10 Things worth remembering about Solvency II – Part 1

I wanted to take the chance to focus on some points that were discussed at recent conferences and address some issues that have been at the forefront of the minds of asset managers, insurers and third-party administrators over the past year.

• Look-Through Principle – Gaining access to the granular data required is still proving difficult for many insurers. But the regulation requires that the SCR be calculated on each of the underlying assets of collective investment vehicles and other investments packaged as funds (look-through approach). Fund mandates and applying a type 2 equity charge of 49% should only be applied if look-through cannot be achieved. 
• Concentration risk, liquidity risk, market risk – Should look-through not be achieved there will be repercussions from a capital standpoint, but also for the risk management process. Exposure to specific entities and the liquidity of investments cannot be understood without access to granular data.
• Demands of Pillar 1 versus Pillar 3 – It is often stated that insurers find the demands of Pillar 3 and the reporting aspects more onerous then the Pillar I SCR calculations and the responsibility demands of Pillar 2. This does not make sense though if the right processes are applied in Pillar I, as Pillar 3 is in essence a summary of Pillar I (or at least a summary of how the calculations were made). How can reporting be a bigger issue than capital calculation?
• Some of the early insurers tried to test the market by trying to source granular portfolio data, but had difficulty in doing so. A few years ago, asset managers were not prepared for such requests, nor were they willing to provide the information. This has changed and during the second half of 2012 asset managers finally realised that they would have to provide the information required – or risk losing mandates. It is time for insurers to ask again, today asset managers will be better prepared and more aware of requirements.
• Unit-linked funds do require look-through as clearly stated by Carlos Montalvo of EIOPA. “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.”