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August 5, 2011

Are you ready for Solvency II? A Q&A

Jason Stamper speaks to Colin Rickard, DataFlux business development director, Europe, about the pending Solvency II regulations impacting insurance companies.

By Jason Stamper

Colin Rickard, DataFlux

Colin Rickard, DataFlux business development director, Europe

Q. Could you start by summarising the effect that Solvency II is likely to have on organisations?

A. It splits into two main areas from a data management angle. Insurers will need to provide calculations such as capital adequacy to the regulator, but they will also need to show that they are getting the right data going into their risk assessment models.

Q. From talking to customers, how prepared do you think businesses are for these pending regulations?

A. There are the ‘bleeders and leaders’, who from a data management perspective realise that this is something that they need to be doing anyway – they understand you need people, process and technology to prove that data is correct. Then the other group are the followers, who often feel that the regulations are not terribly clear and are not going to do anything until there is more clarity. I am afraid many of the followers are going to have a rude awakening.

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Q. The Financial Services Authority (FSA) concur, saying in their recent document on Solvency II: "Few firms provided sufficient evidence to show that data used in their internal model was accurate, complete and appropriate."

A. They’re absolutely right. I talk to three or four insurers a week, and only in about one in ten cases do I get the feeling they have fully understood the data quality issue around Solvency II.

Q. DataFlux says that as well as helping companies comply with Solvency II, DataFlux’s data management plan and technology can actually be a competitive differentiator. How so?

A. I think it’s good practice in any case to have well-trusted and validated data. It could be a competitive advantage too, because if an insurer can’t prove that they are in compliance then they will no doubt be made to have more capital reserves. Companies will also be able to more easily make decisions and they won’t need to be as conservative because they will know their exact risk.

Q. In the recent document from the FSA, they talk about the value of a data framework: "Better prepared firms had started to support their data framework by a comprehensive data policy covering data quality and data updates, approved by senior management". What are they really saying here?

A. I think what they’re talking about here is how you manage the sources of data going into your model. How do you measure data quality and make those measures available to the regulator? The regulator is trying to get this to the stage where it becomes part of business as usual. They don’t want data quality to be a one-off – companies will be expected to show the quality of their data and processes not just at the drop of a hat but quite frequently.

Q. The FSA also had some concerns about data warehouses: "data warehouses are not a solution to the problem of combining data from disparate source systems…" Is there a misunderstanding amongst some firms about the capabilities of their data warehouse?

A. At some firms, the level of understanding is that a warehouse is just like a bucket where you put all of your data. It’s akin to Basel II, where banks built warehouses, put their data in and produced reports. But you need data validation that says your data is appropriate, accurate and complete, and you need it throughout the whole process. So populating a data warehouse with data that is provable, auditable and accurate – yes that will be of benefit.

Q. The FSA also has concerns about the use of spreadsheets in many firms, saying, "spreadsheets provide a key area of risk because they are typically not owned by IT". What’s the worry?

A. It’s not spreadsheets per se, it’s what you do with them and at what point you do it. One of the problems that led to the financial crisis was that risks were misunderstood because there was a lack of accountability and transparency through the data chain. If you are using spreadsheets to view and manipulate data that’s one thing; if you are storing key data in spreadsheets, or have an uncontrolled spreadsheet environment, that’s going to be unacceptable under Solvency II.

Q. What is the FSA saying about insurers’ boards?

A. For me, the FSA’s concern that there is little discussion of data quality at board level was quite interesting. They’re saying that data quality really needs to be reported on at board level, but I don’t know of any board that produces data quality KPIs, such as, ‘accuracy is trending up at 93 per cent’. To get to that stage we need to present the boards with the right KPIs, but also help them understand and analyse these KPIs effectively.



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