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Solvency II - Turning regulatory challenge into competitive advantage

While Solvency II is thought to impose high burdens by many insurance companies, it also provides the chance to modernize system landscapes in the insurance sector. SimCorp can help by combining regulatory compliance with future-proof asset management software.

With the introduction of Solvency II on January 1st, 2016, a new regulatory regime for the insurance sector was established in the European Union. Solvency II comes at a time where the insurance sector faces the enormous challenge of a low interest environment. Investing in assets with high yield in general also means high capital requirements under the Solvency II framework and makes it even more difficult for insurance companies to find niches with high returns to invest in. One of the possibilities put forward by the EU is the infrastructure sector (see EU DELEGATED REGULATIONs 2016/467 and 2017/1542), but it is yet to be seen if the encouragement by the regulator is accepted by the insurance industry.

The influence of Solvency II however, reaches beyond the insurance sector. The demanding transparency requirements of the Solvency II framework challenges asset managers and fund managers to provide Solvency II-related information on their investments. The so called Tripartite (TPT) template represents a market standard for the exchange of Solvency II-related data between fund managers and insurance companies. Proving the Tripartite information means additional effort for the fund industry. Driven by the investment demands of the insurance sector, the provision of the TPT template evolves to be a competitive requirement for the fund sector. When talking to our clients we hear some say that in the future they intend to invest only in funds for which detailed Tripartite data can be provided. Without Tripartite data, funds cannot be decomposed and have to be declared as non-transparent which in general leads to substantially higher capital requirements than a proper decomposition.

It is obvious that building the infrastructure and establishing the software systems which allow to manage the demanding Solvency II requirements costs money. This raises another challenge for the insurance sector. The budgets which would be required to renovate and modernize the software systems in order to be competitive in the low interest environment are eaten up by the regulatory demands. At some of our recent Solvency II client councils we often heard our clients saying things like, “We would like to invest in a better infrastructure, more performant systems and a better educated staff, but the investments required for fulfilling the regulatory requirements hinder us from stepping forward and modernizing our working environment.”

While most of our insurance clients suffer under the burdens imposed by the regulators, Solvency II can also be seen as a chance for a step forward to a more future-proof system landscape.Dr. Andreas Schäfer, Business Consultant Principle, SimCorp CE

While most of our insurance clients suffer under the burdens imposed by the regulators, Solvency II can also be seen as a chance for a step forward to a more future-proof system landscape. This is how we approach this large regulatory requirement at SimCorp.

SimCorp’s current developments in the Solvency II area provide solutions for the complex Solvency II requirements in software modules which are designed for Solvency II, but which are also designed to cover a much broader spectrum of typical business requirements of the Solvency II community like forecasting, risk analyses and reporting. The Strategy Manager, SimCorp’s new Middle Office module, is a mighty tool which integrates Solvency II pillars 1 and 2, stress testing, horizon analyses and simulation. The design of the modules allows for a transition between the different applications so that Solvency II analytics can be calculated in simulated or stressed scenarios or forecasting can be combined with simulation or with stress testing. Most of the Solvency II shocks are not hard-coded into a pure regulatory solution, but these are based on configurable stress test generators which can be easily modified and used for other purposes than Solvency II.

The idea of combining regulatory compliance with future-proof asset management functionalities also holds for basis platform for our Solvency II pillar 3 solution, which is based on the SimCorp Data Warehouse Manager.

Sooner or later I expect that the business needs in the Solvency II community will lead to the insight that the large investments for the exhaustive Solvency capital requirement calculations in pillar 1 and for collecting and storing the tremendous amount of QRT data in pillar 3 will also be used for non-regulatory purposes. Using SimCorp’s Strategy Manager and Data Warehouse Manager as a basis platform for Solvency II provides the right basis to go in this direction. Eventually, it is SimCorp’s way of thinking to design modules in a flexible and re-useable way which aims to provide long-term value, enabling our clients to turn the regulatory challenge into a competitive advantage.


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