Solvency II presents major data management challenges for insurance firms, asset managers, their custodians and fund administrators, but compliance can provide opportunities to optimise portfolios, reduce capital holdings and build data architectures that can satisfy not only Solvency II, but also other incoming regulations.
The data management implications of Solvency II were discussed recently during an A-Team Group webinar. A-Team editor Sarah Underwood moderated the webinar and was joined by subject experts Anthony Belcher, director, EMEA Pricing and Reference Data, Interactive Data; Tim Lind, Pricing and Reference Services, Thomson Reuters; and Devesh Shukla, global head, Reference Data Products, Bloomberg.
If you missed the webinar, you can hear a recording and download the accompanying Special Report here. You can also find out more about Solvency II in the A-Team Group Regulatory Data Handbook, which is free to download here.
Opening the discussion, Belcher provided a quick review of Solvency II. He explained: “Solvency II is the insurance equivalent of the Basel regulations for banking. Its goals are to make insurance firms more stable, create a more effective insurance market in Europe and reduce systemic risk. These goals transpose into the three pillars of the regulation, which cover asset liabilities and capital requirements, corporate and risk governance, and disclosure and reporting to national regulators. Each pillar has a broad data requirement and the regulation is more complex than most.”
Shukla added: “Solvency II is not just about insurance firms, but also about the companies they invest capital in, so asset managers, custodians and fund administrators are all affected. The regulation also has cost implications for insurance firms and we may see a shift in the mix of assets they invest in as less risky assets mean a lower capital requirement.”
Considering the overarching data management issues of Solvency II, Lind said: “Solvency II introduces a new language including lots of acronyms that need to be understood. There are challenges in data gathering and aggregation to determine the Solvency Capital Requirement (SCR), but perhaps the biggest challenge is developing an auditable understanding of risk. Firms must develop risk models, but how can they document expert judgement on the risk of certain asset classes and be sure the documentation can be understood by third parties? The Own Risk Solvency Assessment (ORSA) is also challenging as business decisions must be made if an assessment shows an issue that must be remedied, such as a capital shortfall that leaves a firm below its Minimum Capital Requirement (MCR).”
Moving on, discussion focused on the data management requirements of the three pillars of Solvency II. The goal of pillar one is to assign a risk weighting to each asset held by an insurance firm and ensure the firm can meet liabilities to policy holders over the next 12 months with a 99.5% probability. Lind commented: “This requires quantitative data inputs to risk models and calculations of MCR and SCR. The data requirements include many new schemes, such as new classifications, that are not native to security master files managed by investment managers.”
Turning to pillar two, which covers risk and governance, Belcher said: “Unlike pillars one and three, the calculations required under pillar two are not prescribed in Solvency II. Individual firms must work out what data they need and how to source it so that they can provide an aggregated view of risk.” Shukla added: “The big piece here is understanding the risk of a portfolio using a firm’s internal model. The model must be transparent, auditable, documented and approved by regulators.” The ORSA also falls under pillar two and poses governance challenges similar to those of other core data management processes. Lind suggested every function that manages data should be involved in the ORSA.
On pillar three, Shukla said: “New data, such as CIC and NACE codes, is required for pillar three and has been included to provide a level playing field and common taxonomy for reporting. More difficult is understanding definitions and their consistency. The Investment Management Association in the UK, BVI in Germany and Club Ampere in France are working on implementing a standard data template for workflow between insurance firms and asset managers, but it is hard to get consistent definitions from regulators.”
Lind added: “There are challenges of technical interpretation when filing quarterly Quantitative Reporting Templates (QRTs) and challenges in mapping to the XBRL reporting requirement. Technical reporting infrastructure needs to be robust enough to meet quarterly deadlines and flexible enough to handle changes to the templates when new guidance is provided.”
While the three pillars of Solvency II include demanding data management requirements, the experts agreed that the look through element of the regulation is the toughest challenge. This is because some required data may not be available and the volume of data that must be aggregated could grow exponentially. Noting the importance of gathering underlying asset data that can affect MCR and SCR levels, Lind explained: “Insurance firms may need to look into collective vehicles and asset-backed instruments that are valued on the performance of underlying assets. The availability of underlying performance data can be very limited. On this basis, we can expect some asset managers to divest asset classes where data is not available as these asset classes could create a large capital charge.”
Belcher added: “The willingness of asset managers to provide data required for look through also needs to be considered, along with the timeliness of data provision. QRT reporting requires look through data straight after quarter and year ends, but asset managers may not want to provide the data quickly for competitive reasons. The industry has not yet worked out how to deal with these issues.”
Addressing the question of whether compliance with Solvency II will help firms comply with other incoming regulations, the experts agreed that much of the data required for Solvency II will be required for other regulations, although its application may be different. Lind concluded: “A common theme across risk-based regulations, including Solvency II and Risk Data Aggregation, is the need to roll up data to value exposure. This requires common data, providing an opportunity to develop scale and prepare for the next risk-based regulatory requirements. The collaboration caused by Solvency II between insurance firms, asset managers and trade associations will also help us prepare for further regulations.”