Solvency II and déjà vu.

I have to admit that I am old enough to have worked on implementation of the original Capital Adequacy Directive (CAD) back in the mid-80’s and I am experiencing déjà vu now with Solvency II (SII).

The trigger has been the number of roles around now asking for project/programme managers for insurance companies. These are pretty stringent asking for experience of both the insurance business and of SII. This combination is pretty rare for reasons I will explain, but the behaviour is not uncommon and happens whenever this type of change has hit the world of finance eg CAD, Basle, Basle 2 and now Solvency II. Interestingly I sense that Solvency I slipped by under the radar.

In principle all these changes have been focussed on building confidence in a specific sector of financial services (insurance in the case of SII) by requiring that senior management can articulate and understand (still a question there) the risk in their business and the make appropriate provision of capital to protect the business against foreseeable crisis. The need for capital has a significant impact on an organisations profitability and ability to grow and/or move into new markets. It needs for greater transparency and consistency in reporting, which for any complex business non-trivial and tends to create another internal industry to just crank the machine and report the numbers.

It is not unreasonable to expect senior management to understand the risk(s) there are managing, is it? Indeed there is a whole risk industry researching and modelling risk. Cynically, one could suggest that its prime intent is to justify a business decision and create an acceptable “small” number that purports to show the risk. One major organisation I know ran its primary trading limits as cash limits until not many years ago when ownership changed. I do believe that was in large part because the senior managers understood cash better than deltas or thetas and behaved more prudently when they were talking about gross positions of £500 million rather than a delta of £25 thousand.

Recent history is littered with evidence that risk is not well understood in many quarters, hence the drive for regulatory reporting and back to Solvency II.

So SII has been on the cards for a few years. I believe it is due to be implemented at the end of next year and that for many large organisations they are expected to be running “as if” from the last quarter of this year. So why are we now seeking so many project/programme managers? A bit late one might say.
In defence, businesses have had a lot to cope with in the last few years and indeed the details of the requirement were still under discussion until very recently (may still be as I haven’t checked recently). The other aspect is that in many cases this has been given to IT to effect, but this is not an IT change. Yes, they are part of the solution, but not the driver. It needs business ownership. I know the SFA have been banging this drum for a while, but still I wonder how many businesses really embraced it. That is other than the consultancies who see it as another gravy train and have looked to “support” their clients with views, presentations, reviews etc.

So now we are 12 months or so away and the realisation is there. It is a bit like the start lights on a grand prix grid. There is not amber as a warning, they just flash “go” and every driver tries to make the first corner in front or at least intact.

By definition there are few programme managers with any demonstrable experience in SII, everyone is learning the specifics as they go along. Similarly as this is new to Insurance the pool of relatively experienced programme managers who can show “insurance” on the CV is not huge. So we enter into a scrabble.

When I was helping start up an SII programme, over two years ago, I went to the SFA and managed to attract someone who was working in their side. He then moved with six months.
So the déjà vu element, well it seems like a perfect storm again, one that has been seen in Banking a few times. There is evidence of under-thinking, where companies hold out doing little looking for an industry solution or that it will be delayed or at best give it to IT. This can lead to the over-thinking that IT and some consultancies are guilty of where they get lost in the weeds, over analysing, over complicating, building disproportionate fear and resources.

Yes it is late to be doing this and there will be people who strive to take commercial advantage, but I do think there are ways to progress and they are:-

•    Make sure this is absolutely a business change, owned, driven and supported by the business. IT is important, but not paramount.
•    Pick relevant experience in the programme team. There is experience out there from other sectors who have faced essentially the same challenges. Don’t hold out for perfection as it probably doesn’t exist.
•    Keep perspective on the solution – the experience above can help. Don’t over-engineer a solution, make it just as complex as it needs to be, while striving for simplicity.

As they say learn from history and avoid repeating the mistakes of the past.