14 March 2016

Financial Times: Banks’ and insurers’ systems creak under regulatory pressure

Companies are under increasing regulatory pressure to revamp their reporting and internal systems. While companies have had to invest to update their IT infrastructure, some executives and investors question whether the resulting disclosures will achieve their aim of boosting market oversight.

Under the new Solvency II framework, for example, insurers are required to carry out complex calculations on how diversified their businesses are in order to gauge the amount of capital they need to hold. While computers have made the modelling faster, the process is no less complicated.

Industry consolidation over the years has left many insurers with a patchwork of decades-old IT systems. “The existing systems are not capable of delivering what the regulators want,” says Philippe Chambadal, chief executive of SmartStream, an IT supplier to the financial services industry.

To meet the new rules, the insurance industry has spent billions of pounds and euros building new IT systems. José Morago, chairman of the Institute of Risk Management, estimates that British insurance companies have spent more than £2bn on the Solvency II project and that more than half was spent on IT infrastructure. “There has been a huge investment in systems,” says Mr Morago, adding that a lot of people have been “involved in implementing and changing decision making”.

Simon Woods, transaction advisory partner at EY, believes the new information required under Solvency II will help managers at insurers to understand their company’s profitability better and shift their attention to increasing returns on capital rather than driving up income or revenue. This will help insurers make better decisions, he says.

Insurers have published some Solvency II information in their 2015 results ahead of formal disclosure requirements. But some believe the experience of banks preparing for the Basel III rules provides bleak signs for insurance companies, their regulators and investors over how useful the newly required disclosures will be to investors.

Like Basel III, one of the aims of Solvency II is to provide additional data to the market so that it can understand the companies and provide oversight.

But Basel III disclosure has also added to banks’ heaving annual reports. While some sophisticated investors welcome the additional information, many believe it is not effective.

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