Accelerating Solvency II Compliance with SAS

Building the bridge to competitive advantage

WHITE PAPER

SAS White Paper

Table of Contents
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Solvency II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 From Planning to Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Evolving for Future Flexibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 SAS: Building a Bridge to Compliance . . . . . . . . . . . . . . . . . . . . . . . . 2 Implementation in the Spotlight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Challenge 1: Data Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Challenge 2: Meeting Solvency II Capital Requirements . . . . . . . . . . . 4 Challenge 3: Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Challenge 4: Compliance Reassurance . . . . . . . . . . . . . . . . . . . . . . . . 5 Challenge 5: Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Challenge 6: IFRS Reconciliation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 SAS: Our Expertise, Your Solvency II Solution . . . . . . . . . . . . . . . . . . 7 The SAS Solvency II Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 An Integrated, End-to-End Solvency II Data Management Solution . . 9 A Robust Risk and Capital Modeling Solution . . . . . . . . . . . . . . . . . . 9 Integration of Solvency II and ORSA . . . . . . . . . . . . . . . . . . . . . . . . 10 Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Alignment of Solvency II with IFRS Accounting . . . . . . . . . . . . . . . . 10 Conclusion and Next Steps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 The Five Steps to Solvency II Compliance . . . . . . . . . . . . . . . . . . . . 11 About SAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Accelerating Solvency II Compliance with SAS

Executive Summary
Solvency II, the biggest transformation of European insurance legislation in almost 40 years, is set to come into effect on January 1, 2014 . Designed to introduce a harmonized, EU-wide insurance regulatory regime that will protect policyholders and minimize market disruption, the legislation sets stronger requirements for capital adequacy, risk management and disclosure . The recent proposal to extend the deadline for Solvency II compliance by one year reflects the finding of a report by the Financial Services Authority (FSA) in the UK that many insurers have much to do before they reach the Solvency II standards .1 While the proposed deadline would give firms more time to prepare, it should not be cause for complacency . The challenges of meeting Solvency II requirements are incredibly complex, regardless of whether insurers are using their own internal capital model or the Solvency II standard formula . Embedding new solvency capital models, data management processes and reporting systems into day-to-day business, across multiple business lines and subsidiaries, is a complicated and sophisticated task . The extension should, therefore, be viewed as an opportunity to take a structured approach to the Solvency II transformation project; to use the space to make considered decisions that will not only lead to compliance, but also inform strategy and drive competitive advantage in the long term . SAS has worked closely with customers in the insurance industry for more than 30 years . Our extensive experience with regulatory change means that we are able to understand the needs of insurers and the solutions to those needs . Through this experience and knowledge, we have developed a complete Solvency II framework to help our customers accelerate the compliance process, reduce the cost of the project and reduce the risk in their Solvency II transformation process . In this paper, we share our insight into the challenges customers are facing in the countdown to Solvency II, and we outline the SAS solutions that are helping insurers to prepare .

The extension is an opportunity to take a structured approach to the Solvency II transformation project; to use the space to make considered decisions that will not only lead to compliance, but also inform strategy and drive competitive advantage in the long term.

Solvency II
From Planning to Implementation
Once implemented, Solvency II will provide a solid risk- and capital-based foundation for the insurance industry for many decades to come . The EU-wide legislation will improve capital adequacy, risk management and accountability, thereby increasing protection for policyholders, giving clarity on insurers creditworthiness and reducing the risk of market disruption and business failure . It will replace the current 14 EU insurance directives with a single regulatory standard that will harmonize the rules for the insurance industry across Europe .
1

FSA Solvency II: Internal Model Approval Process Thematic review findings, February 2011, p. 4. www.fsa.gov.uk/pubs/international/imap_final.pdf

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But the short-term challenges of meeting Solvency II requirements are numerous and complex . Beyond compliance, Solvency II solutions must be woven into an insurers daily operations . The deadline for compliance may potentially be delayed by a year, but insurers should not be lulled into a false sense of security . Failure to act now will only result in increased pressure in a years time . Since the inception of Solvency II, many insurers have seen it as an opportunity to make important strategic decisions for the future . Much time and energy has been put into planning how the transformation to Solvency II can improve operational efficiency, or how new internal capital models can help insurers understand their business better, develop new product lines and gain competitive advantage . However, the reality is that despite the time spent in planning the transformation to Solvency II, many insurers have found that the toughest challenge is implementation . Embedding new models, rules and processes into their multifaceted businesses is proving to be complicated and expensive . How can they build a platform that works for all stakeholders from actuarial to finance to risk and IT? And how can they build it costeffectively and on time?

Embedding new models, rules and processes into their multifaceted businesses is proving to be complicated and expensive.

Evolving for Future Flexibility

There are many changes required to meet the Solvency II standards, including financial, actuarial, capital, risk management, audit management and management of the overall insurance group . Unfortunately, clarity and guidance from the EU and the European Insurance and Occupational Pensions Authority (EIPOA) will not be available for some time yet,2 and insurers may also need to incorporate changes imposed by the revised International Financial Reporting Standards (IFRS) . This means that platforms, systems and processes built now must be flexible enough to absorb changes to the requirements in the future . In the short term, this transformation has become a necessary compliance exercise . But, by building a platform that can be quickly and cost-effectively adapted later, insurers can still invest in their long-term competitive advantage . Insurers are, therefore, seeking to build flexible IT platforms and data management frameworks that both enable them to be compliant now and provide a solid foundation for future innovation and development .

SAS: Building a Bridge to Compliance

SAS understands the complexities of the data and IT infrastructure transformation needed for insurers to be Solvency II compliant . In more than 30 years of business, we have worked with more than 1,000 insurers in more than 50 countries, and have supported numerous financial institutions through regulatory change programs . We also understand that Solvency II is not just about capital management . Strong corporate governance and risk management are at the very heart of Solvency II, and for many companies, these present a greater compliance challenge than the Pillar 1 requirements .
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The EUs Level 2 Implementing Measures and Binding Technical Standards are not due for publication until summer 2012, and EIOPAs Level 3 Guidance documents cannot be published until after the Level 2 is published.

Accelerating Solvency II Compliance with SAS

Based on our extensive experience, our solutions will help you meet the minimum Solvency II requirements within the time frame and help to transform your companys culture . Using SAS, you can connect the actuarial, risk, financial and IT functions of your business to build a single framework that meets all of the regulatory standards . This framework can provide a solid foundation for improved capital and cost-efficiency, and continuous product innovation, into the future .

Implementation in the Spotlight

At SAS, we regularly engage with our insurance customers to understand the challenges that Solvency II presents . What is increasingly clear is that the more progress insurers make, the more they realize they have to do . This anecdotal evidence is supported by the findings of the FSAs Solvency II: Internal Model Approval Process Thematic review, which found that some firms judged themselves to be already close to Solvency II standards but, on closer questioning, were not able to provide evidence to justify this . By combining the experience of our customers with the FSAs findings, we have identified six key challenges that insurers must address immediately to meet Solvency II standards in time .

Insurers are, therefore, seeking to build flexible IT platforms and data management frameworks that both enable them to be compliant now and provide a solid foundation for future innovation and development.

Challenge 1: Data Management

Data management or more precisely, managing the quality and consistency of data is fundamental to Solvency II compliance . The directive requires data to be accurate, timely and appropriate for all stakeholders, across actuarial, risk and financial functions . But, in many firms, siloed use has led to disjointed data . This is an issue that must be addressed for firms to be Solvency II compliant . Many insurers have made plans for improved data management, but have stumbled at the implementation phase . The FSA commented that most firms have overstated their current level of preparedness against Solvency II criteria . The regulator noted that insurers had started to create data dictionaries to help with companywide classification of data . These data dictionaries will help to convert data into the information each stakeholder needs whether that be risk profiling or reporting information and ensure that everyone is compliant . However, the FSA also commented that there is little evidence of timely maintenance and consistent use of the data dictionaries across the business . It therefore recommends that one or more data experts should be the custodians of data quality and management for the entire firm . In addition, the regulator views multiple spreadsheets as an area of risk, leading to an uncoordinated approach and a lack of cross-functional alignment and not the best route to compliance . A centralized software solution is therefore essential to ensuring consistent use and easy maintenance of data, as well as reliable monitoring and reporting .

Data dictionaries will help to convert data into the information each stakeholder needs whether that be risk profiling or reporting information and ensure that everyone is compliant.

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But with multiple stakeholders, and limited resources, how can companies ensure policywide compliance in the remaining time?

SAS Recommendation
Solvency II compliance is a massive and multifaceted exercise, but it does not require firms to tackle data management at a policy-by-policy level . Insurers using the regulators standard formula will find that homogenous risk groups are acceptable . We advise that others should prioritize the data that has a material impact on their compliance issues, and ensure that these are clearly defined in the data dictionary . Our Solvency II solution features products that enable data experts to quickly, easily and cost-effectively improve data quality, harmonize the data dictionary and meet the basic requirements for compliance . Firms can use these tools for all future data management, maintenance and reporting as they develop their data dictionary . Read about SAS end-to-end Solvency II data management solution on page 8 .

Challenge 2: Meeting Solvency II Capital Requirements

In the past, insurers have used numerous, separate actuarial models to calculate capital requirements and project cash flow for individual products or subsidiaries . This siloed approach has meant that balance sheets and therefore regulatory capital have not always truly reflected all of the risk undertaken by the business (e .g ., market, credit, underwriting, liquidity and operational risk) . Solvency II requires all insurers to integrate the models used to calculate their solvency capital requirement (SCR) to produce an accurate balance sheet that is reflective of all risk taken at product, subsidiary and corporate levels . This applies to all firms, regardless of which approach insurers base their capital requirement calculations on: internal model, standard formula or a combination of the two . However, there are very few software solutions on the market that can apply these complex calculations in a compliant and harmonized way . And with the delays to the publication of the directive, there is still uncertainty as to the exact calculation requirements of the future .

SAS Recommendation
Insurers must develop a central risk calculation engine that will analyze risk and calculate capital requirements in line with both Solvency II and company strategy . This engine should be quick and easy to use whenever firms need to measure actuarial risk at a subsidiary or corporate level . Furthermore, it should not only be used for capital and risk calculations, but also for aggregation and stress testing, as well as for validation and reporting purposes . SAS offers an out-of-the-box solution, SAS Risk Management for Insurance, which both integrates and accelerates the risk and capital modeling process . We use a standard, predefined formula, but offer the flexibility to adapt the calculations to accommodate

Accelerating Solvency II Compliance with SAS

future changes to the regulators requirements . And the same risk engine can be used to meet the standards for partial and internal models . See page 9 for more information .

Challenge 3: Risk Management

Measuring and managing all types of material risk is not just about regulatory compliance; it also informs business strategy, planning and operational decision making . Insurers will therefore continue to assess all types of risk, especially those specific to their own business, using an Own Risk and Solvency Assessment (ORSA) . To produce a complete risk profile that is both compliant and strategically valuable, the Solvency II standards and ORSA must be calculated and managed in a consistent way . Risks identified by ORSA should be included in a firms Solvency II model, and resultant capital requirements will directly affect financial planning . In addition, progressive insurers will want to continuously improve their risk management systems over time, as they turn this compliance exercise into an opportunity to create competitive advantage .

SAS Recommendation
Insurers should take this opportunity to develop one calculation engine to help produce both the SCR and the economic capital requirements under the ORSA . Working with SAS, firms can integrate their ORSA model with the Solvency II Standard Formula calculation engine to produce harmonized calculations and reliable management information for operational and strategic planning . Find out more about SAS Risk Management for Insurance solutions and SAS solutions for enterprise governance, risk and compliance (SAS Enterprise GRC) on pages 9 and 10 .

Insurers must develop a central risk calculation engine that will quickly and easily analyze risk and calculate capital requirements in line with both Solvency II and company strategy.

Challenge 4: Compliance Reassurance

Solvency II compliance is not just about establishing a compliant business process and implementing it . Insurers are required to demonstrate how they arrived at this process, that the implementation of the system is valid and consistent, and that it has been fully embedded into the firms working processes . The regulators will conduct frequent assessments of an insurers compliance with the Solvency II rules through the Supervisory Review Process . It will be vital for insurers to explain how and why they comply with the rules, justify their internal models and detail the processes in place to meet the standards . In addition, insurers will need to be able to quickly and easily provide the regulators with regular implementation updates as the go-live deadline approaches . Our experience has shown that companies that conduct self-assessments of their own compliance with the rules have better relationships with the regulators, are less at risk of fines or censure, and ultimately have a lower overall cost of compliance . Beyond regulatory scrutiny, these self-assessments form the foundation of a strong internal control framework to help ensure continued long-term compliance .

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But, as we have already noted, the regulators (in this case, the FSA) found that firms often judged themselves to be ready for Solvency II, but were unable to provide sufficient evidence to justify this . In the midst of a massively complex actuarial and IT transformation program, how can insurers quickly and easily document and record their journey to Solvency II compliance?

Insurers should develop one calculation engine to help produce both the SCR and the economic capital requirements under the ORSA.

SAS Recommendation
Because the SAS Solvency II framework helps insurers to establish the business processes required for full Solvency II compliance, we also fully support compliance self-assessment and progress monitoring . An intuitive project management interface enables firms to quickly access evidence of Solvency II compliance processes and formula development . Results can be used for both external and internal audit, saving time and giving valuable insight into Solvency II implementation . For more information, on SAS Enterprise GRC see page 9 .

Challenge 5: Reporting
Greater transparency through public disclosure and reporting requirements is one of the central foundations of Solvency II . Insurers will be expected to produce more reports than ever before such as capital calculation and risk management results on a monthly, quarterly and annual basis both for internal, regulatory and market scrutiny . Not only will firms need to produce more reports, but turnaround times have now been cut from months to a matter of days . Also, final reporting requirements will not be defined until Solvency II enters the final Guidance phase . Meeting the new reporting standards will require an unprecedented amount of work, in a time of immense pressure and limited resources . For many insurers, reporting is the final hurdle to compliance and they stand to fail if they do not put sufficient reporting tools in place now .

Companies that conduct self-assessments of their own compliance with the rules have better relationships with the FSA, are less at risk of fines or censure, and ultimately have a lower overall cost of compliance.

SAS Recommendation
Managing separate reporting systems for regulatory, market and management reporting will not be practical or cost-efficient once Solvency II legislation comes into effect . Insurers must save time and money by integrating their reporting system to produce consistent, timely and relevant information for all stakeholders . Only SAS offers a predefined Solvency II compliant reporting format SAS Risk Management for Insurance with all the necessary data structures for both internal and external reporting . SAS Risk Management for Insurance offers the opportunity to develop meaningful management and market information to meet the needs of all stakeholders . In addition, it can be easily updated as new regulatory reporting requirements are defined . No other software provider can offer a complete reporting solution out of the box . To find out more about the reporting capabilities of SAS Risk Management for Insurance, please see page 9 .

Accelerating Solvency II Compliance with SAS

Challenge 6: IFRS Reconciliation

The move to Solvency II and the upcoming IFRS accounting changes will both have huge implications for how insurers measure their performance and are viewed by the financial markets and regulators . Failure to communicate capital management and value creation effectively will lead to greater market scrutiny and an increased cost of capital . Firms must therefore be able to report both standards clearly, and help the market and regulators understand any discrepancies the two methodologies create .

Greater transparency through public disclosure and reporting requirements is one of the central foundations of Solvency II.

SAS Recommendation
The crossover of the implementation of Solvency II with the IFRS changes presents an opportunity to integrate the two reporting frameworks . The logistics of this will present huge challenges . However, expense and risk associated with managing them separately make reconciliation the most prudent long-term strategy . SAS believes that insurers should consider IFRS evolution and Solvency II compliance as part of the same process . Using SAS Financial Management, insurers can manage and plan operational budgets and regulatory capital under one reconciled view . For more information, see page 10 .

SAS: Our Expertise, Your Solvency II Solution

SAS is the leader in business analytics and software services, and the largest independent vendor in the business intelligence market . For more than 30 years, we have worked closely with our 1,000 insurance industry customers to understand their needs and develop solutions that help them to do more with increasingly limited resources . We also have extensive experience with regulatory change, having enabled more than 100 Basel II implementations worldwide . Thats why no other vendor can offer the comprehensive, end-to-end risk management capabilities you get with SAS . Unlike other solutions, SAS provides a single, integrated risk platform that supports the entire Solvency II process from data management through to advanced risk analytics and reporting . With the SAS Solvency II framework, you can: Accelerate Solvency II compliance projects with a robust risk analytics framework . Improve data quality for an accurate risk profile and better-informed decision making . Reduce the impact of risks and mitigate losses using advanced analytics . Lower your cost of ownership with a single integrated solution . Ensure transparency and traceability across the entire process . You can also save money and gain competitive advantage by using the same solution for advanced, non-regulatory measures and fully integrating the system into your business decision making . Plus, our solution is future-proofed; it is flexible enough to quickly and easily meet any regulatory changes as they occur .

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The SAS Solvency II Framework

The SAS Solvency II approach starts with a flexible, modular framework that can be integrated into insurers existing actuarial tools where required . We use a phased implementation approach to bridge any compliance gaps in legacy systems, data stores and data models . Because the solution is modular, you can implement only those components that address your specific business needs, and then expand the solution over time as your needs change . With SAS, you can adopt a single platform for compliance across all three pillars of Solvency II, plus achieve real business benefits now and in the future .

The crossover of the implementation of Solvency II with the IFRS changes presents an opportunity to integrate the two reporting frameworks. The logistics will be challenging, but the expense and risk associated with managing them separately make reconciliation the most prudent long-term strategy.

Portal Run Models Risk Dashboard Distribute Reports

Risk Management Pillar 1

Technical Provisions Risk Aggregation Stress Testing

Pillar 2
Supervisory Review Model Change Asset and Liability Management Risk-Based Measures Risk Appetite

Pillar 3
Risk-Based Measures Regulatory Reporting Internal MI Financial Reporting

Data Dictionary

Data Pro ling

Data Lineage

Metadata Management
Liabilities
DATA

Assets
DATA

Third Party
DATA

Finance
DATA

DATA

DATA

Document Management

Standard Formula Internal Model

Work ow

Monitoring / Audit
Reconciliation Con guration Business Glossary Data Quality Data De ciencies Data Warehouse

Other Source

Accelerating Solvency II Compliance with SAS

An Integrated, End-to-End Solvency II Data Management Solution

Only SAS offers an integrated, end-to-end data management solution for Solvency II compliance . We can provide: A single process for data management and data quality throughout the framework . Deployment of a Solvency II data warehouse or a complete insurance data model . A preconfigured Solvency II analytical data model for the capital management process . Integration of a risk management framework into the internal model process . A result-reporting data model . Repository of quantitative regulatory reporting (by company or group) . Metadata management for improved controls and governance, data lineage from source to report, with a data dictionary of business and technical metadata . Data profiling capability with built-in data quality management routines to ensure data integrity and drive maximum value for the business . Full audit control functionality via a simple user interface . Workflow management, including escalation of tasks and automation of processes to and from actuarial models .

A Robust Risk and Capital Modeling Solution

SAS Risk Management for Insurance is designed to perform risk analysis and risk-based capital calculations for life, property and casualty, and health insurance companies . As a modular approach, it can be flexible in line with a firms changing needs . It can also provide open data interfaces to import liability cash flows from third-party actuarial applications . The application supports the standard formula and the internal model approaches, enabling insurers to perform complex risk calculations, define control measures and maintain compliant capital ratios . It can provide the platform for the calculation of: Technical provisions . Market risk . Counterparty default risk . Underwriting risk . Risk margin . Operational risk . Firmwide risk (SCR/minimum capital requirement) . Group risk capital . Concentration risk . Stress-testing analysis . Regulatory and internal risk model reporting .

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Integration of Solvency II and ORSA

SAS Enterprise GRC provides a Web-based application that enables insurers to identify, collect, measure, manage, monitor, analyze and report on all exposure to risk . That information can be applied across your Solvency II implementation and as part of an ongoing internal risk management process . Business strategy is an integral part of the application, so SAS Enterprise GRC will enable better-informed decision making based on a coherent, accurate risk profile and expected changes to this and SCR . The solution also offers: Integration of business planning into the risk profile for use in the capital modeling process . Risk identification and assessment at group or subsidiary level . Control testing and assurance reporting in line with both regulatory and business requirements . Mitigation action alerts for policy management purposes . Risk monitoring using key risk indicators . Stress testing and scenario planning using advanced analytics . Remediation and action plan management to report and mitigate identified issues .

Reporting
SAS Risk Management for Insurance includes standard and ad hoc reporting capabilities that are critical for disseminating risk information to regulators for Solvency II compliance and to senior management for improved risk decision making . The application provides functional, data and reporting components of the SAS Solvency II framework to deliver: Aggregation of results from solo to group level . Solvency and financial condition reporting and reports to supervisors . Internal reporting and management information . Risk reporting .

Alignment of Solvency II with IFRS Accounting

SAS Financial Management is designed to meet Solvency II finance function requirements, including statutory consolidation, financial reporting, budgeting and planning . By implementing this solution, insurers can greatly reduce the workload involved in complying with multiple reporting standards i .e ., IFRS, local GAAP and Solvency II . SAS Financial Management can accommodate any specified structure, and the solution enables separate hierarchies to be defined, for example, for local and/or group reporting .

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Accelerating Solvency II Compliance with SAS

The application enables financial managers to: Easily handle currency conversions, intercompany eliminations, reconciliations, minority interests, new acquisitions, etc . Use either a top-down or bottom-up approach (or a combination of the two) for the budgeting process . Customize budget forms to allow users flexibility on how they submit budgets e .g ., via Excel or a Web page . Automatically calculate results based on the latest approved data for a more dynamic operational environment .

Conclusion and Next Steps

As we have seen, time is of the essence if insurers are to meet minimum requirements to be Solvency II compliant by January 2014 . And there is still much to do . While considered an exceptionally ambitious project, Solvency II was designed to generate benefits for policyholders, the market and insurance companies themselves . Its implementation should make the European insurance industry more competitive while opening the door to many new opportunities . The SAS Solvency II framework builds a bridge to compliance and provides a solid foundation for firms to reap the benefits of a truly EU-wide insurance industry . We are the only software company that can offer a flexible framework to meet the needs of all insurers, large and small, regardless of which formula they have chosen or where they are along the path to implementation .

The Five Steps to Solvency II Compliance

1 . Review your Solvency II program with SAS . 2 . Incorporate the SAS Solvency II framework into your existing architecture . 3 . Deploy a flexible Solvency II platform to meet solo and group compliance . 4 . Take a phased approach to ensuring completeness and cultural change . 5 . Deliver regulatory reports, and improve business management information .

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About SAS
SAS is the leader in business analytics software and services, and the largest independent vendor in the business intelligence market . Through innovative solutions delivered within an integrated framework, SAS helps customers at more than 50,000 sites improve performance and deliver value by making better decisions faster . Since 1976 SAS has been giving customers around the world THE POWER TO KNOW .

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