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Solvency II: a question of how, not when

There was a collective sigh of relief in Brussels from policymakers earlier this month as a final version of Solvency II was agreed upon following lengthy negotiations spanning years. However, it was tempered with a note of anxiety from market participants facing up to the reality of the regulatory regime. Now that the European Insurance and Occupational Pensions Authority (EIOPA) has also published its final guidelines subsequent to the ruling, there remain no question marks over what is expected of market participants to comply.

Insurers themselves received some reprieve on Pillar I in terms of the final capital requirement ratios they are expected to adhere to, but the implications of the directive remain largely unchanged from the perspective of the asset management community. Firms must be ready to comply with EIOPA’s preparatory guidelines by 1 January 2014, ahead of the full implementation in 2016; a relatively tight timeframe for such a far reaching piece of regulation.

For insurers’ asset management arms, this means there can be no further delay to doing what needs to be done to ensure that they are on the right side of compliance in sufficient time. However, this is an opportunity to consider the wider principles that the regulation represents before any restructuring of internal systems takes place.

Solvency II is symbolic of a changed attitude to risk – pillars II and III are iterative about governance and supervision as well as requiring both insurers and their asset managers to undertake greater disclosure. This means both parties need to carefully consider the different types of risk they are appointed to oversee, and this has evolved considerably since the financial crisis. In a paper published earlier this year, Celent identified 30 different types of risk insurers and asset managers must monitor – a hugely expanded universe.

Asset managers will find it difficult, if not impossible, to maintain a consistent and comprehensive overview of risk if they are still operating on “legacy” technology platforms comprised of disparate systems and processes, as many are. State-of-the-art, integrated technology systems will allow them to identify and communicate different risks, not only assisting in compliance with the regulation but allowing them to manage and neutralise these risks before they become critical.

To underpin this a single, clean source of data is an essential requirement. Regulators are becoming increasingly interested in the role of data and enterprise-wide data management, due to the close relationship of accurate data and handling of information with effective risk management. Given the increased reporting requirements for Solvency II, attempting compliance while operating on a system of disparate spreadsheets and multiple data sources will be onerous, error prone and expensive.

Prioritising risk control can also help asset managers keep pace with wider industry changes. Other new regulation, such as EMIR or AIFMD are part of this, but there are subtler, structural shifts happening too. For example the investment universe is becoming more complex for insurers as they seek higher returns amid a low yield environment. This is leading insurers’ asset managers to go beyond traditional investments and consider alternative asset classes to achieve returns. These need careful monitoring given that they can carry higher levels of risk, yet the required data and valuations for these asset classes can be harder to obtain and analyse. Building an infrastructure that allows the integration of this intelligence with that for more vanilla investments will be critical to complying with both the letter and principle of Solvency II.


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