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Solvency II: Calm before the storm

Solvency II: Calm before the storm

The storm clouds are gathering quietly, darkening the horizon.  And still we relax in the sun and let our cares drift away.  But while we’re all unwinding at the beach, the earth moves on its inexorable course.  Come September, when we get back to the office, the storm will be about to break.

The Solvency II 2012 deadline is immovable and many companies are now realising that they have seriously underestimated the work that is involved.  And with that realisation comes a serious headache as insurers rush to make themselves compliant with the regulations.  This is going to give many Life and Pension companies a difficult autumn as they struggle to make Solvency II projects deliver.

Already there is anecdotal evidence of low-level panic in the marketplace, as there is now a dearth of contract actuaries available for hire, with those in the market getting snapped up quickly to join teams that are falling behind in their preparations. And this is happening in the quiet time of the year for recruitment.

Online Solvency II discussion groups are showing signs of concern.  The scale of the work involved is beginning to dawn on participants in these transformational projects.

And make no mistake about it; these projects are transformational.  It is not just a question of coming up with a suitable formula to calculate corporate solvency and getting it approved by the regulator.  Pillar 2 of the regulations requires firms to implement real changes across the management of life and pension enterprises.  This is to ensure that they can meet the use test scenarios – demonstrating that solvency calculation approach is factored into all decision-making processes within the organisation.  How this will be judged is an unknown factor in all this, yet executives and directors will be held fully responsible for meeting the regulations.  And how this should be reported under the Pillar 3 reporting requirements is not fully specified yet.

And then there are the unknown unknowns, to borrow Donald Rumsfeld’s phrase.  These could be around unforeseen complications in proving the Pillar 2 scenarios or even the data issues that caught the bankers out in the Basle II regulatory drive.[1]

A shortage of qualified personnel, unclear tests to be satisfied, poor data quality issues ready to bite, lack of installed systems to reduce the workload; these are all reasons to believe that complying with Solvency II is not going to be a simple matter.

Add to this the fact that a key factor of Solvency II is to ensure that there is board level responsibility for corporate compliance and you can see that this is going to be one of the highest profile projects in most organisations over the next two years.

So while you relax at the beach bar with the ice-cubes slowly dissolving in your gin and tonic, perhaps you should ignore those storm clouds growing on the horizon.  They won’t break until you get back to the office.  But “après cela, le deluge”.

Tom Murray

[1] For further information on the data issues faced by the banking community during Basle II, see this whitepaper produced by myself and my colleague Kathryn Desmond

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