Dr. Andreas Schäfer
Business Consultant Principle, Regulatory Center of Excellence, SimCorp CE
Read the article and learn about:
- Solvency II and changing market requirements
- Investment strategies from a regulatory angle
- The impact of a low interest rate environment
Almost four years after the introduction of a new regulatory framework for the insurance sector in the EU, many market participants still don’t know whether to regard Solvency II as an important and powerful regulation or something less relevant. At the Regulatory Center of Excellence, we can clearly state that we still see Solvency II as both relevant and powerful. However, the focus of the Solvency II community has changed – from regulatory compliance towards Solvency II-oriented investment.
A regulatory framework with changing market requirements
In the first 2-3 years after the introduction of the regulatory Solvency II framework, the focus was very much on fulfilling its compliance and reporting requirements. As an example, an insurance company in the EU must generate and provide more than 70 reports (so called QRTs) to the National Competent Authorities (NCAs) on a quarterly and yearly basis. Besides, the SFCR and RSR reporting requirements, and also the quarterly calculation of the capital requirements, impose additional efforts on the insurance sector. As a consequence, budgets for IT investments have sometimes been “eaten up” by the fulfilment of these regulatory obligations.
Whereas, up until now, insurance companies have worked on getting their internal processes and software systems ready to become Solvency II compliant, the focus is now moving towards creating investment strategies that include the aspect of reducing or minimizing Solvency II capital requirements.
What we also observe is that the processing of regulatory adjustments has become routine – partly because firms are prepared for such changes and partly because software vendors offer support for the analysis and implementation of these changes. The new focus on long-term Solvency II-oriented investment strategies, however, together with the need for attention to simulation and forecasting of capital requirements, put new demands on firms.
These new demands, in turn, put new requirements on the software services needed by insurance firms. In the early days of Solvency II, insurance companies just asked for a piece of software which at a certain reporting date automatically and precisely produces a bunch of pre-defined reports that adhere to a strict formal structure and contain a set of authority-defined fields. The demands nowadays go much further. Today, firms require a software solution which allows for flexible scenario and forecasting analysis and supports client-specific investment strategies.
Low interest rates demand a rethinking of investment strategies
The low interest environment is a driver for insurers to look for alternative investment strategies because classical approaches of buying standard government bonds do not provide competitive returns anymore. Today, simulations of entering new markets and new financial products like alternative investments on the one hand and forecasting of expected returns and risks on the other hand are basic cornerstones for an insurance company to be successful. Also here, appropriate software systems are needed to support the new investment strategies.