The European insurance landscape has been fundamentally reshaped by two critical regulations: the “Solvency II Directive”, in effect since January 1, 2016, and the new accounting standard, “IFRS 17 for Insurance Contracts”, which became effective on January 1, 2021. These directives are not just new rules; they're driving a paradigm shift, aiming to boost insurer solvency, harmonize EU regulations, and ultimately forge a robust, single European insurance market.
Think of Solvency II's impact on insurance as mirroring what Basel III and the EU Bank Recovery and Resolution Directive did for European banks. Its sheer complexity is evident in its implementation timeline, which was delayed by four years from initial proposals, highlighting the immense challenges it presents for insurers' information systems. This regulatory overhaul also led to the creation of the “European Insurance and Occupational Pensions Authority (EIOPA)”, taking over from CEIOPS with expanded responsibilities.
Solvency II: The Three Pillars of Prudential Regulation
Pillar 1: Quantitative Requirements
This pillar focuses on the financial models that prove an insurer's ability to meet its obligations, including determining crucial capital requirements.
Pillar 2: Governance and Risk Management
Here, the directive sets out the framework for internal governance and risk management. This 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.
To help insurers address these complex regulatory requirements, SAP has introduced analytics tools for Insurance. Like SAP Banking, SAP for Insurance offers two sets of functionalities:
- SAP FPSL for IFRS 17: This module is essentially the insurance equivalent of Bank Analyzer's Accounting for Financial Instruments.
- Solvency 2 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 two sets of features have been developed in accordance with the Integrated Financial and Risk Architecture guidelines, leveraging its sophisticated four-layer architecture, echoing the structure of Bank Analyzer:
- Source Data Layer: Integrates data from diverse 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 aim 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 and Single Source of Truth.
Just like banks have grappled 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 requiring a shift away from manual processes and fragmented spreadsheets.
During this crucial transition, the data governance capabilities inherent in Insurance Analyzer's four-layered, integrated financial and risk architecture become an indispensable asset. The Source Data Layer, for instance, is vital for bringing together data from heterogeneous legacy systems into a harmonized data model that covers master, operational, and market data.
Consider customer data: many insurance companies struggle with a fragmented view of their policyholders, with information scattered across disconnected legacy systems. This lack of integration can lead to issues like 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 builds the framework for customer-centric profitability analysis and robust risk management.
Transforming an insurer's entire IT landscape is a massive undertaking, demanding significant resources. Without the integrated risk and accounting vision that Insurance Analyzer provides, it's incredibly difficult 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 isn't confined to Europe; it's 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.
Furthermore, the next level is Capital Optimization, which requires the integration of Real Economy and Financial Economics processes. For the past 12 years, our team has worked on modeling all economic events and business flows represented in the Real Economy SAP systems, in terms of capital and liquidity consumption and generation. With this information, our systems measure how to offer financial instruments to cover capital and liquidity gaps or invest excess capital and liquidity, thus optimizing capital consumption and system liquidity.
We are working to introduce our system to the market and are looking for business partners and investors. If you are interested, please do not hesitate to contact me.
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I look forward to reading your thoughts.
Sincerely,
Ferran Frances.
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