The Solvency 2 legislation currently being implemented creates significant challenges for all European insurers. A risk based approach to the capital calculation and the regulatory framework is a major departure from that traditionally taken in the insurance industry. It is intended to provide a harmonised solvency regime across Europe with a capital requirement better aligned to the risk that an insurer takes and greater transparency within the industry.
The framework is based around 3 pillars and the approach is to some extent similar to that adopted with the Basel 2 regulation in the banking sector.
The first pillar focuses on the calculation of the amount of captial that an insurer needs to hold to adequately cover its risk and requires that an insurer can measure its capital on a risk basis to a confidence level (or value at risk) of 99.5% over a one year period (known as the solvency capital requirement or SCR), as well as a lower threshold (the minimum capital requirement or MCR).
The second Pillar relates to the risk and control environment within the organisation. As well as ensuring the risks within the firm are recognised, the second Pillar also requires that the senior management are in control of the risk management process and can demonstrate to the regulator that this is in fact the case.
The third pillar covers disclosure requirements and will require greater transparency by the insurers both in terms of the risk profile of the organisation and the calculation methodologies employed in the estimation of risk and capital.
At the very least, the SCR contains:
- Non-life underwriting risk
- Life underwriting risk
- Health underwriting risk
- Market risk
- Credit risk
- Operational risk
This creates a significant number of challenges as the measurement of risk and capital involves integration of data of these different risk types (at a minimum). This data is a mixture of quantitative and qualitative and will come from many different sources. Even once this data has been integrated and an estimate for risk and capital calculated, it is essential that this is efficiently linked to the risk and control environment itself.
Symb developed Aptius to meet these challenges. Aptius provides senior management the ability to easily integrate risk data of disparate types to produces an enterprise estimate of risk and capital. One of the key elements of the framework is that it is highly flexible, being able to add and change datasources for risk easily.
Equally importantly, core Aptius functionality provides the capability to link KRIs, KPIs and the measures of risk from its integrated modelling with the risk environment and its requirements and associated actions.
This provides management with a full picture of both the risks to the organisation and the requirements and actions that are in place to mitigate those risks. This translates directly in the ability to demonstrate both internally and to the regulators the effectiveness of the risk management, that good corporate govenance is being practiced and that all of the relevant regulation is being adhered to.
In addition, Symb has considerable experience in the areas of managing the complex challenges around multiple sources of data such as identification of data sources, integration across multiple systems, data cleansing and normalization.
Aptius
An overview of the main features and components of the Aptius Enterprise Risk Framework
Aptius Express
Features and benefits of the Aptius Express Operational Risk diagnostic service
