Navigating the New Era of Insurance Regulation. Solvency II, IFRS 17 and Capital Optimization with SAP for Insurance (PaPM and FPSL).

The European insurance sector has undergone a significant transformation due to two key regulations: Solvency II, implemented on January 1, 2016, and IFRS 17 for Insurance Contracts, which took effect on January 1, 2021. These directives are more than just new rules; they represent a fundamental shift aimed at enhancing insurer solvency, standardizing EU regulations, and ultimately fostering a robust, unified European insurance market. The impact of Solvency II on insurance mirrors the effects of Basel III and the EU Bank Recovery and Resolution Directive on European banks. Its complexity is evident in the four-year delay in its implementation, highlighting the substantial challenges it posed for insurers' information systems. This regulatory overhaul also led to the establishment of the European Insurance and Occupational Pensions Authority (EIOPA), which took over from CEIOPS with expanded responsibilities. Solvency II: The Three Pillars of Prudential Regulation Solvency II is structured around three pillars: Pillar 1: Quantitative Requirements This pillar focuses on the financial models that demonstrate an insurer's ability to meet its obligations, including the determination of crucial capital requirements. Pillar 2: Governance and Risk Management This pillar outlines the framework for internal governance and risk management. It involves identifying, measuring, and managing the risks an insurer faces, alongside defining the supervisory model. Pillar 3: Disclosure and Reporting The final pillar emphasizes transparency, detailing how companies must disclose and report their risk exposures and capital requirements to the market and regulators. SAP's Solutions for Insurance Regulatory Compliance To assist insurers in navigating these complex regulatory requirements, SAP has introduced analytics tools specifically for the insurance industry. Similar to SAP Banking, SAP for Insurance offers two primary functionalities: SAP FPSL for IFRS 17: This module serves as the insurance equivalent of Bank Analyzer's Accounting for Financial Instruments. Solvency II Business Content of Profitability and Performance Management Software: This mirrors Bank Analyzer's Credit Risk Analyzer (Basel III) module, providing robust tools for solvency management. These features were developed in alignment with the Integrated Financial and Risk Architecture guidelines, leveraging its sophisticated four-layer architecture, which echoes the structure of Bank Analyzer: Source Data Layer: Integrates data from various legacy systems into a unified model. Processes and Methods Layer: Handles the complex processing and application of financial methodologies. Results Data Layer: Stores all processed and calculated financial results. Analytical Layer: Provides advanced tools for in-depth analysis and reporting. The ultimate goal of this four-layer architecture is to establish a single source of truth for all accounting, risk, and liquidity information, ensuring unparalleled consistency and accuracy across the entire organization. Overcoming Data Challenges with Integrated Architecture Just as banks have struggled with integrating sophisticated reporting tools with disparate operational systems, insurers face similar hurdles. Achieving full compliance with new data governance requirements will take time, often necessitating a move away from manual processes and fragmented spreadsheets. During this critical transition, the data governance capabilities inherent in Insurance Analyzer's four-layered, integrated financial and risk architecture prove invaluable. The Source Data Layer, for instance, is crucial for consolidating data from heterogeneous legacy systems into a harmonized data model that encompasses master, operational, and market data. Consider customer data: many insurance companies contend with a fragmented view of their policyholders, with information scattered across disconnected legacy systems. This lack of integration can lead to issues such as undetected fraud and inaccurate risk management. With SAP Financial Services Data Platform (FSDP), insurers can integrate these divergent versions of customer data into a single, cohesive repository within the Source Data Layer. This foundational step establishes the framework for customer-centric profitability analysis and robust risk management. Transforming an insurer's entire IT landscape is a significant undertaking, demanding considerable resources. Without the integrated risk and accounting vision provided by Insurance Analyzer, it becomes incredibly challenging to align IT strategy with the evolving requirements of Solvency II and IFRS 17—challenges that will remain top priorities for IT executives in the years ahead. Ultimately, the stability of the insurance industry is a global concern. The entire industry is shifting towards a model driven by efficient capital management and a heightened sensitivity to risk, making integrated, forward-thinking solutions more critical than ever. The Next Frontier: Capital Optimization The next level of sophistication involves Capital Optimization, which requires integrating Real Economy and Financial Economics processes. Our team has spent the last 12 years modeling all economic events and business flows represented in Real Economy SAP systems, in terms of capital and liquidity consumption and generation. With this information, our systems can determine how to offer financial instruments to cover capital and liquidity gaps or invest excess capital and liquidity, thereby optimizing capital consumption and system liquidity. We are currently working to introduce our system to the market and are actively seeking business partners and investors. If you are interested, please don't hesitate to contact us. Connect and Stay Informed: Join the Conversation: Connect with fellow professionals in the SAP Banking Group on LinkedIn. https://www.linkedin.com/groups/92860/ Stay Updated: Subscribe to the SAP Banking Newsletter for the latest insights. https://www.linkedin.com/newsletters/sap-banking-6893665983048081409/ Explore More: Visit the SAP Banking Blog for in-depth articles and analyses. https://sapbank.blogspot.com/ Connect Personally: Feel free to send a LinkedIn invitation; I'm always open to connecting with like-minded individuals. ferran.frances@gmail.com I look forward to hearing your perspectives. Kindest Regards, Ferran Frances-Gil