What is Solvency II?
Solvency II is a fundamental review of the capital adequacy regime for the European insurance industry and is currently due to be implemented on 1 January 2016. Solvency II falls under the authority of EIOPA (the European Insurance and Occupational Pensions Authority). EIOPA is accountable to the European Parliament and the European Council.
One of the main aims of Solvency II is to contribute to the objectives of the EU Financial Services Action Plan (FSAP) by encouraging a deeper single insurance services market that enables EU companies to operate with a single license throughout member countries. It will do this by introducing a unified legal framework for prudential regulation for all insurance and reinsurance entities operating in the EU. The Directive will help maximise harmonisation and will be consistent with the principles used in banking supervision. This new single market approach is based on economic principles that measure assets and liabilities to appropriately align insurers’ risks with the capital they hold to safeguard the policyholder.
Who is affected?
Solvency II will impact all insurance and reinsurance entities operating in the EU and EAA that have a gross premium income exceeding €5m or gross technical provisions in excess of €25m. For European insurance and reinsurance firms, Solvency II also applies to their branch operations in non-EU countries and may apply to their non-EU subsidiary and associated companies. Non-EU groups will need to submit Solvency II fi lings for their EU operations; although there is no need to report their global solvency figures on a Solvency II basis. The impact on Asset/investment managers, custodians and third-party administrators (TPAs) will be significant. It arises from the look-through principle in terms of data disclosure, as well as the need to provide insurance clients with complete, accurate and timely asset and risk management data, as stipulated under pillars I and III of Solvency II.
Overview of the breadth and granularity of the data stipulated under Solvency II
Inaccuracies in the identification and valuation of assets under the market risk and default risk parameters could potentially result in either too little capital being retained - putting the firm in breach of capital requirement limits - or too much capital being set aside that could otherwise be utilised by the business to generate revenues.
- Firms need to identify and centralise the core data attributes required specifically for Minimum Capital. Requirement (MCR) & Solvency Capital Requirement (SCR) calculations while continuing to support the individual business areas that utilise some of the same data inputs e.g. providing a consistent view of counterparty data to the credit risk and legal departments.
- There are several areas of particular focus around the new data items required to populate the QRT (Quantitative Reporting Templates) under pillar III. The introduction of the CIC as a new asset classification schema and the NACE industrial classification are obvious examples. In addition Investment Managers will look to centralise views of securities master data across asset classes and combine it with the entity hierarchy master, to produce an aggregated view of asset and counterparty concentration risk.
The ‘look through’ requirement to identify the individual components and weightings of specific funds will present a challenge, not only for Investment Managers, but for the industry as a whole. Fund Managers are only obliged to provide this information to the investors in a fund, making it unclear as to how the data will be supported within the various parties involved in the supply chain.
What are the data implications for your firm?
As a starting point firms will need to aggregate, consolidate and present the data that underpins the process of regulatory reporting on an enterprise-wide level.
We have seen in the recent past how regulation has been the driver for data centralisation projects, and expect that insurers will use Solvency II to establish a single platform on which to support existing, and potentially future, regulatory requirements.
While this is a significant undertaking, it is necessary as firms have an increasing need to maintain a single view of their assets and liabilities in order to achieve an accurate and continuous assessment of their solvency provisions, as mandated by the new risk-based capital regime and its associated three pillars.
What data reporting and risk management tools will be needed to comply?
Asset managers and their insurance clients will need access to cross-asset pricing and reference data to successfully manage the transition to Solvency II and maintain ongoing compliance in their reporting, and capital and risk management functions. The ability to price those instruments not on liquid markets will also be an integral component of any firm’s compliance strategy.
The Investment Management Association in the UK, BVI in Germany and Club AMPERE in France have established a Tripartite Template for Solvency II reporting. The template is designed to facilitate the SCR calculation under the standard formula and supports data delivery for QRTs. The template will be core to the provision of data from asset managers to insurers under the funds look-through principle.
QRT reporting will in the main become a quarterly activity for insurers. For the assets QRTs, over 100 data items will need to be sourced and maintained, including hard to find data on structured products and derivatives.
The most complex part of Solvency II involves the regular calculation of the Solvency Capital Requirement (SCR), with the expectation that most insurers will want to generate their SCR on a monthly basis.
Fixed income analytical tools that can be used to stress test assets and model scenarios to help firms understand the impact on portfolio values, and help calculate the levels of capital required will also play an important role.
As stipulated in each of the three pillars associated with Solvency II, the firm’s ability to monitor and manage the following types of risk across the enterprise will be crucial:
- Market Risk– VaR modelling, stress testing & interest rate risk – historical prices, curves and analytics.
- Counterparty Risk – Business entity data & derivative data (CVA / DVA)
- Credit Risk - Bond / CDS spreads & analytical data, Credit ratings & Business entity understanding
- Liquidity Risk - Trade and quote depth, Bid-ask spread & Liquidity indicators
- Operational Risk - In-house vs. outsourcing
A Challenging - Opportunity
Data managers recognise that consistency of the underlying data and the relationships between data points, which provide a matrix view of relationships and interdependencies, are of paramount importance. While many view Solvency II as a challenge, we at Interactive Data see it as an opportunity to focus on how structured and unstructured data from across the enterprise can be managed to deliver efficiencies and add value across business divisions.
By Hubert Deroubaix, Managing Director, Pricing and Reference Data, Interactive Data