Solvency II & Risk - It's All Granular

Posted by Erika Alter, Global Head of Commercial Strategy, BISAM on Jan 19, 2016 9:58:21 AM
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Last week I wrote that the BISAM Insights blog is widening its scope in 2016 to bring our readers various points of view and intel on topics and trends across performance, attribution and risk - expanding beyond traditional discussions of performance measurement to look more closely at the broad spectrum of portfolio analytics. It is with this goal in mind that I found myself reading a Financial Times Q&A in early January, which outlined Solvency II and its implications on European insurance firms, and those global insurance firms with operations in Europe. Since Solvency II went into effect on January 1, requiring that “assets and liabilities be marked to market more closely than they were before,” I’ve seen a flurry of thought pieces about the impact of this regulation on firms’ operations and risk management processes.

So what does Solvency II mean for insurance firms in terms of adjustments to their operational processes, the pain points related to those adjustments, and what they should expect from a risk management platform in terms of helping to support their compliance with Solvency II?

Data Granularity

Remembering Lisa Conner’s “you better get the data right” advice from last year’s data management series, I decided to start with the likely data component of Solvency II compliance. Lisa is BI-SAM’s Head of Data Management, and has extensive experience on both the institutional and vendor side. As Lisa explained it, the Solvency II regulations require an “unprecedented level of granularity of portfolio analysis.” In the past, it was sufficient for insurance firms to only analyze higher level views, but now they must delve into constituent levels to create their analyses. As a result, the business processes to support more detailed analysis require access to more detailed data that firms have not had to previously manage within their risk systems.

When it comes to getting the data right for Solvency II compliance, the data gathering process will likely happen in an asymmetrical way. In some instances, firms have the data already in their risk systems. In other cases, they have the data and just need to get it into the risk system, and in the most challenging scenario, they may have to go get granularity from bespoke external data providers.

Modeling the Granularity

Managing the data to the right levels of granularity is the first step, but then the question becomes: now that I have the data, how do I model it?

It is no longer enough to just model at the positions level where the system already has the data. Modeling capabilities must be flexible enough to allow for more customized bespoke modeling at a detailed level. Further, Solvency II requires a set of detailed stress tests, which means a firm’s risk platform, in addition to supporting more custom modeling requirements, must also be able to handle the tests and be flexible enough to deal with increased demands on the software. For example, the ultimate number firms use to determine their capital requirements must be able to solve for VaR across all types of risk. And if firms are using different best-in-class solutions for different types of risk management, then those systems must be designed to flexibly deliver and integrate all analytics and inputs. 

In Summary:

  • Solvency II says Insurance firms must get more granular.
  • Firms must therefore be able to manage data to the right levels of granularity.
  • Firms then must have a risk system flexible enough to model the granularity and technology that can handle increased demands on software and systems.

What do you think?

To our readers, if your firm is currently adjusting to Solvency II or other regulatory requirements, we invite you to use this forum to share your own experiences, discuss best practices with your peers, and pose questions to BI-SAM’s global community of industry experts.

Topics: Market Trends, Risk Management

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