RegulationFeb 4 2015

Knock-on effects

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This may sound a little strange, but the Solvency II directive – the new Europe-wide capital-based risk framework for insurers that is now passed into EU law – has an indirect knock-on effect on many of the key business partners and financial services firms those insurers work with, especially those that manage their assets. Solvency II demands that insurers understand the risk of their investments, to a finely detailed level, and hold enough capital to offset those risks should markets take a downturn. This is ultimately to protect their clients – namely all of us; their policyholders.

Insurance companies hold assets and make investments to provide the income to make good on their liabilities; the commitments they make to their policy holders. For many insurers, especially the life companies, this means investing in funds. If we follow the process through the many layers of regulatory complexity, what it boils down to is that asset managers who run the funds insurers invest in are having to react to one of the biggest data transfer challenges the industry has ever known, and they are under increasing pressure to help their clients comply with Solvency II.

With this data challenge in mind, it is clear that it is not just insurers that are affected by Solvency II. The new regulation places significant demands on asset managers to respond to their clients’ commitments under Solvency II – which is an insurance regulation, not a regulation for asset managers, as insurers must gather data on their investments at portfolio line item level.

The portfolios, their construction and investment strategies, are the crown jewels of asset managers’ businesses. Who would not want to protect them? Protect them from being unravelled by too much information reaching the public domain. Protect them by the individual strategies not being mirrored by other firms, and certainly protect their intellectual property from the competition.

With Solvency II being many years in the making, a certain level of fatigue has set in across the industry. This has resulted in a degree of numbness to the pain yet to come, and there is a risk that as the finish line approaches, after a very long distance race, the climb uphill to the sprint finish is under-estimated. The challenges facing asset managers with insurance clients – both direct and indirect through platforms, or even their competitors – places them in the difficult position of needing to protect their proprietary information in a regulatory landscape in which their clients are operating while at the same time having to react to their own ever-increasing direct regulatory environment.

It is fair to say that there is still uncertainty in some areas of Solvency II – such as technical interpretations, and qualitative or quantitative measures – however, one thing is clear: with deadlines looming fast, everybody affected by the regulations, whether directly or indirectly, needs to be doing something. But what is the right something?

From an asset manager’s viewpoint, a prudent course of action would be to help clients meet the new regulations with the least impact on their business.

Uncertainty also exists between the various national supervisors and regulators – this regulation is new for them too, do not forget. Although subject to the same overarching regulatory framework, national supervisors’ interpretations have varied across Europe, making life even more complex for insurers with pan-European businesses, and more difficult for their asset managers to respond to their clients’ needs, which vary across each territory.

This uncertainty has manifested itself in various ways, one of which is that different insurers are asking for wildly different things from their asset managers even though they are responding to the same piece of regulation. Some have been asking for a great deal more data than they actually need. Others have asked their asset managers to complete some of their work on their behalf. Some asset managers have built bespoke responses which they believe are best suited to the needs of their clients. However, for the most part these ‘solutions’ have been built in isolation from their peers facing similar challenges in the market, and in some cases in isolation from the needs of their clients.

This has led to the unfortunate, and certainly unproductive, situation whereby insurers have widely bemoaned the lack of readiness of asset managers to help them comply with Solvency II, while the asset managers blame insurers for not asking clearly for the information they need.

This also sums up the biggest challenge still to be faced right now. In preparation for the sprint finish, it is vital to have a closer engagement of the data needs of insurers with the information that can be provided by asset managersl. Communication issues in general underpin three of the significant challenges to be faced urgently for Solvency II to be delivered on schedule by those subject to its demands.

Firstly, the regulators and supervisors need to provide more clarity to the market on a number of specific areas of Solvency II, both on a national and pan-European basis.

Secondly, insurers need to ask for the data they need with consistency, clarity and with clear timelines to allow their asset management partners sufficient time to deliver. If insurers have not taken this step already, they should act now. Time is already short.

And thirdly, asset managers need to respond to their clients’ needs in a positive, engaging way, although mindful that they need to find an efficient and streamlined response to the mass of data required. After all, insurers make up a significant proportion of their overall assets under management, and are therefore worthy of close attention.

Insurers need to speak with one voice, loud and clear, with the power to cut through interference and background noise, and one that delivers precise definition of their needs to their asset management partners.

Given the size of the challenge and the now pressing timelines, the only logical industry response is to drive standardisation.

We need standardisation of requests for data from insurers – which as noted above is likely to be separate from what some insurers actually want and ask for – and in response, standardised responses from asset managers to those requests in a streamlined, efficient manner. There is a very positive initiative by the Investment Association in the UK and its fellow industry bodies in Germany and France to bring a ‘tripartite data model’ into being. Its aim is to become a standardised response by the asset managers en masse to the needs of insurers for data under Solvency II. This model has the potential to mitigate many of the concerns referred to here, and across the industry, but it now needs mass adoption by asset managers across Europe.

Without a marketwide appreciation and mutual understanding of the challenges facing each of the individual participants, and a marketwide approach to reduce the burden as much as possible, how will any firm know where its responsibilities, and those of its key partners and clients, begin and end?

Ashley Smith is senior vice president of business development of Silverfinch

January 1 2016 is the now widely known and understood as the official ‘go live’ date of Solvency II for insurance companies across Europe.

Solvency II has a knock-on effect on many business partners and financial services firms those insurers work with.

With Solvency II being many years in the making, a certain level of fatigue has set in across the industry.