According to a new report from KPMG entitled KPMG Solvency II Readiness Survey in Central and Eastern Europe, some significant progress towards Solvency II implementation has been made by insurers in Central & Eastern Europe (CEE). But the lack of certainty over the timetable and the ongoing shortage of skilled people resources may still be real hurdles for compliance.
“There are obviously a lot of issues around people resources,” explains KPMG Partner Roger Gascoigne, Head of Insurance and Head of Risk and Actuarial Services at KPMG in CEE.
“People within the industry are struggling to get the amounts of resources that they need and while the numbers that were given in terms of how under resourced they are likely overstated,” he says of the survey results, “there’s clearly an excess of demand over supply on the market for skilled people in some of these specialised areas.”
Mr Gascoigne says that the current emphasis on reducing costs exacerbates the problem by limiting the ability of companies in CEE to increase headcount, even where current resources are insufficient.
“They’re not actually able to recruit the people that they need because of cost containment measures introduced often at group level because of the crisis,” he explains. “And obviously there’s a perception of ‘Why are we spending a huge amount of money on basically compliance requirements?’ The most pressing issues for insurance CEOs remain growth and profitability, particularly given the economic and market pressures.”
KPMG’s Readiness Survey demonstrates that the quantitative aspects in Pillar I have been where most of the effort has been directed so far, a trend that was already clear in 2010. Since that time, companies have redirected their attention to the qualitative aspects of Solvency II.
“Between 2010 and 2012 we’ve seen a lot of investment in the Pillar II – the risk management aspect – so that’s probably where the most progress has been made,” notes Gascoigne. “Two years ago, not many had started. While the picture looks much healthier now there remains much to be done in really embedding these structures into a business-as-usual environment – formally we have the policies documented and in place but do we actually use them to manage our risks on a routine basis?”
Pillar III, the area covering reporting to the public and the regulator, he explains, is still at a very early stage, and harbours the most political uncertainty.
Mr Gascoigne adds that there’s much work to be done regarding issues around data quality and the underlying calculations and reporting.
“The market’s expectations of the final go live date for the regulations have slipped since we did our survey, so there’s still uncertainty on some of the detailed guidance and there are moving goalposts in terms of when the deadline is,” he remarks. “Indeed, there has still been no official pronouncement from the European Commission on when, and in what form, the regulations will come into effect”.
Despite the fact that the Solvency II deadline for compliance could be moved to 2016 or even later, he says he believes insurers in CEE should still push forward.
“They should be going ahead. Certainly as many companies in CEE started later than their peers in other countries, they can’t afford to leave it for two years to see what happens. From the survey results it seems a large number of them were not going to make it on time anyway according to their own estimates,” he says.
“The delay may give them some breathing space and allow those that started later to catch up and maybe benefit from the others’ errors or lessons learnt, but it shouldn’t be an excuse to shelve it for two years – that would be a fatal error. The key elements of the regulations, in particular Pillar II, will be required, whether they’re driven at a European or international level.”
The involvement of national regulators was generally seen as positive according to KPMG’s survey participants, he adds.
“I think people are generally expecting to see a lot more practical guidance from the regulators and probably the regulators have also been caught out by uncertainty in Brussels, so they’re rather waiting to see what the European authorities and politicians do. Clearly, given the relative resources available to CEE regulators, they are generally looking for the larger markets to take a lead.”
According to him, while some progress has been seen the involvement of senior management in driving compliance is lacking at present.
Gascoigne explains, “In some cases it’s still seen very much as a technical project done by technical departments and it may be supported at the top but not always fully embedded in the company’s routine – so it’s still seen as a sort of special project to get something done. Probably what still needs to be done is that it’s really engrained in companies’ ethos and the way the work and how they use the information on a day-to-day basis to really run the business and manage risks.”
For those whose questions remain unanswered, Roger Gascoigne says that KPMG’s experience from the projects it’s been involved in across the region can prove invaluable for helping companies achieve their goals more effectively and efficiently.
“They can also benefit from emerging best practice from what we’ve seen both in Western Europe and the work that has been performed so far in CEE. In addition to the technical expertise in the individual areas of Solvency – each of the pillars and data quality – we can provide an overarching, strategic point of view. By getting away from the detailed mechanics of the regulations we can focus on what it means for the business – trying to make it a management tool rather than just a purely form filling exercise.”
He reports that KPMG survey participants were surprisingly positive about the potential benefits: improving risk management procedures, quality, internal evaluation and processes.
“That’s probably not exactly what we would have expected,” says Gascoigne. “Despite the concerns over the time and costs involved and a perception that the regulations have become over-sophisticated and bureaucratic, respondents see many benefits to realigning their risk management processes. Certainly, in the medium to long term, I think that the challenge for companies will be to take it beyond pure compliance, which is what they’re aiming for now to satisfy the regulator, and to really try to improve performance by better evaluation of risks, operational or underwriting.
“Being able to better assess and manage risks should remove volatility in the numbers and lead to increased profitability. Going forward, the difference between those who just scrape over the bar and those who sail over with something to spare will be noticeable in the company’s performance.”