Gaining Additional Value From Solvency II

May 25, 2016

The implementation of Solvency II has been a huge and expensive challenge for the industry, and as the dust is starting to settle, many commentators are asking whether it was all worth the effort. What started out as sound principles of risk based regulation developed into a complex regulatory framework around these core principles. How does the CRO assist in gaining additional value from the Solvency II spend?

1. Stop talking about risk management and compliance with Solvency II in the same breath. Smart companies had CROs and risk frameworks long before risk-based regulation took hold. They had them because they really helped provide a better insight into the risks in their business to help drive long term value creation– so in these difficult market conditions use the framework in anger to help steer the business.

2. Use your models to assist and inform your decision makers. A key tenet of good risk management underpinning the core principles of Solvency II is to embed the risk models into the business and use them as a key element of decision making. For many this hasn’t yet happened to the extent that it could due to the pace of model development and competing business priorities. This has led in many cases to risk models (including the internal model) sitting separate from the business operations. Examine where the output of the models can be helpful to assist decision makers and help them to use the models to create useful KPIs.

3. Focus on embedding the risk culture. A positive risk culture is a key attribute of good risk management underpinning the core principles of Solvency II but it is difficult to quantify how risk culture is measured. A positive risk culture will trump any number of rules that are put in place to manage risk. Define the attributes of your risk culture with your board and senior management and then ensure it is well articulated, reinforced and owned throughout the organisation.

4. The ORSA process creates a great framework for thinking about the risk across the business. Use these same principles in talking to all colleagues about the risk framework and don’t get lost in the weeds. Maintain risk transparency throughout the business but target those risks that materially impact earnings and capital.

5. Do not forget that in reviewing hard-to-quantify risks the key benefits are often in the dialog around the risk rather than solely the quantification itself. Continue to focus on the dialog and engagement on risk matters – from a risk management point of view, this is more impactful than focussing on populating a spreadsheet which feeds a formula.

For those that view risk management as a pure compliance exercise, the implementation of Solvency II will always look expensive. For those that embrace sound risk management as a key differentiator and a core element of their business strategy, it will be shown to have been a good investment in enhancing the risk management frameworks within their companies.