Solvency II: Preparing for Pillar 3 success

Looking back at this time last year, there was still a pre-conceived idea that once Pillar 1 and the ORSA were under control, Pillar III of Solvency II would necessarily be plain-sailing. After all, it is just reporting – how hard can it be?

The unpalatable reality is: very hard. Not only are firms required to submit far more data than under previous regimes, national competent authorities (NCAs) are also requiring that firms submit high-quality, granular data much more frequently than before, with some supervisors throwing in an extra curve-ball in the form of an XBRL format requirement. Sourcing data, overcoming gaps and eliminating quality issues are just some of the major challenges facing firms.

But beyond the narratives and the mechanics of getting the right data into the right templates in a time and resource-efficient manner, Pillar 3 has a public disclosure aspect that means that not only regulators, but also analysts, investors, competitors and other stakeholders will have access to far more detailed information than ever before, exposing insurers to an unprecedented level of scrutiny. Firms that tackle Pillar 3 with a minimalist tick-box approach expose themselves to the danger of falling far short of market and stakeholder expectations in terms of the clarity and understandability of the information they share externally.

Successfully managing the reporting and disclosure aspects of Solvency II involves mobilising a cohesive, cross-competency skill-set. Tying together the myriad strands of Pillar 3 is neither just a business project nor can it be managed in isolation by IT; both need to work hand in hand so that the operational requirements of agile business-as-usual are at the heart of the technology decisions made to support sustainable data-management and reporting processes.

When a succession of hard regulatory deadlines are looming, the most judicious approach available to firms is one based on forward-looking moderation: firms need to find a middle-ground between neglecting the importance of their disclosure and XBRL strategy until too late in the day, and being tempted to super-size the data-management and reporting effort into a vast transformational endeavour, as both extremes expose firms to an elevated risk of missed milestones and undue expense. By making carefully-considered and timely investments in people and processes, enabled by robust technology proven to deliver the very specific outputs that Pillar 3 demands, firms can manage their data so as to maximise their agility and mitigate their disclosure risk, offering themselves future-proofed infrastructure and data governance mechanisms that will support their businesses over time.

The reality is that the overall success of a Solvency II programme hinges on having a coherent strategy that is unified on a firm-wide level across all three Pillars. However, the tripartite structure of the Directive has led to many firms managing their Solvency II programmes on the basis of three very distinct silos, with the perceived importance of Pillar 3 being significantly less than that of Pillars 1 and 2. Firms are seen deploying resources on a per-Pillar basis, with internal project teams often never engaging with one another and, in some instances, actually being unaware of each other’s existence. But it doesn’t matter how good a firm’s Pillar 1 modeling is, or that the ORSA is outstanding, if the firm in question is unable to communicate high-quality and pre-validated Pillar 3 data in the designated format to the relevant national supervisor. In that case, the excellence of the firm’s Pillar 1 and 2 efforts will be marred and over-shadowed by its failure to cross the last hurdle in the Solvency II marathon: reporting the right data, on time and in the right format to the regulator.

In spite of the harmonising spirit of Solvency II, not all jurisdictions are equal as regards the stance taken by the national supervisor. With an air of ‘Vive la différence!’, the ACPR (Autorité de contrôle prudentiel et de résolution) has put insurers operating in France under pressure by expecting them to furnish an ORSA report in addition to demanding the first round of Pillar 3 reporting in Excel or XBRL format on 24 September 2014. The result has been that firms with operations spanning a range of European countries, in addition to France, have found themselves with difficult questions to answer regarding the viability of a single group-wide Pillar 3 strategy. However, while certainly challenging, the French pilot-exercise was a resoundingly worthwhile experience and the good news is that firms outside France can now learn from their Gallic peers, by engaging with those who have successfully deployed technology strategies that deliver.

Beyond the macro priority of committing to a critical path for Pillar 3, firms would be wise to stay mindful of the mass of complex micro detail that awaits them once they get deep into the nitty-gritty of the reporting guidelines. Underestimating the time, effort and technological agility required to align the functional data requirements with the technical XBRL format specifications could result in firms finding themselves having to source an unpalatably expensive contingency plan in order to meet their reporting obligations under both the Interim Guidelines and the full gamut of Pillar 3.