Best Practices for Solvency II Readiness and...

Lloyd’s Risk Management Best Practices for

Solvency II Readiness and Seamless

Data Accuracy

WHITE PAPER

‘Solvency II will change the ground-rules of European insurers by bringing risk awareness to the forefront of how

businesses are judged by regulators, investors, and customers. It promises

to increase the competitiveness of EC insurers and leave non-EC

insurers behind.’

—Solvency II: Stakeholder Communications and Change,

by Gabrielle O’Donovan

S O L U T I O N S

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The Solvency II directive is transforming how Lloyd’s syndicates govern their data and manage their reporting. In preparation for the 2016 implementation, many syndicates are examining their data management framework closer than ever before and discovering that their systems and processes are simply not rigorous enough to comply with Solvency II requirements.

After the 2014 Solvency II dry run, Clearwater experts met with Lloyd’s syndicates to discuss their biggest challenges, the lessons they learned during the process, and best practices moving forward. All dry-run syndicates sought seamless template integration and efficient, transparent reporting processes. Each syndicate had their own unique approach to this goal—yet each experienced universal difficulties. With these difficulties in mind, syndicates are working to ensure their data management processes are fully Solvency II compliant.

In this report, Clearwater’s Solvency II experts outline the common problems encountered by Lloyd’s syndicates, and prescribe best practices for efficient and effective Solvency II compliance and overall data accuracy.

S O L U T I O N S

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But even when syndicates’ third-party managers claimed to be Solvency II ready, there were still major issues in data conveyance. Spreadsheets and reports were often formatted incongruously, transmitted at different times, and missing entire fields (such as CIC, LEI, or NACE).

This incomplete data from third-party investment managers forced syndicates to manually enter data into spreadsheets—an extensive, cumbersome, and time-consuming task. Some syndicates had to manually process data through VLOOKUPS,

SUMIFS, PivotTables, and other Excel functions just to complete a single QMA template.

This issue was also prevalent when syndicates needed to work with QAD submissions. Syndicate accountants were required to manually consolidate the data that came from third-party managers, and manually resolve all data disparities and complications. These issues took up valuable employee time and introduced the potential for harmful manual data entry errors. At a time when data clarity, consistency, and correctness are more vital than ever before, this incongruent data (and the resulting manual data entry) was exactly what syndicates were hoping to avoid.

Both EIOPA and national regulators have stressed the importance of high-quality data for ensuring successful compliance with Solvency II directives. Solvency II is especially stringent, requiring syndicates to proactively anticipate any data accuracy issues. Relying on internal personnel to manually add missing data is not a sustainable long-term solution, and could easily lead to inaccurate data.

Syndicates must be able to trust that their third-party investment manager is providing thorough and complete data, with no unexpected problems at any stage. Data collection for Solvency II is complex enough already—investment and accounting teams don’t need additional tasks to complete to ensure their information is correct.

Solution: The Power of Automated Data

Data collection and aggregation is one of Clearwater’s core competencies, and we have been helping

insurers meet the exacting standards of Solvency II for years. Many third-party providers dump raw

data on their Lloyd’s clients, leaving syndicates with the burden of aggregating and reconciling that

data themselves. In contrast, Clearwater aggregates your data and moves it upstream without any

client assistance, and provides clean data that meets Solvency II and Lloyd’s reporting requirements.

Challenge One: Data Integrity

In 2009, independent business research and analysis group the Economist Intelligence Unit (EIU) conducted a survey that examined Solvency II data preparedness. They found that 41 percent of the 334 executives surveyed considered data availability and integrity major challenges in the face of new directives, and that poor data quality and timeliness were major risk management gaps. Recognising these issues as they planned for Solvency II readiness, many Lloyd’s syndicates hired third-party experts, custodians, or investment managers, and considered them the key to a seamless reporting and data management process.

‘As insurers embark on enterprise-wide risk

management initiatives, a key challenge faced is that of data

management. While it is well recognised that the integrity of internal data is very

much the lifeline of insurance companies, there are significant challenges to

aggregating data to create analytical metrics ... the need for comprehensive

data management infrastructure increases with the complexity of the risks and the

size of the organisation.’

—Executive’s Guide to Solvency II, by David Buckham and

Jason Wahl

S O L U T I O N S


GL tag input requires manually tagging securities, manually aggregating information into the correct format, and then manually extracting the numbers for the QMA template. The basic data entry required for this kind of GL management takes extensive time and effort from employees—time and effort that could be used to support core business operations.

In addition to being cumbersome and time-consuming, this approach to security and GL management can become a true threat to an organisation’s reporting. Manually inputting GL tags requires an enormous amount of data transposition. And each time an accounting manager manipulates data, it’s one more opportunity for error.

This manual data transposition can also inhibit the execution of dynamic investment strategies, because time spent manually keying in data is time lost on more vital tasks. In addition, even as syndicates think they have pinned down their processes and templates, investment plans change, and the accounting team is exposed to new security types and challenges. And when the GL doubles as a reporting tool, any new security type causes extra

chaos, since both the QMA and GL flow are disrupted. In Clearwater’s interviews with syndicates, every insurer that used the GL to populate their QMAs encountered major Solvency II data compliance and reporting difficulties.

The GL was designed to manage debits and credits, not to be a reporting tool. When insurers turn their GL into a reporting mechanism, they pay a price in investment data quality and accuracy. This is especially risky when that data is relied on for Solvency II compliance.

Solution: Free the GL to be the GL

Clearwater’s automated data management ensures that an organisation’s GL is no longer vulnerable

to data entry errors, nor a manual burden for employees to constantly administer. Since there’s no

need to input data, employees can focus on more strategic and valuable tasks—and accounting data is

always clean, complete, and up to compliance standards.

Clearwater treats the GL as the GL–not as a reporting tool. With Clearwater, the structure of the GL

isn’t held hostage by any QMA information, yet the values within the GL always reconcile with other

accounting, compliance, performance, risk, and regulatory reports. This way, data automatically adapts

to any new investment strategies’ reporting needs, with no extra work from employees, and no risk

of errors.

Challenge Two: Manual and Clunky General Ledger Process

Many syndicates currently use their general ledger (GL) as a security classification and reporting tool. Investment teams build manual tags into their GL, which enables outputs and simple extraction of all data with the appropriate tag to populate the corresponding QMA template. While this is an effective method for easy output, inputting tags into the GL is not nearly as straightforward.

‘Solvency II should ... avoid the spurious

pursuit of accuracy by “reconciling” losses to the

general ledger.’

—Frontiers of Risk Management: Key Issues and Solutions,

by Dennis W. Cox

S O L U T I O N S


For example, even when two asset managers held the exact same portfolio, syndicates found that the data point availability, formatting, and timeliness would vary across their reports. Several syndicates also mentioned that there were certain data points (CIC, LEI, NACE, counterparty, etc.) that their managers had trouble providing. This led to incomplete reporting and manual overrides to enrich the data. Relying on an asset manager or custody institution to create Solvency II-ready reports greatly limited dry run syndicates’ investment flexibility, and they found that disparate data from their asset managers led to unclean data and unreliable data conclusions.

In an attempt to overcome this challenge, many syndicates asked their existing asset managers to update their reporting platform. In the most extreme cases, syndicates even restructured their investments to consolidate to one manager, or switched to a new asset management firm with more Solvency II reporting experience, hoping to better accommodate reporting requirements. Overall, many syndicates ended up basing their complex investment decisions on simplifying reporting processes—instead of their overall investment strategy.

Solution: The True Value of Investment Reporting

Syndicates who use Clearwater are not tied to their asset managers’ reporting capabilities. Instead,

Clearwater gives investment and accounting teams transparent, timely, and thorough reports. This

enables syndicates to choose their asset managers based on how well they manage assets—rather

than on how well they can report on those assets. This is beneficial to asset managers as well as

syndicates, because it allows each party to focus on their core competencies and bring their expertise

to their investment strategy roles.

Clearwater can handle many asset types, all currencies, and multiple reporting bases (UK GAAP, IFRS,

etc.) and regulatory reporting (Solvency II and Lloyd’s reporting, among others). This allows Clearwater

clients to make investment decisions based on strategy, rather than reporting limitations.

Challenge Three: Asset Manager Relationships

An overreliance on asset managers to provide timely, accurate, and complete data proved troublesome to many syndicates’ Solvency II compliance strategies. Providing data that is clean and ready for Solvency II reporting is simply not an asset manager’s core competency. They need to stay focused on investment management and often don’t have the time—or the tools—to generate the intricate data needed for Solvency II. Asset managers are experts in managing and preserving assets—not in aggregating, reconciling, and providing regulatory reporting on investment data.

‘Data quality is paramount for any system

that operates for the sole purpose of producing valuable business

information. No insurance company can ever be sure that its economic

and/or regulatory capital calculations are accurate and reliable if the

supporting data are not cleansed and validated according

to defined business rules.’

—Executive’s Guide to Solvency II

S O L U T I O N S


Multiple teams within a treasury or accounting department are usually involved in the Lloyd’s reporting process. In a typical workflow, the asset manager provides initial source data to the syndicate’s accounting team. The accounting team then aggregates and collates the data points before inputting the data for another department, such as the actuarial team who owns the actual modeling of risks. For the syndicates who followed this general workflow, the final data was multiple manual steps away from the original source data. And with every email, spreadsheet, or data transmission, there was inherent potential for errors to be introduced or overlooked. For syndicates with multiple multinational offices, communication was especially problematic.

Similarly, for syndicates with both syndicate and non-syndicate investments, other reporting domiciles and locations presented ongoing and time-consuming challenges.

When reporting on syndicates’ Solvency II readiness, the Financial Conduct Authority (FCA) discovered several troubling issues related to this type of communication and spreadsheet management. They reported that ‘spreadsheets provide a key area of risk because they are typically not owned by IT, but by other business or control areas. They may not therefore be subject to the same IT general controls as firms’ formal IT systems (i.e. change controls, disaster recovery planning, security etc.).’ Even though these internal communications contain vital investment data, they were cobbled together in homegrown transmissions that were not controlled or secure, and could easily be lost or corrupted due to the simplest technology malfunction.

Aggregating data from multiple custodians and managers, then keeping that data free of inaccuracies caused by manual processes, is a time-consuming and error-prone task. Yet many syndicates have long relied on manual data management methods. These processes might have been sufficient in the past, but as data requirements expand and become more complex, these are unsustainable solutions.

Solvency II requires strict data consistency and accuracy. Homegrown or manual methods cannot consistently and reliably keep organisations Solvency II compliant. These processes also make critical data dangerously vulnerable, since they often lack the level of secure backup needed for such vital tools and information.

Solution: The Universal Language for Investment Accounting and Reporting

Clearwater’s web-based solution has become the universal language for investment accounting and

regulatory reporting across the world. All that’s needed is an Internet connection to access consistent

and accurate source data in Clearwater’s standardised and trusted online formats. This web-based

format means that the entire accounting team can look at the same trustworthy and uniform data.

Clearwater’s robust system automatically compiles and aggregates disparate data daily to provide

consistent and validated numbers, even from dissimilar data sources. In addition, Clearwater’s robust

data security and focus on fool-proof physical, environmental, and operational security measures keep

syndicates’ data secure and fully backed-up at all times.

Challenge Four: Outdated, Homegrown Data Management

Internal transmission of data, especially when multiple departments or offices were involved, was an unexpected challenge for many syndicates. Emails and spreadsheet attachments were often the ‘language of data’, but with no clear, contained workflow or system, data was often lost in the shuffle of day-to-day communication.

‘Those insurers at the more advanced stage of Solvency II

implementation have embraced automation as a key catalyst to meet ongoing reporting requirements and concurrently running the business.

However, many insurers are still using highly manual processes.’

—Solvency II: Stakeholder Communications and Change,

by Gabrielle O’Donovan

S O L U T I O N S


All syndicates are responsible for ensuring their compliance with Solvency II and staying aware of any regulatory updates, yet syndicates struggle to allocate employee resources to maintain constant working knowledge of the latest Lloyd’s and EIOPA regulatory guidance. The time-consuming processes of reviewing updates and researching best practices take employees away from more critical tasks. But without in-depth knowledge of best practices—let alone proactive responsiveness to the most recent initiatives—syndicates are left trying to learn from their missteps, and correcting issues midstream that they could have prevented altogether.

The best way for syndicates to have the most current knowledge of Lloyd’s requirements is to work with a third-party investment solution that employs in-house Solvency II and Lloyd’s experts. Syndicates can then focus on their accounting assumptions, inputs, and processes, and ensure that their investment management system and process is tailored to their individual needs.

Challenge Five: No Clear Best Practices

In conversations with Clearwater, syndicates expressed concern about staying up-to-date with changing Solvency II guidance and requirements. It was clear that there were no best practices for many areas, and a number of syndicates expressed interest in networking opportunities to understand how their peers were handling collective industry challenges.

‘None of the more advanced respondents

were “very confident” that they would be ready on time; in effect, the level of confidence appears to reduce as the project progresses

indicating a heightened awareness of the challenges of implementing

Solvency II.’

—Getting Set for Solvency II: Comparing goals and benchmarking progress on

Solvency II implementation across Europe

PriceWaterhouse Coopers

Solution: An Expert in Ever-Evolving Regulations and Standards

Clearwater’s industry knowledge is based not just on a relationship with Lloyd’s, but also on specialised

expertise built through client experience. Clearwater’s numerous Solvency II experts, along with

specialised technology, can immediately address and resolve any discrepancy with Lloyd’s requirements

or classifications as needed without any client intervention. In-depth knowledge of Solvency II challenges

and best practice processes allows Clearwater to develop functionality that solves pervasive Lloyd’s

market challenges.

Clearwater works with dozens of Lloyd’s syndicates, and can often answer questions our clients may

not even know to ask. Syndicates who use Clearwater don’t need to scramble to determine their best

practices methodology—Clearwater is the best practice.

S O L U T I O N S


According to a 2014 Ernst and Young (EY) survey on insurers’ Solvency II preparedness:

The vast majority (83%) of companies are manually

reporting and calculating key risk management

metrics. There is substantially more potential—perhaps

in alignment with other activities—to improve the

information flows throughout the organisation.

Leveraging technology and data progress to improve

risk management cost effectiveness is an area of

opportunity for many insurance companies.

Clearwater’s first-hand interviews uncovered similar results. There is a growing industry-wide realisation that manual processes and out-of-date technologies are hindering not just information and

data flows, but are also leading to large hurdles in data accuracy and Solvency II completeness.

Many insurers have let manual data issues and investment management gaps linger as background inconveniences, ostensibly to be taken care of when they have more employee resources. But Solvency II Pillar III requirements have made it clear that the status quo is no longer sufficient—nor sustainable. Lloyd’s reporting requirements are more stringent than ever before, and syndicates need to do more than just maintain their current cumbersome processes. To ensure full compliance, syndicates need an investment management solution that ensures data management, documentation, and reporting processes are as streamlined, clear, and repeatable as possible.

The tools syndicates use to manage their investments and risk will have a large

impact on how disruptive Solvency II is—or isn’t. With extensive industry experience

and a best-in-class automated web-based solution, Clearwater overcomes the

major complexities and challenges of Solvency II. Clearwater acts as an extension

of clients’ teams, with industry experts constantly monitoring regulatory guidance

from EIOPA, sharing new market updates, and working to ensure any new reporting

requirements are seamlessly incorporated, without any additional burden on the

client. Using Clearwater is simply the best approach to Solvency II, and beyond.

Accurate and Automated Data. Seamless Integration. Secure Data Management.

S O L U T I O N S


©2015 Clearwater Analytics. All rights reserved. Clearwater is a registered trademark of Clearwater Analytics, LLC.

This material is for informational purposes only. The information we provide is from sources Clearwater Analytics considers reliable, but Clearwater Analytics provides no warranties regarding the accuracy of the information. Further, nothing herein should be construed as legal, financial, or tax advice, and any questions regarding the intended recipient’s individual circumstances should be addressed to that recipient’s lawyer and/or accountant.

About Clearwater Analytics

Clearwater Analytics® is the leading provider of web-based investment accounting, reporting, and reconciliation services for insurance companies, corporate treasuries, and investment managers. Clearwater aggregates, reconciles, and reports on more than £876 billion worldwide assets daily and helps clients such as Hiscox, C.V. Starr & Co., Cisco, Oracle, and Starbucks streamline their investment and accounting operations. Clearwater is committed to continuous improvement and specialised expertise, and encourages prospective firms to rethink how they approach their investment accounting and reporting challenges.

INQUIRIES+44 (0)13 1524 8138 [email protected] [email protected]

WORLDWIDE OFFICESEdinburgh, UK New York, New York Boise, Idaho

References

1. Buckham, David, and Wahl, Jason. Executive’s Guide to Solvency II. Hoboken, N.J.: Wiley, 2011.

2. Champ, Bryan. Solvency II Challenges. 2014. In person.

3. Cox, Dennis W. Frontiers of Risk Management Key Issues and Solutions. London: Euromoney, 2007. Print.

4. Economist Intelligence Unit. After The Storm: A New Era for Risk Management in Financial Services. London: The Economist, 2009. Print.

5. Ernst & Young. European Solvency II Survey 2014. London: EY, 2014. Print.

6. O’ Donovan, Gabrielle. Solvency II Stakeholder Communications and Change. Burlington, Vt.: Gower, 2011.

7. Pricewaterhouse Coopers. Getting Set For Solvency II: Comparing Goals and Benchmarking Progress on Solvency II Implementation Across Europe. London: PwC, 2010. Print.

INQUIRIES+44 (0)13 1524 8138 [email protected] [email protected]

WORLDWIDE OFFICESEdinburgh, UK New York, New York Boise, Idaho

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