Look before you leap – why you should consider a target operating model approach to your Solvency II programme
The BT Tower is saying 940 days to go – counting down to the opening ceremonies for the London 2012 Olympic Games – a huge event for the UK and London. But this countdown could also be for a slightly less exciting event, an indication of the limited time frame that European insurers have to prepare for Solvency II.
During January 2010 we are likely to see a growing number of solution announcements ranging from actuarial models to risk management tools to management information and dashboard solutions. Each proclaims a quick fix in the spirit of ‘getting on with the work’. But just as the brave souls jumping into the unheated Brockwell Lido before Christmas had to consider the risk of ice scrapes, hypothermia and the impact of cold water on their respiratory systems, so too should insurers consider the scope and complexity a Solvency II transformation before setting out on a specific solution course.
Why further consideration? With the waves of CEIOPS advice and industry feedback in 2009 – according to CEIOPS there were more than 20,000 comments received on the July Level 2 consultation papers – the complex and interrelated nature of the requirements is becoming clearer. For instance, the inputs required by insurers in developing an Own Risk and Solvency Assessment (‘ORSA’) mean that firms need to pay attention to organisation structure, culture, the debate about risk tolerance in the boardroom, risk profiles and risk tolerance, and their
approach to business strategy and long-term financial planning are all pre-requisites to developing a compliant ORSA solution. Failing to address the ‘tone at the top’ on risk, for instance, could mean that a technical risk management solution may not reflect the scope and depth of risks specific to an individual firm – generic solutions will be of limited value given the ORSA requirement that insurers provide assurance of robust processes to monitor ongoing solvency.
Further examples of complex, interrelated requirements are the capital requirements tests (MCR and SCR) where insurers seeking to maximise business value by adopting internal capital models will need to prove that their data quality, systems, governance and approach to ensuring qualifications of actuarial staff meet a variety of tests imposed by the regulations.
What is needed is a wide-ranging approach to planning and executing the programme required to deliver Solvency II compliance. The programme should be anchored in a ‘to be’ vision that considers all aspects of a firm’s operating model – the ‘Target Operating Model’ or TOM. The TOM is a important tool to guide, shape and inform the programme over its life cycle with links to governance and benefit realisation; it’s not just a one-off piece of work at the beginning.The ‘levers’ in the operating model should include:
- Processes and KPIs
- IT & Infrastructure
- Financials
- Customers & Markets
- Organisational Structure
- People, Skills & Culture
- Suppliers & Partnerships
with each lever spanning the three pillars of Solvency II (Pillar 1 – Quantitative, Pillar 2 – Qualitative and Pillar 3 – Markets / Reporting).
Future blogs will explore each of the levers in more depth. We welcome your feedback on approaches you are using / seeing in the market for operating models. In particular, we wonder whether the focus on capital calculations has diverted key resources from other Solvency II requirements, such as risk management.
Written by David Smith with input from John Harvie, David Musson and Michael Erras
Posted in Financial, IT Leadership