Solvency II: Asset Managers and Custodian Banks Face Data Burdens
Fund managers handling insurance firms' assets, and their custodian banks, had better brace themselves to find the data insurers will need to comply with a pending European regulation designed to help regulators understand their investment risks.
So says a study just released by custodian bank BNP Paribas Securities Services and London-based risk management consultancy InteDelta based on their survey of insurance firms. The study did not specify the number of insurers analyzed, but its findings mirror the results of an informal poll of a dozen European asset managers conducted by ISS Magazine's online edition on Friday. A full copy of the study, entitled "Solvency II: Insuring Risk Compliance" can be found on InteDelta's website www.intedelta.com.
"We are expecting the data to come from us and the custodian banks," one operations executive at one London-based asset manager tells ISS. Yet another was a bit concerned about the extra work and increased scrutiny from its insurance clients. "I can just imagine them monitoring our operational procedures and reporting a lot more heavily now," he says.
Indeed, the overwhelming majority of insurers -- about eighty percent --survyed by BNP Paribas and InteDelta acknowledged either not having the data or poor data governance procedures. About seventy percent of the insurers surveyed by BNP Paribas and InteDelta cite asset managers as either a "high" or "medium high" source of the data. About forty percent say custodian banks will either be a "high" or "medium high" source of the data. "In general, participants regarded their data sourcing eposure to custodian banks or other asset servicing providers as less critical than affiliate or third party fund managers," the survey notes.
Insurers need the data on the portfolios run by asset managers to comply with the three broad requirements -- or pillars- of the proposed European legislation called Solvency II. The pan-European measure, which takes effect in January 2014, will require to better calculate the regulatory capital they must put aside to take into account their ability to pay policyholders and pensioners in the event of a market downturn; regulators don't want insurers to go bust. To make all the calculations and fill out the reports required by regulators, insurers will need to find information on their portfolio's positions, transactions, attributes of financial instruments and valuations as well as the methodolgies and assumptions used to make the valuations. That information is typically held by asset managers and custodian banks.
The first pillar of Solvency II requires insurers to calculate minimum capital requirements and solvency capital requirements. Minimum capital requirements reflect the absolute minimum capital which an insurance company has to operate and solvency capital requiremetns represent the capital necessary to absorb unforseen future losses. Insurers must also mark their assets based on independent price sources and keep track of the methodology and inputs used. Under the second pillar, insurers must monitor the quality of the data they use to calculate risk and keep track of all of the historical data used to make the calculations. The third pillar requires insurers to publicly report their financial status on an annual basis to investors and on a quarterly basis to regulators. Such reports are far more detailed than standard financial reports.
When it came to determining who would carry the burden for completing the necessary risk reports, insurers appear to be less dependent on asset managers and custodian banks. About fifty percent of insurers studied say that they will give asset managers a high or medium level of responsibility while only forty percent say they would do so for custodian banks. "The vast majority of risk reporting is generated internally by insurance firms, albeit drawing on data from third party providers," the study says.
BNP Paribas, one of Europe's largest custodian banks, and InteDelta naturally recommend that insurers rely more heavily on their asset servicing partners -- aka custodian banks -- to help them comply with Solvency II. "Asset servicing providers are the primary source of the valued positions and transactions data that is required by the insurance firm to support its Solvency II process," say the two companies. "Asset servicing firms have the expertise in the aggregation and reporting of asset data and are therefore well-placed to support insurance firms in meeting Solvency II's data requirements."
Insurers will need all the help they can get. Many haven't even started preparing for Solvency II, according to the BNP Paribas and InteDelta study. Only sixty percent have put the first iteration or some skeleton of a risk and solvency assessment. That's a an elaborate gameplan of the approach they will take to aggregate and formalize their data and risk analytics in a consistent format across the firm. None of the insurers reviewed have actually completed the risk and solvency assessment. About eighty percent say they have not started work or are only in the initial planning of how they will comply with the third pillar of Solvency II- the heavyduty reporting requirements.
Written by Chris Kentouris, Editor-in-chief (Chris can be reached at Chris.Kentouris@hotmail.com).
