Solvency II and capital efficiency. A basic problem and its solution. Today. How XLayers by C Consulting easily solves the problem

12 May 2016 —
What is the objective behind the latest Solvency II in just a few words? To provide transparency to the consumer. And to guarantee that the insurance sector can be trusted to keep its promise, or, in other words, guarantee to the consumer a choice between the various products available without also having to question the trustworthiness of the insurer promoting these offers. The guarantee of the solvability of the insurance company is therefore at the very basis of everything.

In that context, reinsurance greatly increases its importance. Why? Because it is not only fundamental in protecting against the volatility of the company's results, but it also serves to protect against the risk of default (and is therefore one of the elements used to calculate the solvency margin according to the Solvency II regulation) and to achieve the desired capital efficiency.

So an important question comes to mind here. Does it make sense that in 2016 reinsurance is still calculated and managed manually by using data extracted from internal databases, from a query and from various MS Excel files?

It is evident that - apart from considerations on the time required to produce a result - the probability of making mistakes is extremely high. Therefore, the possibility of calculating the solvency margin incorrectly is also extremely high, as well as the risk of not being able to operate appropriate corrective actions to reach the desired capital efficiency. For these reasons alone - and they are only two of the many reasons for automating the financial and administrative management of reinsurance - one wonders how long it will take for the internal and external auditors of insurance companies, if not the local Supervisors as well as EIOPA, to make it mandatory for the European market to use a system that can guarantee the accuracy of reinsurance data.

Therefore, it is obvious that the decision to purchase a reliable and complete reinsurance management system is forward-thinking as well as prudent. In fact, it is very wise. Given the importance of reinsurance and the fact that it is not the insurer's core business, it is not advisable to try to create a system in-house. There are far too many critical issues involved. One example is the expense in providing internal training for IT staff on reinsurance, it takes up a great deal of time and then, at the end of the day, the insurance company is too dependent on who developed the system. Furthermore, entrusting the IT department with the control, maintenance and development of the system requires a significant investment (it can take 3 to 10 years to build in addition to the delicate testing process). And for what reason? The result would be a system designed to meet just the current needs of that insurance company only, and therefore always behind in catching up with the variations to the reinsurance conditions. Let's look at the reality of the situation. The IT department has other priorities and activities to take care of. In addition, the certification process carried out by internal and external auditors is pretty onerous and even more complicated where an in-house system is involved compared to using market solutions that have already been certified and tested by many other companies.

So how does one go about choosing the right system? What are the list of characteristics that represent value and that should be examined carefully? Since reinsurance is a very specialist area and difficult to manage automatically, it is important to find a specialised software vendor that has been fully focused on this sector for many years. It is important to look at the number of clients they have, their size and their satisfaction. The software house should not only employ software developers and specialist analysts but also reinsurance experts, to ensure that every new regulation introduced by the regulator (whether domestic or European), or by the reinsurance market, can be understood immediately and correctly. This means that the software house must be able to easily and rapidly develop the necessary requirements or adjustments and tailor them to the specific complexity of each individual client. The software must be able to manage outward reinsurance correctly whether by product, by branch, by line of business or by specific guarantee, and have the necessary flexibility to feed into each individual reinsurance contract automatically. All types of traditional reinsurance contracts must be managed (QP, SPLS, XL, SL, including facultative) whatever the working base used (U/Y, R/A, O/Y, C. Cut). In addition, the system must be able to accept various premium and claim portfolios in order to guarantee activity in the case of mergers. Needless to say, run-off business must also be managed as well as inward reinsurance. Finally, and something that should not be overlooked, it must include the information requested by the local regulator as well as EIOPA, in order to have the necessary reinsurance information in one single database. Does such a system exist?

Yes, it does exist. It's named XLayers, and it has been developed, installed and maintained by C Consulting since 2002. More than 50 Companies are today happy Clients. That includes large and small Companies, Life and non-Life, Independent Companies and Subsidiaries of multinational groups. C Consulting staff is composed by more than 30 dedicated professionals, most of them with more than 10 years specific experience, always in C Consulting. All the original developers are still there. The staff also includes some reinsurance managers with more than 25 years of experience. If a Company makes the choice to install XLayers, they will have not only the best product for the reinsurance management, but also the guarantee to have all the outstanding support of the above staff. And to have the system in production in a very limited time.

Enrico LERZA
CCI - Director of Reinsurance consulting & Business development
Phone: +39 335 1418995

C-Consulting supports FIAR - The International Insurance-Reinsurance Forum 2016 as Partner. More details about the event, which takes place in Brasov, Romania, between the 15th and the 19th of May, 2016, are available here.

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