Article Appeared in Insurance Day Feb 2011
The countdown to the implementation of Solvency II continues and the pillars that will define the requirements from underwriters have shifted the claims function away from its traditional Cinderella role.
The expectation was the requirements of pillar one would be the core area for underwriters. However, what has become apparent in recent months is that pillars two and three demand underwriters have a full understanding of their operational risks and that will require a far greater focus on claims. Pillars two and three draw the focus to risk governance and operational risk.
Operational risks can be caused by failed processes, which lead not only to business disruption (an obvious operational risk) but also to leakage through lax validation procedures, and fraud – both employee fraud, where processes can be sidelined and are not tracked closely, and external claims fraud, where sufficient checks are not in place and detection is weak or compromised. Underwriters who tighten up on these areas of operational risk and can accurately and effectively manage their claims will begin to enjoy distinct advantages over their peers in their freedom of capital management under Solvency II.
The growing issue with fraud in the present economic climate means systems that enable underwriters to identify those claims likely to be fraudulent while enabling genuine claims to be quickly settled will provide another significant weapon in reducing claims costs and meeting the demands of the regulators.
The issue of employement fraud will see regulators seeking evidence systems are in place that make it as hard as possible for employees to defraud their employer. It brings with it the need for systems that identify who has accessed what, what actions have been taken and the issue of access in terms of ensuring only those who have a business role can access certain areas of the system. In other words, systems have a full audit trail.
Claims leakage has to be addressed. We have been told of underwriters who have been paying out for risks not actually covered by the policy in place. Systems need to identify clearly the areas and risks covered. It may well be there are potentially five risks that are standard within a particular class but the policy only covers three. You have to be confident your system will highlight the liability assumed by your underwriters.
Solvency II is all about capital and the creation of individual capital models and the ongoing reporting requirements will mean underwriters have to have accurate and fully evidenced data to show the regulators. What is clear is those underwriters who have a clear understanding of their claims levels and can prove they have accurate data on the level and type of claims they have experienced and can expect, will find that it will pay dividends for their work on Solvency II and their eventual treatment under the regulations for a number of reasons.
The inability to provide regulators with reliable and accurate information will result in greater levels of capital being used to meet solvency targets rather than being used to underwrite risks; the cost to the business of that additional capital being the price it has to pay for poor data.
Accurate and timely reserving will assume greater significance under Solvency II. The regulators will require reassurance the reserves held at any point in time are an accurate and up-to-date representation of the liability of the extant claims. Reserve figures registered weeks after notification and not changed to reflect a fluid position are unlikely to provide such reassurance. It will become even more important for underwriters to accurately reserve for the claims they do have.
It will pay to ensure claims are quickly settled. The fewer live claims, the smaller the reserves needed to be offset against them. Fundamentally, the efficient settling and management of claims will directly affect solvency ratios in that it leads to fewer long-term outstanding reserves and accurate reserving due to the ability to gather higher levels of data.
It will also aid the ability to strip out claims volatility, which is viewed as a significant imponderable by the regulators and will have a direct impact on solvency.
At the heart of Solvency II is data. The accuracy and reliability of the data provided will be significant. The delivery of a greater level of granular data will play an important role in the management of claims and the reduction of claims leakage at a stage when claims management will play an increasing role in the approach to settling solvency levels and reserving. Quality claims data can also be a vital tool for underwriters to understand the risks they are being asked to assume and to price them at a technical level.
The ability for an insurer to pay claims is at the centre of the rationale for Solvency II. The regulators want to ensure policyholders can have confidence their risk carrier can pay a claim if it is made. Therefore, anything that demonstrates to the regulator an underwriter understands its claims levels, understands its exposures and has accurately reserved will aid how that underwriter is treated by the regulators.
The bottom line remains that Solvency II will require a reporting structure that has not been seen in the industry previously. Detailed data will need to be produced and published at regular intervals and the inability to provide accurate figures on claims levels will prove a serious impediment to the ability to use capital effectively.
