1. Solvency II IT ImpactsBy Ali BELCAID Managing Consultant

2. ContextProgramme Management : Risk Driven Decision SupportAn illustrative Implementation through SAS 3. Context Risks borne by insurance companiesMajority of these risksare covered by the Risk model requiredscope of Solvency IIInterest RiskDirective Stock Market Risk (prices)FOREX RiskMarket risk Operational risk ConcentrationVolatilityLiquidityRisk model requiredInsurance riskCredit risk Risk model requiredEconomical factorsDisasters Creditor/Debtor RiskReinsuranceNew BusinessConcentrationExisting Business (Reserves) 4. ContextRisks borne by insurance companiesKnown the diversity of risks borne, Solvency II programme will require an importantmobilisation of the overall skills in your company. Knowing that Solvency encompasses several work streams. It has to be split in two categories in a context of budget and expense constraints : Need to adapt the works/response continuously to the evolution of rules, directives, andin particular to your specific needs.Business & Ability to work in parallel on work streams requiring similar skills with strong interactions,technical and requiring the dedication/allocation of specific expertise. Successful achievement in adapting the business/operational, technical and financialsystems to be able to provide data for an optimal feeding of the risk models. in order to ensure a satisfying course and the success of the programme : Control the management of the programme in a timely manner, Management of the transversal consistency of the work streams, in terms of methodologyOrganisationaland technique.(programme Management of the interactions between Solvency II projects and the other majorsteering) projects in your company. Involvement and dedication of all the different functions, departments, businesses of thecompany, beyond the usual technical expertise traditionally involved.In order to properly respond to these challenges, you are supposed to : Control optimally the risks of the programme and of the arbitrage processes. Implement an adequate programme steering organisation, based on 2 pillars (the ProgrammeManagement and the Work stream leaders). 5. ContextProgram Management : Risk Driven Decision SupportAn illustrative Implementation through SAS 6. Programme management An integrated risk-driven approach 1. Risk Identification 2. Target definition3. Implementation Plan4. Implementation Project steeringRegulatory watch and training Target for eachRisk stakes : Insurance risk Work stream major risk strategy / steering - Repository Market risk / Liquidity Work stream - Your Adaptations Scoping/ First impact Launch of measurement Gap analysis by Counterparty risk /Concentration Work streamthemajor riskprogramme - Control / Process Operational risk Work stream - Data Inventory - Systems Organis./Procedures Systems upgrades - Reporting / Score cardingIdentification and Internal Models Dashboards Reporting/ classification ofUpdate of impact /Controls risks measurementAction plan bymajor riskData Collection & Reliability Work stream 7. ContextProgram Management : Risk Driven Decision SupportAn illustrative Implementation through SAS 8. Decision SupportDataHigh quality and available informations are mandatory in the 3 pillarsPillar 1The goal is to define quantitative thresholds as well as Pillar 1 technical provisions for equity capital (MCR, Minimum Capital Requirement et SCR, Solvency Capital Requirement)SCR (Solvency Scale of intervention Capital Requirement)Pillar 2Regulation authority will have the power to check data MCR (MinimumCapital Requirement) quality, estimation procedures, systems in place for measuring and mastering risks in case they occur. It will also be in a position where it can also compel theRisk margin company to have an additional Solvency margin (capital add-on), under certain conditions, in case it considers that risks have been under-estimated.TechnicalProvisionsPillar 3 Best EstimateThe goal is to define the set of detailed information that(Liabilities) regulation authorities will consider as mandatory.An appropriate decision Support system is the cornerstone of the Solvency II programme 9. Decision Support Impact on Pillar 1 Pillar 1 completely change the way insurance companies allocate capital. Pillar 1 handles quantitative assessment of required data for calculating MCR and SCR. Pillar 1 completely changes the way insurance companies allocate their capital.1. Increase actuarial calculation Indeed, the SCR model ensures the capital is allocated according to the exposure torisks. As a consequence, this will increases the actuarial calculations. Among others, actuarial calculation relies on the use of referential data (interestrates, mortality rate, etc.).2. Accuracy of data This calculation requires data coming from heterogeneous systems. Actuarial calculation means the need for accurate thus heterogeneous data, so thereis a need for an enterprise-wide data/information governance. Actuarial calculation deepening and the need for best quality data will lead to these 2must-have requirements :3. Implication Availability of best quality data Analysis and interpretation of data processed 10. Decision SupportImpact on Pillar IIPillar 2 constitutes the governance framework of pillar 1.It handles the quality assessment of data, for which accuracy and availability are critical conditions(cf. Pillar 1). Monitoring process will ensure data are present at each step with the proper level of1. Monitoring Processdetail, of quality, allowing further review or correction, in case of need. Best quality data, processed in the monitoring process, are essential for the Risk2. Detect, Alert and Act Management system. They help identify risk at any step, and above all, provide the ability to alert Management for doing the right action at the right time. Pillar 2 changes the risk management and the internal control mechanisms, at enterprise level : it makes them deeper, tighter and more rigorous. Several enterprise processes are impacted. Here are some: Budget planning Capital management3. Implication Financial Reporting IFRS Reporting Marketing Reporting Etc. 11. Decision Support Impact on Pillar IIIPillar 3 focus on market discipline.It is about communicating a set of information to the regulatory authority, to shareholders and moregenerally to the public. Whereas pillars 1 and 2 cover respectively availability of data and its quality, pillar 31. Data Confidentiality ensures its secrecy and confidentiality. Data exposure to regulatory authorities, shareholders and the public assume theimplementation of an efficient and adequate control process on data, thus allowing2. Appropriate monitoring Process to detect any possible anomaly, potentially causing misinterpretation and whoseconsequences could cause damages to the company (e.g. Share price drop down). Improvement of data management and data confidentiality procedures.3. Implication Improvement of control over data flows. Extension of the use of universal data format (e.g. XBRL). 12. Decision Support Data Sourcing One of the major challenge that Im seeing in Solvency II is the availability of data for SCRcalculation based on new rules from Pillar 1, on one side, and on the other side thecomplexity and heterogeneity of IT systems in the insurance sector. Knowing that data comes from different sources, it is important that the feeding andprocessing mechanisms must be high-quality and efficient enough to satisfy Pillar 1requirements. Data management system must be able to process data from heterogeneous systems whileensuring data integrity and consistency. This requires a robust data model and a reliableprocessing system. The data system implemented must meet these 4 requirements: Quality Integrity Reliability Comprehensiveness The system must be able to process high data volumes, in particular because of the need forhistorical data. 13. Decision-makingData SourcingSolvency II Data SourcingLegacy System1. QualityActuarial Reports2. Integrity 3. Reliability4. Comprrehensiveness MainframeDisclosureReports Actuarial SystemAccountsCapital SCR/MCR allocation Capital allocation ALM CalculationData Cleasing andActuarialprocess Processing Interface(ETL) ALM Risk RiskRisk ReportsassessmentManagement Policies toolRisksAccounts Claim andLiabilities reportsRisk DataSystemsCapitalManagement and Claims Allocation 14. Decision Support Data Sourcing The approach for understanding changesin source data is to analyse them bymajor risk impacting the SCR calculation. Source data collection should beconsidered in terms of risk types or majorrisk. Here are a few examples of risk types: Health Repurchase Fees Invalidity Mortality Longevity Disasters Claims / Cancellations Epidemics / Accumulation Revision Interest rates Equity price risk Spread Exchange rates Real estate Premiums and provisions 15. Decision-making Migration of the Data SystemAfter ensuring a comprehensive and relevant data sourcing , target system design should be based on a Gap analysis through comparison of the existing system versus the target one.Legacy Data System Data SourcingThe new system should eliminate inconsistencies, improve sourcing process, storageGap AnalysisMigration toward the new and maintenance of data. Those criteria must be Solvency II data system addressed during system design phase.Data sourcing and maintenanceDiscrepancies identificationChoice of the central database must be done in IT Users Education accordance with architecture choices and existing architecture (Data Warehouse versus ODS). This subject must be addressed carefully in details because it will determine the target system.The migration should address several subjects, among others: As-is system analysis : this will mainly define the data flows and the data sources. Data Sourcing and their maintenance : the new system must collect and maintain existing data in an efficient and flexible manner, allowing further integration of newly required data. Identification of incongruities : at this step, the identification of gaps between the existing system and the proposed model must be clarified. Existing data and flows will also be described and categorised, as well as additional ones and the related flows (new).A very early setup of the migration to the new system will allow to identify inconsistencies upstream in theprocess and, undoubtedly, reduce contingencies and difficulties. Transition to the new Solvency II regulatoryframework will then be smoother. 16. ContextProgram Management : Risk Driven Decision SupportAn illustrative Implementation through SAS 17. Warning : SAS part is provided forSAS Solutionillustrative not for Selling purpose Integrated Approach Operational Data Sources Policy Underwriting ClaimsExternal Data6 ReinsuranceInternal Data Investment Commissions Products Assets/Liabilities General Ledger 15Data Mart 24 3 Standardisation Operational Risk Engine Actuarial Risk EngineRisk Data Warehouse Credit Risk Engine Market Risk Engine 18. Warning : SAS part is provided forSAS Solutionillustrative not for Selling purpose Alignment to ComplianceClaims Extraction, transform, loading of any kind of data(scoped) from a unique central point. Missing & 2incorrect data are audited, corrected with high Actuarialvalue-added automated functionalities like groupingof identical codes, redundancy detection and 1 +2 + 3Dataremoval (contracts, products,), existing dataenrichment. SAS DDS dictionary is enriched via a metadataserver, offering true information on information for ALMthe whole decision-making production system,ContractsAccounting (GL) 1 The approach consists of selecting Existing Risk source data and profile them by major Datarisk having potential impact on SCR calculation. SAS DDS for insurances3 SAS DDS. A Ready-to-use model gathering all required data This assumes source data collection is foreseen by risk type or major risk.for risks related calculations. Collects and gathers all dimensions et granularity of data DDS model, given its extensive coverage, allows to reduce significantly the implementation of Solvency II programme. 19. Warning : SAS part is provided for Solution SASillustrative not for Selling purposeRe-use of informationRisks 3CRM Marketing AutomationSAS DDS for insurances SAS DDS could be used as receptacle forComputed Risk Data and then make itavailable for other purposes CRM, Marketing, ... 20. Warning : SAS part is provided forSAS Solutionillustrative not for Selling purpose SCR/MCR CalculationsYou do not need to throw away your4existant cash Flows analysis. So youcan inject them directly into the Risk Engine. Existant Cash FlowsSAS interfaces SAS Web Portal SAS Add-infor MicrosoftSAS DDS for insurancesOfficeThe Input Data Mart is purged for each calculationYou can analyse data before and after Risk Calculation You can analyze and report on DDS data for audit, intermediaryresult, purposes Risk Data Mart as an input includes all data coming from SAS DDS as well as external or modelled data used for riskscalculations. Its main purpose is to define the business scope and thus the content of the input of data required for the risk calculation engine. It is purged for every new calculation. 21. Warning : SAS part is provided for SAS Solutionillustrative not for Selling purposeAnalysis and Risk simulation Module4Main functionalities of SAS Risk calculation engine are : Measure risk Restitution of consistent results Calculate at-risk measures Achieve analyses in a given time scale. Assess financial and physical assets of the company and the level of exposure to risks. Offer risk managers, managers and analysts a performing toolMain characteristics of this engine:Numerous pricing functions built-in (extensible)Predefined analysesPredefined risk models (extensible)Library of External functionsAllow to build on existing environment 22. Warning : SAS part is provided forSAS Solutionillustrative not for Selling purposeModels, Analyses and Calculations Calculations and results4Results of stochastic simulations (VaR)VaR results(with orwithoutreinsurance) 23. Warning : SAS part is provided for SAS Solutionillustrative not for Selling purpose Restitution Datamart5 After simulation of the risk models, it is possible to collect calculated data to deliver them in a restitution datamart, used as a standard model for the reporting. The analysis can be done with dimensions like (risk type, products, product types, currencies, ) You can get results of quantitative complex analysis calculations such as SCR, MCR but also all the variables involved in the calculation. 24. Warning : SAS part is provided forSAS Solutionillustrative not for Selling purposeReporting (Internal & Regulatory) 6 Analyst : SAS Insurance Risk Studio A portal offer a synthetic overview allowing themanagement to know the exposure to thedifferent risks. Unique entry point for analysis of any kind ofindicators, at aggregated or detailed levelManagement / Analyst : SAS Information Delivery Portal Solution includes a Risk Studio allowing analysts to : Perform analyses or Portfolios replication Generate internal or regulatory reports SCR and MCR calculation Run Stress Testing 25. Warning : SAS part is provided forSAS Solutionillustrative not for Selling purpose Reporting (Internal & Regulatory) (Example of a Solvency II Dashboard) 6 Example of restitution of a certain number of indicators via a Solvency II dashboard A finer analysis can be performed via the Drill Down functionality to analyse details of intermediates or final calculations. 26. http://intelligenteenterprise.blogspot.com/http://www.linkedin.com/in/albel