Quarter four of 2013 will be seen by many as a milestone in the Solvency II journey. We’ve had a 2nd quick fix directive and an agreement on the Omnibus II trilogues. Both of these have led to the dust being wiped of the project files of insurers as dates are now in place for implementation.
Anyone who attended either the recent ABI conference in London or EIOPAs conference in Frankfurt will be in no doubt that we are now in the run in period. The time for debate is over, and planning for 2016 is now.
In 2012, Solvency II Wire ran two symposia which were identified as key unresolved items faced by those impacted by Solvency II. The first symposium on long term guarantees (LGT), and the second on look-through. Whilst omnibus has dealt with the LTG issue, look-through is now the elephant in the room which will raise its head in 2014 for both insurers and asset managers.
Look-through itself is based on the Prudent Person Principle which is in the directive. Insurers must understand what they are invested in and this for investment funds means looking through to underlying line-by-line investments.
Through 2013, many have questioned if and how this will be applied, as it is neither an easy task for asset managers or insurers. But while people have been dealing with the issues of LTGs and equivalence in 2013, it is worth looking at what EIOPA have been saying on look-through.
In the most recent consultation paper issued on 27th September 2013, many raised the look-through issue.
On page 567 in the consultation paper, questions were asked about the fact that the requirement for look-through on fund assets is not included in the interim guidelines. EIOPAs response (and interesting how it is underlined)
“EIOPA confirms that Assets D4 has not been cancelled but was not considered proportionate to include it in the preparatory phase.”
Another comment raised the issue of applying look-through for unit linked funds. EIOPA responded with
“Excluding unit-linked assets undermines a comprehensive view of the undertaking risk profile, in particular contagious risk. The security-by-security reporting will also concern unit-linked products, since we consider that these also present specific risks (for instance, undertakings selling bonds issued by entities of their own group, leading to conflicts of interests; or undertakings exposed to reputational risk if they have a major problem on one of their unit linked etc)”
It is also worth looking at the comments made by Carlos Montalvo, Executive Director of EIOPA in Solvency II Wires look-through symposium on unit linked funds.
“The argument has been made that unit-linked funds should not be part of the look-through reporting because the insurer does not carry the financial risk. EIOPA understands that this is the case, but at the same time would like to note that excluding investment funds of unit-linked business from the reporting requirements would undermine a comprehensive view of the undertaking’s overall risk profile. In particular, contagion risk or reputational risk would be left out. The crisis has shown how relevant this has been to certain products and undertakings.”
So whilst the issue of look-through may have been sleeping for 2013, it has by no means disappeared. All should be aware that look-through is based on sound principles and there seems to be no intention of it being removed. How can one be seen to be prudent if it was?
Filed under: insurance regulation, look-through, regulation, Solvency II Tagged: asset managers, EIOPA, Insurers, look-through, regulation, Solvency II
