Solvency II has been some time in the making, but as deadlines loom for interim requirements in 2015 and full implementation in January 2016, the data management challenges of the regulation must be tackled not only by firms in the insurance industry, which Solvency II seeks to regulate, but also by third-party administrators and asset managers with which they work.
The challenges of Solvency II, as well as the potential to repurpose compliance processes to meet the requirements of other upcoming regulations, were debated during a panel session at the London Data Management Summit. A-Team Group editor Sarah Underwood moderated the session and was joined by experts Chris Johnson, head of product management, Market Data Services at HSBC Securities Services; Anthony Belcher, director, EMEA Pricing and Reference Data at Interactive Data; and Darren Marsh, senior product manager at SIX Financial Information.
Belcher set the scene by outlining Solvency II and its intent to ensure capital sufficiency among European insurance firms, monitor systemic risk across the industry, and create a level playing field for insurance products. In terms of the scope of the regulation, he said: “Solvency II is wide ranging. Insurance firms must comply, as well as third-party fund administrators that have insurance clients and asset managers that manage funds on behalf of insurance firms.”
Johnson noted delays in the implementation of Solvency II since its initial deadline in 2008, and said: “We are getting very close to the regulation’s deadline with interim requirements in 2015 and implementation in January 2016. To date, there is a perception that insurance firms have focused mostly on liabilities reporting rather than assets, but Solvency II means they will have to be equally responsible and accountable for assets and not delegate this responsibility. The regulation requires a change in emphasis and upskilling, and it is tough to deliver at a time when the requirements of other regulations must also be met.” Marsh concurred, saying: “Solvency II has many moving parts, even at this late stage, and is particularly difficult to implement for firms with operations in more than one jurisdiction as the focus on particular areas of the regulation and the interpretation of its requirements can be different.”
Looking at the data management challenges of Solvency II, the extent of the regulation’s data requirements outstrips that of most other regulations. Pillar 1 of the regulation focuses on the Solvency Capital Requirement (SCR) and requires insurance firms to demonstrate that data used to support the SCR process is accurate, complete and appropriate. Pillar 2 covers governance and risk management, and requires an understanding of all assets within the scope of the regulation and the ability to aggregate exposure across assets. Pillar 3 focuses on reporting, requiring new data items such as Complimentary Identification Codes (CICs) and NACE classification codes to ensure compliance with the regulation’s Quantitative Reporting Templates.
Marsh said: “The data management challenges of Solvency II are the requirement for large volumes of data, the focus on quality data, and the need to link data for, say, concentration risk calculations. Also, the data management layer for data sourcing needs to be larger than it is for other regulations.”
Identifying some of the data management challenges of Solvency II for HSBC Securities Services, Johnson explained: “The asset reference data required for the regulation is among the most expensive and difficult to source. The requirement for complete data is tough to achieve as not all required data exists in the market and appropriateness can be interpreted in different ways. In terms of reporting, the data management challenges include issuer content such as Legal Entity Identifiers (LEIs) where they are available, securities without credit ratings, and the lack of vendor data around unlisted securities.” Other data difficulties identified by panel members include not only the requirement for data content, but also for data lineage; how to source data such as LEIs, CICs and NACE codes; and how to support the funds look through element of the regulation. Marsh described Solvency II as a rich mix of data management issues, but also pointed to potential benefit in implementing the regulation, saying: “The SCR process in Pillar 1 can be an incentive for insurance firms using the internal model approach. If they focus on the quality and provenance of data that is put into the calculations, and classify assets and their risk weightings correctly, they may be able to reduce the levels of capital that must be set aside.”
Another potential benefit is in repurposing the data management processes required for Solvency II for other regulations. Database structures that support multiple regulations can be a good start, but they do have limitations and must be coupled to analytics specific to particular regulations. Johnson said : “If you get Solvency II content right, you are in good shape for other regulations, but there are still issues such as data licensing to be addressed.” Marsh added: “Some data is the same across regulations, but different treatments must be applied to it to give regulators what they want.”
Concluding with a little advice for data managers addressing the challenges of Solvency II, Belcher said: “Look at the data management requirements of Solvency II and other regulations, and try to bring them together holistically. There is not enough time to deal with each regulation separately, but there is data that is needed across many regulations.”