Unum builds a risk framework for Solvency II

Unum is a specialist in financial protection insurance which operates in both the US and the UK. In the UK, Unum Ltd has approximately £2 billion in assets under management, and its policies protect more than 1.8 million individuals. It employs around 1,000 people at three main UK offices in Dorking, Basingstoke and Bristol.

Meeting the risk management challenges of Solvency II
Like all insurers that operate in Europe, Unum will be subject to regulation under the Solvency II Directive, which is due to be implemented in 2013 and will come into force in 2014. Solvency II is a much more comprehensive regulatory framework than existing European legislation; it aims to protect consumers by ensuring that insurance companies maintain sufficient reserves of capital to meet all claims. The Solvency II framework is built on three main ‘pillars’: the first concerns quantitative calculations for capital requirements; the second defines requirements for governance, risk management and supervision; and the third involves supervisory reporting and transparency requirements.

“Like all insurers, we have done a lot of work on the first pillar – creating an internal model for calculating capital requirements,” explains John Swallow, Risk Manager at Unum. “But Solvency II is about more than just the model: you also need to be able to demonstrate good governance of the data that feeds into it, including data on risk management. For some time, we had been keen to find a solution that would give us tighter control of our risk management data and processes, and Solvency II provided a strong incentive to put this plan into action.”

Embedding risk management across the enterprise
The company decided to find an IT solution that would unite the company’s existing risk management processes into a single system, replacing a number of spreadsheets and databases, and providing both departmental and corporate-level oversight of risks and controls.

“The project was motivated by a desire to gain greater transparency and increase our confidence in our risk management data,” comments John Swallow. “This would not only help us meet the requirements of the second pillar of Solvency II; it would also give us deeper insight into risks and controls across the whole business, and ultimately help us minimise avoidable losses. This could be equally valuable for the wider Unum group, so we wanted to find a solution that could be rolled out in the UK initially but had the scalability for groupwide deployment if required.”

Choosing the right solution
The Unum team drew up a list of four potential solutions.

“Whilst all the vendors demonstrated very compelling solutions, the more we looked into it, the more convinced we became that IBM OpenPages was the right solution to meet both our existing and future needs,” says John Swallow. “We visited a number of existing OpenPages customers, and their advice was very influential – they gave us a realistic picture of what the implementation would involve, and this convinced us that we would be able to build a solution on OpenPages relatively easily.

“We were also impressed with the OpenPages team – they were confident in the product and showed us how it could deliver most of what we needed out-of-the-box, without significant customisation. Of course, it’s a very flexible solution and you can customise it if you need to, but we found that the standard version was such a good match with our existing risk management framework that very little customisation was required. In the event, the implementation went well and we completed it within budget.”

Harnessing the capabilities of IBM OpenPages
IBM OpenPages Operational Risk Management enables Unum UK to capture, manage, monitor and reassess risks across the whole business. It also integrates data from the company’s credit, market and liquidity risk assessments and holds risk information from external sources to provide insight into the company’s overall risk status.

“While we were working on the project, we also updated our risk assessment methodology to enable more accurate measurement of less-frequent, higher-impact risks,” comments John Swallow. “As a result, the solution we’ve built on OpenPages will add a new dimension to our ability to identify and analyse the potential effects of large-scale, serious incidents.”

Each department has full visibility not only of its own risks, but also of their dependencies and potential impact on other parts of the business. Moreover, the departmental risk data is aggregated into an overall corporate risk profile, helping senior managers gain a better understanding of potential exposure and support strategic decisions on the company’s risk appetite.

“OpenPages provides risk management reports at the touch of a button, which is a major advantage,” comments John Swallow. “Collating data from different departmental systems and creating reports used to be a laborious manual process, so the new solution is going to give us more time to spend on actual analysis. As a result, we’re now able to spot patterns and trends that were difficult to identify before. Moreover, the risk, compliance and audit teams are able to use the same system and see the same data, which will help us work more effectively together.”

The solution also offers advantages in terms of data quality: automatic imports, validation and a full audit trail help to increase Unum’s confidence that its risk management data is timely, accurate and complete. Workflows embedded within OpenPages make it easier to enforce a “six-eyes” approach for quarterly risk assessments: the risk-owner’s self-assessed report is passed to both the relevant departmental manager and the corporate risk team for sign-off.

Getting ready for Solvency II
John Swallow concludes: “We’re still at an early stage of our OpenPages deployment, but we have already seen some very encouraging results. We completed a ‘dry run’ of our operational risk capital assessments using the OpenPages data feed and it showed that our methodology will meet all the requirements. As we continue to roll out the solution to our user community, we expect to start seeing operational benefits as well – for example, in the long term we expect to see a reduction in avoidable losses as a result of a more joined-up approach to risk management across the business. As a result, there is a high level of interest from our US colleagues as to the success of the OpenPages deployment here.”

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