level is mandated, with a need for executives to demonstrate that certain principles of risk and capital adequacy have been worked into the review and decision-making fabric of the business from top to bottom.

Some might take this as a huge imposition, but the move is not surprising given that so many high profile issues in the financial services industry as a whole have been tracked back to board level behaviour and decisions. And while Solvency II was conceived before the most recent global economic crisis, the broad media coverage of risk related issues that underpinned the 2008 crash has put even more of a spotlight on industry regulation.

On a more positive note, however, while board members in some organisations may have mixed feelings about being forced into the root-and-branch treatment advocated by Solvency II, it is possible to view it as an opportunity to benefit from an overdue shake-up of business practices.

But how much have executives thought through all this, and how prepared are they and their management teams to deal with implementing Solvency II in the most efficient and effective manner? These are the questions we are concerned with in the remainder of this paper, with reference to a recent research study which provides a flavour of the kinds of sentiment and activity that exist.



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