By Nicola Le Brocq, Regulation and Compliance Market Analyst at Confluence a specialist in investment data management automation for regulatory, financial and investor reporting.
The story behind Solvency II is no different than the story behind most European Directives, since it came as a response to a major failing within the sector, namely the near collapse of American International Group (AIG), the world’s biggest insurer, and the subsequent $182bn bailout by the American tax payer.
AIG’s downfall exposed the weaknesses of the global insurance world, and has pushed the Financial Stability Board (a global body who monitors and recommends on the global financial system) to assess insurance firms and to label nine of them as Globally Systematically Important.
It was the AIG Financial Products’ unit in London and its practice of writing Credit Default Swaps (CDSs) against credit instruments that led to the near collapse, which explains the European focus to increase the supervision of the industry. As a result, Solvency II was conceived and born to introduce new methods of oversight that ensure all risks an insurance firm is facing are identified and managed appropriately, including the investment risk that is often delegated to an external asset manager.
From 1 January 2016, when the Directive will enter into force, an asset manager who is running money for an insurance firm will be required to respond to requests from their insurance clients on a quarterly basis for a look through to investment holdings data.
This data then feeds into the insurance firm’s calculation of their eligible capital resources and helps them assess their solvency capital requirement (SCR). The better quality the look through, the more accurate the assessment, which can lower the SCR making it critical that the asset manager gets the reporting right.
To help asset managers accommodate the new data reporting, three industry bodies in France, Germany and the UK, have compiled a template for the data required to assess SCR using the standard formula (a risk–sensitive model designed to calculate all the risks an insurance firm may be exposed to).