London — Solvency II, which aims to ensure the financial soundness of insurers and protect policyholders, will be implemented in Europe in 2012, but insurers should look to influence the drafting of the legislative text now before the process begins in earnest in 2009, says global insurance broker Aon Corp. The broker is urging European insurers to learn from the work undertaken by banking colleagues in implementing the Basel II accord and start preparing for Solvency II now. At a roundtable hosted by Aon for insurers, under Chatham House rules, the participants were encouraged by a panel of speakers to view the impending regulations as a chance to create wider business opportunities.

Comparing the lead up to Basel II for banks, a recurring theme from the speakers was that many financial institutions found the process at the time much more complex and time-consuming to plan and implement than anticipated, with a requirement for significantly more resources than expected.

Boston-based Celent released a report in May that finds that IT spending on risk management systems to comply with Pillar 2 of the forthcoming Solvency II regulations will be high. In total, Celent estimates that European insurers will budget between 700 million and 900 million euros for new IT projects in order to comply with Solvency II.

While Solvency II will not impact U.S.-based insurers directly, its implications may well ripple across the Atlantic as insurers in the United States beef up risk management systems in order to remain competitive in the global marketplace. Indeed, whether required by law or not, a better understanding of risk is vital for insurers. To achieve a more holistic view of risk throughout the enterprise, investment in new analytical tools available on the market could help in reaching more accurate and sophisticated risk calculation and simulation, Celent says.

Earlier this year, Bermuda-based Accenture released results from a survey of European insurers. Accenture reported that more than three-quarters of large European insurers expect to spend less than 25 million euros through 2012 on Solvency II compliance, with more than half of those expecting to spend less than 5 million euros.

While the vast majority (93%) of Accenture’s respondents said they believe Solvency II will increase the importance of risk-management capabilities, a significant number said their organization needs to enhance their risk infrastructure in order to better identify, assess, quantify and monitor risks.

Aon recommends insurers bring together a team to lead the project that has the necessary skill sets, including IT and risk professionals as well as project management specialists. In addition, Aon recommends insurers:

• Identify and secure an executive-level sponsor within their business
• Look at the way in which their organization collates data on operational risk loss events and challenge themselves to improve their granularity
• Engage in a constructive debate with the FSA and other regulators to develop the focus and implementation of the legislation—help shape Solvency II
• Be collaborative, and be prepared to develop, share and implement risk models as an industry
• Look to harness the insurance policies currently purchased within the operational risk frameworks in their firm. This will lead to better decision-making, improvements to the risk management process, cost efficiencies and potential capital relief through the ICAS procedure

Sources: Aon Corp., INN archives

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