By Ashley Smith, senior vice president of business development, Silverfinch
Who doesn’t wish for a chance to have a second shot at something? How often do we muse about rerunning the botched job interview, or the exam we failed? For insurers and asset managers the rerun is not going to be a dream because, this year, thanks to the piecemeal introduction of Solvency II, they are getting another first stab at this complicated and demanding set of rules.
In 2016, the year that Solvency II was officially introduced, we didn’t hear anything from 70% of Europe’s smaller insurers that only have to report annually (instead of quarterly for their larger competitors). Once we hear from the entire industry, we will be able to make an assessment as to how the rules are taking hold.
Look-through is one of the tougher elements of the rules, where insurers must be able to peer down through various levels of ownership to see the securities that make up their assets. Larger firms that have had to report this year have been given a pass by regulators on look-through for 2016. However, from this month, it will be time for all industry players to expect a tougher approach from the regulators.
Given that we have had a rehearsal for Solvency II, the question then arises as to whether it has been time well spent. The results so far have not been promising. Considering that the rules were originally due to come in during 2014, too many companies are leaving it late in the day to investigate how to build systems to support the new regime. Many of the smaller companies mentioned earlier were still only investigating how to source Solvency II data as late as the final quarter of 2016, and are only now realising the challenges they face. Even for the larger firms that have already reported, the effort has been inconsistent and sporadic.
On the asset management side, many firms have been unable to provide clean data in the form that their clients require. Items such as Complementary Identification Codes (CICs) are entirely new to them and not something they need for other regulations. It’s understandable that it is a challenge – but let’s face it, asset managers have known for years that insurers would be demanding a whole new set of data. In addition, some asset managers have struggled with their third parties, with some data vendors challenging the use of information for Solvency II under current licensing arrangements. Underlying all of this is that many in the asset management industry completely underestimated the size of the task at hand.
Apart from the universal lesson of always taking time to be prepared, we believe there is one clear takeaway from what we have outlined above: the bespoke, single-company approach to Solvency II has not worked and cannot work. If you are looking to exchange data on the industrial scale envisaged in the rules, you have to make it easy for the asset manager to provide data to all clients without getting stuck attending to the individual, nuanced approach of each insurer. Likewise for the insurer, it has to be able to send out requests that can be understood by all fund managers, not in the different formats of the individual companies running their money.
There are positives we can take away from 2016: the tripartite data model, which sets out clearly the different pieces of information needed by insurers to meet Solvency II, has been broadly accepted as the basis for companies exchanging information. The work done by Europe’s asset management trade groups to get this up and running has been invaluable. Second, Europe’s multi-line insurers have demonstrated the success of adopting a strategic and unified approach to the rules. Finally, we noticed in the last few weeks of the year a greater interest from Europe’s larger fund managers in buying into a shared, strategic, industry-wide approach to Solvency II.
This progress matters because 2017 isn’t just the second chance for Solvency II – it is also the run up to the introduction of PRIIPs, which again, can only be successfully implemented through an all-encompassing, strategic approach. When it comes to regulation, to borrow a phrase from the last Chancellor of the Exchequer, we are all in this together.