Solvency II led review of valuation processes

Background:

A large UK insurance client was required to review all their existing processes for valuing positions and future assets and liabilities to meet changing requirements imposed by the regulatory authorities under the auspices of the Solvency II guidelines.

Solvency II is a fundamental review of the capital adequacy regime for the UK and European insurance industry, to come into effect in October 2012. The client, as an insurance company, was required to assess capital adequacy at subsidiary and group levels. Both entities intend to adopt the Advanced Management Approach (AMA) to calculate capital requirements. This involves developing a capital model and thereafter demonstrating “suitability” and ongoing “use” to the FSA.

The modelling involves stressing both asset and liability profiles for different scenarios to determine extreme capital requirements. The subsidiary company is a core source of information on the profile of the assets; providing data to the group for inclusion in their modelling. It was anticipated that the subsidiary would be required to provide more granular data, more frequently and more quickly to facilitate group level capital modelling.

The objective of the client’s Solvency II programme was to manage and deliver the necessary process, technology and organisational changes required to meet the business requirements, including; enhancing the sourcing and provision of more granular data, improving the quality and consistency of data, and increasing the frequency and timeliness of provision.

Reformis Solution

Reformis was engaged to assist in the documentation of the processes by which analytic data supports the calculation of key valuation and risk statistics, challenging where appropriate the methodologies employed and the assumption implicit within the current process. Reformis undertook an in-depth analysis of all regulatory reporting activities undertaken by the business, detailing the process by which key analytics measures were calculated, and the process by which the supporting data was captured and maintained.

As a secondary part of the process, an analysis of the gaps in current reporting capabilities versus the estimated future reporting requirements required to support Solvency II was undertaken. This in turn lead to a detailed proposal for the extension of the existing reporting carried out by internal systems to encapsulate new reporting standards and values that will underpin the Solvency II outputs needed.

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