It’s less than one month until the third and final pillar of Solvency II, “Reporting & Disclosure” comes into effect on 1 January 2017. From April 2017 Lloyd’s managing agents will be required to publish the details of the risks that could impact on their capital adequacy and risk management. Lloyd’s has said it will fine those that provide incomplete or late information. So, how ready is the market for these new requirements? In Part One, I take a look at what is currently happening in the industry when it comes to providing good quality data in compliance with industry regulations, such as Solvency II.
The current situation
The standard of data coming into Lloyd’s has improved in some areas over the last few years, yet there are still big gaps and errors that need to be addressed. The quality of the business that comes through the Delegated Authority market (binders) continues to be a cause for concern.
The Lloyd’s TOM (Target Operating Model) has established a Delegated Authority (DA) Initiative as one of the key areas of focus. Tenders were due in early November from companies interested in building a central data service for the London Market. This service is intended to enable data that is submitted into London to be accessed and transformed in a coordinated manner to produce consistent outputs to market participants.
The scope and scale of this project acknowledges the major challenges that London faces when it comes to collecting good quality data with few industry wide standards leading to huge frictional costs, as each managing agent and company has to clean the data itself. Solvency II Pillar requires annual and quarterly reporting and data must be accurate, traceable, timely and consistent, provided through standardised templates.
There continues to be major challenges in collecting standard data and quality data from MGAs and brokers. Few standards exist and where they do, they are rarely followed. Data continues to come in different formats: hard copy, PDF files, word files and Excel. There is no consistency in terminology of reporting structure. Data is often miskeyed, resulting in major errors associated with value and geographical location, fundamentally changing the characteristics of what is being written.
In the UK, the Prudential Regulation Authority (PRA) is the regulator for Solvency II. In the eyes of the PRA, Lloyd’s is a single undertaking for the purposes of Solvency II. The PRA is delegating responsibility for managing adherence to Lloyd’s, but that doesn’t mean that individual Managing Agents will get any concessions. The PRA expects standards to be at least as rigorous as those expected of any standard insurer and in fact, Lloyd’s has the ability to be even more rigorous than the PRA. It has explicitly declared that it expects each managing agent to meet the full set of Solvency II tests and standards, and it already has both the staff and oversight framework set up to enable it to audit the syndicates as part of their annual franchise board review.
There is an extensive list of criteria that must be fulfilled, as set out in the recently released Solvency II Pillar 3 Annual Operating Instructions. At 105 pages, this is no light read and there is a lot of information to collect.
The following sections in the Solvency II Pillar 3 Annual Operating Instructions relate specifically to exposure data:
- ASR249: Movement of reported but not settled (RBNS) claims (page 37)
- ASR250: Loss distribution profile – non-life (page 38)
- ASR251: Underwriting Risks Non-Life (page 30)
- ASR252: Non-life distribution of underwriting risks – by sum insured (page 41)
Of these, potentially the most significant requirements for Delegated Authority business can be identified in ASR252. Most notable are the following critical elements that need to be recorded:
- The total by line of business and sum insured of each and every single underwriting risk, which have been accepted by the syndicate.
- The original deductible of the policyholder and the sum insured for each individual underwriting risk must be provided. Where there is no sum insured, defined in the policy, the managing agent should do their own estimations or use default values.
- A policy cover with multiple buildings must be broken down by individual building coverage.
- Premium for each risk.
Penalties for late and incorrect submissions
Lloyd’s is coming down hard on late submissions or those it considers incorrect. It states that “if an inaccurate or incomplete submission has been submitted then Lloyd’s may at its discretion regard that submission as being “late” in which case a fine may be imposed”. This is a flat fine of £5,000 per return per syndicate and an additional fine of £1,000 per working day the submission is late. Persistent delays will lead to further disciplinary action.
Getting ready for Pillar 3
There is still time to get ready for Solvency II Pillar 3 reporting and not risk incurring fines. Tools such as Intrali from VIPR are being used by many Lloyd’s managing agents to clean data effectively and efficiently.
VIPR’s solution offers a data quality audit to help an organisations understand where it needs to focus its efforts. Analyses are performed on a sample of a bordereaux to identify where problems exist and enable the organisation to create a plan to improve data cleansing and storage. A data audit and plan can be undertaken as follows:
Understand Data Requirements
- Understand the requirements of Solvency II and how these relate to the business being written
- Undertake a data audit to establish the quality of existing data and data sources
Define the Process
- Establish rules for checking the quality of data at each key step in the underwriting and portfolio management work flow
- Execute business rules and data quality enhancement by building them into the operational systems
- Measure and monitor the quality of data against what is expected and how it trends over time
- Identify where improvements are required and implement these
It will be a number of years before the Delegated Underwriting solution commissioned by Lloyd’s is fully operational, and even then the barriers to accessing good quality data will likely be impacted as much by market conditions as by technology. Until then, each Lloyd’s managing agent will need to dedicate time and senior resources in order to remain compliant with Pillar 3 requirements.
And finally, the news that European insurer Gable has elected to go into run-off because it couldn’t cope with the Solvency II requirements is a warning of the challenges ahead, which should not be ignored.