SOLVENCY II TRAINING: What needs to be improved and the consequences of not doing so.
Solvency II has been reinvigorated as Brussels start to get their act together. Compliance will require strategic, behavioural and operational changes across the board.
There are a number of aspects that must be considered, such as whether or not the leadership team and performance management system are fit, ensuring that all employees understand their new roles and responsibilities and whether the education strategy has been thorough in regard to providing the necessary training to all who are involved.
WHAT SENIOR EXECUTIVES NEED TO KNOW AND WHY
Certainly, most of the motivation and implementation for the Solvency II related changes must be initiated at the top of the organisations. With this in mind, it is a must that senior executives are aligned and focused on driving the organisational and behavioural changes that will be required to make the needed transition.
For example, because of new performance management and reward structures, behaviours must be adjusted in order to both demonstrate risk management as well as the changes that will be necessary in the finance and actuarial roles.
Appropriate change will only be successful however, if the senior executives of the affected organisations know and understand what must be done and then convey those messages to the remainder of the staff. This will require these executives to be accountable for the implementation and the embedding of new governance and control arrangements with the new enhanced standards for the company’s risk management.
The need for supporting these changes will require the board and upper management to set the tone directly from the top of the organisation. This can be successfully accomplished by sponsoring key communication messages whilst also modelling the supporting behaviours.
Other knowledge that senior executives must have that will result in proper implementation of the Solvency II requirements includes:
- Revisions in HR policies – The new requirements will include updated frameworks for employee rewards and performance management. This should help in further driving the required employee behaviours.
- Management of stakeholders – Stakeholder management and communications will play a key role in the success of all of the required changes. Therefore, senior executives will need to invest in ensuring that the right messages are conveyed to the key stakeholders, along with the information that will help the organisation in accepting the required changes to be in compliance with Solvency II.
- Development of risk skills and capabilities – Senior executives must also have a firm grip on how to demonstrate the proper risk management processes that will need to be embedded within the organisation’s overall culture. Further support can be attained by developing a framework of risk capability that is then linked to employee performance and reward.
Expectations of Regulators During the IMAP Review Process
In moving through the Solvency II requirements and the associated training that is required for such, it is important for senior executives to also keep in mind the FSB’s Internal Model Approval Process (IMAP) that details the major components of the internal model approval process. This can offer additional insight into the FSB’s review methodology as well as how it will then be integrated with the independent reviews for which each organisation will be responsible. Certainly, the goal is to help organisations in understanding what will be expected for model approval – especially because this will be challenging as well as different from the current ICA requirements from the PRA. Some requirements that can be expected from regulators include:
- Data that supports the internal model. This should be seen in its proper context either as part of a system or used in a process;
- Knowledge and expertise from the individuals who will be making decisions regarding the overall nature and management of an organisation’s risks;
- Demonstration from the organisation that it meets the “use-test” requirements;
- Demonstration that a proper governance framework exists for managing the internal model;
- Disaster recovery documentation that shows how a firm will be restored in the event of a disaster;
- Detailed user guides that show how the model should be operated.
THE CONSEQUENCES OF INADEQUATE TRAINING
It has been estimated that over 80 percent of senior executives believe that more than half of their employees do not have a thorough understanding of what Solvency II means to their organisation.
Yet, because Solvency II will have such wide-ranging consequences on the company’s operating model, inadequate training could have some very negative effects on an organisation. Some examples include:
- Improper organisational design;
- Governance structures and processes that are not in compliance with Solvency II;
- Weak control capabilities;
- Non-compliant systems and processes;
- Poor risk strategies.
HOW PROPER TRAINING CAN IMPROVE THE BOTTOM LINE
Because Solvency II will drive changes to the established ways of doing business, proper training can truly improve an organisation’s bottom line. With such training, all levels of an organisation’s structure can be aligned and moving in the same – and the proper – direction.
This will include updated and more sufficient reporting and control functions, as well as employees having a good understanding of why the changes are happening in the first place. With this understanding of why change was necessary, employees will also have a deeper knowledge of how the changes will have a direct impact on them and are thus more likely to act accordingly.
WHAT SENIOR EXECUTIVES MUST DO NOW
There are a number of essential tasks that must be performed now by senior executives in order to ensure that their organisations and employees are ready for the new Solvency II requirements.
First, those in positions of leadership must be educated in order to enable them to set the right tone from the top as well as to act as role models for the correct behaviors. In order to successfully promote this, these management personnel must communicate to, engage with, and offer support to their employees along the way.
In so doing, key executives should also take a close look at their risk culture in order to assess and measure the level of readiness of their organisation. This will be invaluable in helping them to determine the additional training that may be required in order to deliver the skills and capabilities that Solvency II will demand.
Once properly assessed, changes must then be embedded with regard to the roles and responsibilities as they relate to performance management and remuneration practices. The key to delivering this, though, is communication processes that are supported by the appropriate training in order for employees to develop new skills and capabilities.
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