Solvency II Buyer's Guide

This guide provides a high summary overview of Solvency II including many of the difficulties that we’ve seen users experience combined with practical advice on the process of selecting the best Solvency II software and the key features users should look for.

Buying Solvency II software has
its challenges

Whatever route you go, SEEING IS BELIEVING. Case studies and customer success stories are valuable and earn their place in the process, but vendors have a tendency to only showcase their most successful projects.

Every credible vendor will be willing to demonstrate their product and be scrutinised by your subject matter experts to evidence that their software can meet your most intricate requirements.

  • What is Solvency II?
  • Selection Guidance
  • Common Challenges
  • Top 10 Features

What is Solvency II?

  • The Basics
Solvency II is a directive in EU law, overseen by EIOPA (European Insurance and Occupational Pensions Authority), that sets out the regulatory requirements for insurance companies and covers:
  • Financial resources;
  • Governance and accountability;
  • Risk assessment and management;
  • Supervision;
  • Reporting; and
  • Public disclosure.

Solvency II returns have been mandatory for EU insurance and reinsurance companies since January 2016 whilst Lloyd’s Syndicates were submitting returns as early as November 2012. For many, preparation of the Solvency II returns has been an uphill battle ever since.

  • The Uncertainty

Following Brexit, the UK has adopted the existing Solvency II regulations. This is currently under review and although we expect the UK’s Prudential Regulatory Authority (PRA) to continue to support the fundamental principles and framework underlying Solvency II, there may be some divergence to better suit the UK insurance sector.

  • Evolving Regulations

EIOPA have regularly updated the regulations whilst reporting timetables have been accelerated. Events can have significant impact on capital modelling and regulatory reporting teams, for example:

  • The Costs

Let’s not forget the cost of implementing the Solvency II processes and buying the relevant software. The European Commission has suggested that the average cost of implementation is less than 0.4% of written premiums, although we’re not sure everyone would agree that this is good value!

To prove that insurers have adequate financial resources to meet all their liabilities, insurers must (in addition to technical provisions) meet two key capital requirements, namely:

Solvency Capital Requirement (SCR)
The SCR (sometimes referred to as the “soft floor”) is the amount of capital that insurers must hold in order to substantially reduce their risk of insolvency. A breach of the SCR typically results in an investigation and analysis by the Supervisory Authority and a requirement to submit a recovery plan.

Minimum Capital Requirement (MCR)
The MCR (the “hard floor”) is the capital threshold below which the Supervisory Authority would certainly intervene. Consequences of breaching the MCR may be severe including the withdrawal of authorisation from selling new business and the winding up of the company.

Insurers must perform an Own Risk and Solvency Assessment (ORSA) which is reviewed by their local Supervisory Authority. The main objectives of the ORSA are to ensure that:
  • All short-term and long-term risks are identified, assessed, monitored and managed;
  • Insurers quantify their ongoing ability to continue to meet the MCR and SCR given these risks; and
  • Insurers continue to improve their risk management techniques
It is worth noting that Supervisory Authorities can also impose additional capital for governance failings.

To assist the market in imposing greater discipline on the industry, insurers must provide transparency as follows:

Quantitative Reporting Templates (QRTs)

EU standardised quarterly and annual QRTs provide detailed financial information that must be submitted to the local Supervisory Authority in XBRL format.

National Specific Templates (NSTs)

Several individual nations (including the UK and Ireland) require insurers to submit these additional quarterly and annual NSTs which provide similar levels of detailed financial information in specific formats, including XBRL or CSV format.

Solvency & Financial Condition Report (SFCR)

An annual narrative disclosure report, written for a public audience, provides an overview of the company’s financial position and includes topics such as business performance (including the data from a number of the QRTs), governance systems, capital management and risk profile.

Regulatory Supervisory Report (RSR)

A more comprehensive narrative report that is submitted solely to the local Supervisory Authority in full, at least every three years and in summary every year.

How should I go about selecting the
best Solvency II software?

Identify your needs

Identify your principal requirements before you start looking at vendors – refer to the ‘Top 10 Features’ section to discover the typical capabilities that insurers normally look for.

Implementation

Vendors will typically provide their own consultants or point you in the direction of their implementation partners. Verify that these consultants have proven experience and product knowledge. After all, a fantastic solution implemented poorly, is a poor solution.

Book a demo

We have simplified this process by including the main Solvency II contenders and their relevant features for free on our site. Book demos here with one or more vendors and we will facilitate the process and insulate you from the initial sales hassle.

Training

Far too often training is dropped as “cost-saving exercise”. Ensure you spend the time training your staff on the software – it will greatly increase the adoption rate across your business and reduce your reliance on expensive variable resource in the future.

Vendor assessment

Engage with all stakeholders (Procurement, IT, Finance & Actuarial) to determine your final requirements and perform your full software and vendor due diligence. Use our free tailorable Request For Proposal (RFP) pack to get you started.

Support

Purchasing an annual support package from the vendor or an implementation partner can be more cost effective than trying to manage it all yourself. Look for packages that include bug fixes and taxonomy releases.

What are the challenges of
Solvency II reporting?

  • Data Sources
Populating your QRTs requires extracting data from several disparate systems including general ledgers, asset data warehouse(s), actuarial and treasury systems. It is safe to say that one of the greatest challenges you will face when implementing a Solvency II solution is sourcing your data and getting it into the right structure to load into your SII application.
  • Submission Deadlines
The submission deadlines imposed by EIOPA have become increasingly shorter since it came into effect in 2016, thus increasing the pressure on insurers to complete their returns on time. The table below highlights how long reporting teams have to prepare and submit their returns following the period end:
Quarterly Data Annual Data
Solo Companies 5 weeks 14 weeks
Group Companies 11 weeks 20 weeks

It is worth noting that the timelines described above are the timelines made available by the regulator, and are not adjusted for other factors that erode the time available for Solvency II reporting.

  • National Specific Requirements

Many insurers also have to contend with different national regulatory authorities and their National Specific Templates (NSTs). This may be particularly troublesome for insurers who underwrite in multiple countries. Although the requirements are much the same, each regulator has nuanced requirements and require additional submissions. Furthermore, there are inconsistencies between the portals of each regulator which creates further overhead on insurers.

  • Lloyd's of London

Insurers who are participant in Lloyd’s syndicates in the British insurance market also have to report to Lloyd’s of London contending with the Lloyd’s specific solvency requirements and an ever shorter reporting timetable (due to the fact that Lloyd’s themselves have to report Solvency II to the PRA).

  • Regulation Changes

Despite Solvency II being relatively mature, there are frequent changes to the regulation, which bring challenges to the both reporting teams and systems to ensure they conform with the updated taxonomies. 

Whilst many changes can be foreseen, since EIOPA tends to publicise areas of consideration and seek consultation with insurers, disruption from the changes is expected.  This is in part because of the complexity to cater for changes in capital models, but also the time and effort required to update one’s systems to cater for the changes in the taxonomies.

  • Resubmissions
It is not uncommon for Supervisory Authorities to instruct insurers to complete resubmissions – often with considerable elapsed time since the original submission.  Regardless of whether or not taxonomy changes have since been released, all resubmissions must comply with the taxonomies that were applicable to the reporting period.  This necessitates having an ability to prepare returns not only for the current taxonomies, but for the prior taxonomies too.
  • Return Formats
It is important to note that Solvency II reporting systems need to produce outputs that are consistent with the Supervisory Authorities’ requirements.  Aligning to EIOPA taxonomies may not be sufficient, particularly where any instructions may be ambiguous.
  • System Maintenance
Owing to the complexity of Solvency II, and the frequency of change, many SII systems require routine and arduous maintenance. System maintenance tends to fall on the shoulders of finance systems support teams, or on power users in smaller insurance firms.

Regardless, a high degree of Solvency II technical expertise is required to ensure that systems are sufficiently maintained.  The time and effort to maintain the systems needs to be considered and planned, and capital modelling teams need to be aware that these maintenance tasks will further erode the timelines available for data input.
  • Costs
The total cost of operation, including the cost of specialised resources such as actuaries, accountants and systems accountants, to software costs including licenses, hosting (and thus hardware may be a factor too) and support, should not be overlooked.  Unnecessary costs are a common theme across insurers, and tend to be consequential of poor systems and process integration.

Top 10 features to look for when buying
the best Solvency II software

At a minimum, you’ll need software that will validate and map your Solvency II data into a format suitable for the Supervisory Authority portal.  

You may also benefit from additional features which will reduce the risk of error, improve the process, provide added value and reduce the operating costs. Naturally the costs will vary significantly depending on just how feature-rich the software is, so a balanced view of your requirements is imperative.

1. Breadth

Can a single solution/platform cater for all of your current and future SII requirements?

      1. Which pillars does my solution need to cater for?
      2. Do you need to cater for Lloyd’s, ECB add-ons, third country branch reporting, NSTs etc.?
      3. Is a consolidation capability necessary to aggregate solo data for group reporting purposes, or to aggregate data from sub-entity detail?
      4. Is an out-of-the-box Standard Formula Model sufficient? If an Internal Model applies, does the software provide the calculation basis for this?
      5. What other features are required to future-proof your Solvency II reporting?
2. Taxonomy Updates

Does the vendor have a track record of providing accurate taxonomy updates on a timely basis and no intention of reducing their product support in the future?

3. User Experience
Is the software user-friendly and intuitive? Solvency II already brings enough challenges without having a complex user journey.
4. Data Traceability
Has the software got comprehensive data traceability and tracking features? Having your Solvency II data audited can be more challenging than completing it in the first place.
5. Integration Capabilities
Would you benefit from software that has integration capabilities with your source data systems?  It might help automate and streamline your reporting process.
6. Out-of-the-Box Reports
Are out-of-the-box reports, consistent with the quantitative reporting templates (QRTs) specified in the taxonomies, included?
7. Report Writer
Would it be valuable to have the ability to create your own reports? After all, you have spent time collecting all this data so why not extract more value from it by creating value added insight through data visualisations and trend analysis?
8. Validations
Does the software provide point-of-entry validations that are consistent with the taxonomy (both errors and warnings) and are easy to interpret including mechanisms to support easy remediation?  No one wants to go through the whole process only to realise there are data errors when they get to the submission portal on deadline day.
9. Installation Options

Will the software meet your IT requirements and strategy? We’re seeing a significant move towards cloud deployment, however on-premise solutions may still be suitable for some.

10. Narrative Reporting
Last but not least – should you incorporate your SFCR and RSR requirement? With the right solution these narrative documents can be put together more seamlessly. If required, we suggest that the application should provide you with document collaboration and easy access to data to report within your RSR and SFCRs.